Over the past year, China's economy, long the world's greatest economic success story, has slowed. A series of big stock market crashes, together with evidence that the pace of Chinese production had slowed dramatically, resulted in China's once-breakneck pace of economic growth slowing. Though Chinese leaders had long anticipated and planned for exactly this — double-digit growth for years and years is only so healthy — it's still a big deal.
In a video above, George Mason University economist and Marginal Revolution blogger Tyler Cowen explains why this is happening and what it means. It's a great guide to where China's current woes came from, what the big problems are today, and how bad they could get.
"This shouldn't come as a surprise" to anyone who's been watching China for a while, Cowen says. "The current problems fall out of their earlier successes."
Since 1979, a series of reforms spearheaded by Communist Party leader Deng Xiaoping and mass-scale modernization projects have helped lift 721 million Chinese citizens out of poverty. "They've grown at a pace no other country has matched," Cowen says, "and that has transformed everything."
But China's growth model wasn't sustainable forever. "For a long time, China has been investing almost half of its GDP" in things like trains and housing, he says. Now, "a lot of that low-hanging fruit is gone."
To make up for slowing growth, China's national and local governments took on a lot of debt. Years of rapid growth also encouraged unsound private investments in China, as everything seemed to be paying off. Now that things are slowing down, many people could lose the money they've invested.
"The world's number two economy is running a very serious risk of a recession that will be deep, and also may last really quite some number of years," Cowen concludes.