The global economic landscape is shifting rapidly, with China’s economic turbulence far from over. In the wake of Evergrande’s collapse, China is now preparing to spur consumption through policy measures amid weak domestic spending and mounting deflationary risks. As China faces multiple economic challenges, including potentially missing its growth target, these developments underscore the delicate balance needed between immediate relief and long-term economic stability.
Economic Crisis as Catalyst for China
Economic crises often act as powerful catalysts, forcing nations to rethink their economic security frameworks. In China’s case, each financial crisis since the late 1990s — from the Asian Financial Crisis of 1998 to the Global Financial Crisis of 2008, and now the ongoing real estate debacle marked by Evergrande’s fall — has driven significant policy shifts. These crises have pushed China from reactive measures to more strategic, proactive risk management approaches:
1998 Asian Financial Crisis:
During this crisis, which devastated many East Asian economies, China responded with a mix of fiscal stimulus and conservative monetary policy. The Chinese government launched substantial infrastructure investments while maintaining a stable currency to prevent competitive devaluations. This not only helped stabilise China’s economy but also positioned it as a key stabilising force in the region.
2008 Global Financial Crisis: Having originated in the US, the 2008 crisis led to a contraction in global demand that impacted China’s export-driven economy. In response, Beijing rolled out an aggressive fiscal stimulus package to the tune of RMB4trn. The focus was on infrastructure, social welfare, and public services, allowing China to rebound swiftly. However, this rapid recovery came at the cost of ballooning debt levels and increased economic imbalances, signalling the dangers of over-reliance on credit expansion.
2015 Financial Crisis and Beyond: By 2015, China faced a severe domestic crisis marked by a stock market crash and significant capital outflows, partly triggered by a surprise devaluation of the yuan. China’s response included tightening capital controls and implementing measures to stabilise the market. Yet, this response also underscored the challenges of transitioning to a more balanced, sustainable growth model. The lessons from this period heavily informed China’s current strategy under the 14th Five-Year Plan, which (among others) foregrounds the concept of economic security.
Evergrande and the Real Estate Reckoning
The Evergrande crisis has brought China’s economic vulnerabilities into sharp focus. Established in 1996 by Hui Ka Yan, Evergrande grew rapidly, soon becoming China’s largest developer by contracted sales and the biggest dollar-debt borrower among its peers. However, this growth was fuelled by unsustainable borrowing. The situation escalated in 2021 when Evergrande defaulted on its bonds, setting off a long, fraught negotiation with creditors that ended in a liquidation order from a Hong Kong court in January 2024. This court decision marked the biggest casualty of China’s ongoing real estate crisis and poses new questions about the country’s economic security.
Economic Security Under the 14th Five-Year Plan
China’s experience has profoundly shaped its current economic strategy, as seen in the 14th Five-Year Plan. The Evergrande crisis, alongside the collapse of other property giants, has underscored the need for China to transition from its debt-driven growth model to a more sustainable and balanced economic approach.
Crisis-Informed Risk Management: The ongoing real estate crisis, exemplified by the Evergrande collapse, has highlighted long-standing vulnerabilities within China’s economic structure. While similar measures have been introduced before without yielding the intended results, the government’s current approach builds on these lessons by implementing a more comprehensive risk management framework. This framework emphasises not only sectoral governance but also greater accountability and enforcement, aiming to foster truly sustainable economic activities.
Integration of Development and Security: The concept of “coordinating development and security” is central to China’s current policy. This involves aligning economic growth with risk mitigation strategies to address both internal and external threats. By managing the real estate crisis with targeted measures (i.e., lifting specific restrictions and facilitating the purchase of properties), the government aims to stabilise the market.
Focus on Common Prosperity and Technological Self-Reliance: China’s pivot towards “common prosperity” and technological innovation reflects a deeper shift in its economic strategy. The goal is to reduce inequality leading to greater stability in the long run (hence, inequality is viewed through the lens of economic security), discourage real estate speculation, and diversify growth into more sustainable sectors like green technology and advanced manufacturing.
Lessons for Global Economic Security
China’s evolving approach to economic security, especially in the wake of the Evergrande crisis and recent policy shifts like the mortgage rate cuts, offers several lessons for other nations navigating similar challenges:
Balancing Immediate Stabilisation with Long-Term Reforms: Immediate stabilisation is necessary in times of crisis, but it must be balanced with structural reforms to address underlying vulnerabilities. China’s reliance on credit expansion has proven risky, emphasising the need for sustainable growth models.
Coordinated Policy Frameworks for Crisis Management: The integration of economic growth with risk management, as seen in China’s 14th FYP, provides a model for other countries to enhance economic security. A coordinated policy framework helps navigate complex economic landscapes and mitigate risks effectively.
Promoting Economic Diversification and Technological Innovation: By focusing on technological self-reliance and economic diversification, China aims to reduce its dependencies and foster a more resilient economy.
Economic security in times of insecurity requires a careful balance between immediate stabilisation and long-term structural reform. China’s evolving strategies, especially as seen through the lens of past crises, demonstrate a nuanced approach to safeguarding economic stability. The focus on common prosperity, economic security, and diversified growth models under the 14th Five-Year Plan reflects a commitment to reducing systemic risks while promoting sustainable development. As the global economy continues to face uncertainty, China’s experience offers valuable insights into crafting resilient economic policies.
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This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.
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