Coming days after dazzling fireworks marked the end of the Beijing Olympics, when China basked in the world's attention like never before, the collapse of Lehman Brothers and the ensuing global financial crisis found the country's Communist rulers in bullish mode. Where others saw crisis, China saw a shining opportunity to really establish itself in the "new world order" that was emerging.
Beijing started to spend. It introduced a four-trillion yuan (€500 billion) package shortly after the peak of the financial crisis, and switched the focus of its economy from exports, which had dried up as the rest of the world had run out of money to buy Chinese goods. The government encouraged Chinese people to start spending money too. The stimulus package rolled out in the shape of high-speed rail networks, dozens of new airports, a vast motorway network and whole cities seemingly torn down and rebuilt.
As the world looked to China to spend money to prop up the flagging global economy, then-president Hu Jintao wanted more representation on the global stage, and he got it. China was suddenly a force to be reckoned with at global institutions such as the G20 group of industrialised nations. These past five years of ample credit may yet come back to haunt China as the country is heavily indebted. Minxin Pei, an analyst at Claremont McKenna College, pointed out recently that net domestic credit as a share of China's gross domestic product is nearly 140 per cent in China, compared with 90 per cent for Brazil, 75 per cent for India and 35 per cent for Indonesia. "To make matters worse, most of the debt is owed by state-owned companies, real estate developers, and local governments that are known for wasting capital on financially unprofitable investments," said Pei.
There are fears that China has printed money to get itself out of trouble. M2 money supply, which is made up of cash in circulation, demand deposits from institutions, residential savings, and time deposits of institutions, was 105.45 trillion yuan (€13.14 trillion) at the end of June. A month before Lehman collapsed, it stood at 45 trillion yuan (€5.6 trillion).
Growth is no longer double-digit, and this year the economy is expected to grow by 7.5 per cent, a still-respectable figure but well below the rates during the time the economy simmered.
