After China joined the WTO, its economy boomed and many in Beijing started to rethink their views of America, especially as the 2008 global financial crisis brought the Western economic system to its knees. The country’s leaders saw an opportunity in the crisis to expand their influence and promote a Chinese model of development that combined government direction and authoritarian rule with market incentives and massive spending on infrastructure and other projects. Beijing felt it had plenty to teach the rest of the world. World leaders reached out regularly to their Chinese counterparts for help.
A week after the Wall Street firm Lehman Brothers filed for bankruptcy in September 2008, exacerbating the financial crisis, President George W. Bush placed a call to Chinese President Hu Jintao. Hold on to China’s $1 trillion–plus portfolio of U.S. government debt, Bush asked. Don’t sell, especially now. If China were to sell large amounts of Treasuries, it risked driving up U.S. interest rates and squeezing American households and businesses that were already reeling. A big sale also threatened to drive down the value of the U.S. dollar, making Chinese exports to the United States more expensive. Hu did what President Bush asked.
A month later, on October 21, Bush dialed China’s Zhongnanhai leadership compound again. This time he wanted to recruit President Hu to attend a summit of the leaders of the top twenty economies in the world, called the Group of 20, or G-20, to figure out how to deal with the deepening financial turmoil. Again Hu quickly agreed.
Earlier that month, the United States had proposed a $700 billion plan to bail out tottering banks and other financial institutions. Bush wanted China also to commit to emergency measures to buck up its economy and help stabilize global growth. Since joining the World Trade Organization in 2001, China had grown to become the third-largest economy in the world behind the United States and Japan. While China’s GDP was still expanding in late 2008, the pace of acceleration was slowing—to a rate of 9 percent from a rate of 11.5 percent a year earlier—because foreign demand for Chinese goods was plummeting. A steep Chinese slowdown threatened to injure countries from Brazil to Australia, whose economies fed China’s immense appetite for copper, iron ore, and other raw materials.
Three weeks after Bush’s call, China announced a 4 trillion yuan plan, about $586 billion, to build housing, highways, airports, and other big infrastructure projects, all of which would consume billions of dollars in imported commodities. The stimulus plan had been in the works for much of the year. All levels of China’s government would be involved, especially state-owned banks, steel mills, construction firms, and other entities. Years later, the activities of those companies would draw the ire of the Trump administration, but in 2008, they were celebrated.
China’s leaders believed the plan showed the advantages of the country’s state-led growth model and Beijing’s ability to adapt quickly to changing circumstances. When top party officials had gathered earlier at a heavily guarded government hotel in Beijing in December 2007, there was little hint the world would tumble into recession. They were focused on the opposite problem—how to prevent the economy from overheating. Chinese GDP grew at a gaudy 14.2 percent in 2007, and economic planners believed that they needed to cut back aggressive lending.
But as 2008 wore on and the global financial crisis kicked in, those worries were set aside. Instead of tightening credit, some officials argued in early 2008, China should dramatically increase spending. With financial woes in the United States and other developed countries worsening, this was China’s moment to move ahead, suggested officials, including Xu Shanda, the nation’s former deputy taxation chief. China’s stimulus spending could become the country’s version of the Marshall Plan, the American initiative passed in 1948 to help rebuild Western Europe after World War II.
Rather than continue to invest in U.S. Treasuries, Xu and other proponents of the plan said, China should use its vast foreign-exchange reserves to make loans to developing nations rich in coal and other natural resources. The loans would finance mines, railways, and shipping docks to help the countries supply the Chinese market, and also create jobs for Chinese construction firms and other companies overseas. Advocates said their “Plan for a Harmonious World” would support and increase Chinese influence globally.
Around the summer of 2008, then–Vice Premier Li Keqiang called a meeting of senior officials from the government’s main advisory body, known as the Chinese People’s Political Consultative Conference. He wanted to discuss whether China should ditch the initial economic agenda focused on inflation prevention in favor of one aimed at ensuring growth—going beyond the “Plan for a Harmonious World” to create a stimulus plan to bolster domestic investment and shore up global growth.
The growth camp won. Inflation was then running around 5 percent. To drag it below 3 percent, as originally targeted, the central bank would have to dramatically tighten the money supply, which would cause the yuan to appreciate, exports to tumble, and growth to plummet. That was the wrong medicine when the global economy was starting to contract. Days later, the Politburo, the party’s top 25 officials, decided to discard the original plan intended to fight inflation and put together a plan to prop up growth. On November 8, China released the 4 trillion yuan stimulus package to keep the economy humming. The announcement triggered a massive stock market rally worldwide.
Shortly afterward, Hu flew to Washington to attend the G-20 summit. On November 14 and 15, the leaders gathered first around a big conference table in a State Department dining room named after Benjamin Franklin. Hu made the most of his star turn, celebrating China’s efforts and proposing that international financial institutions give emerging-market economies like China more say in governing. “Let us tide over the difficulties through concerted efforts and contribute our share to maintaining international financial stability and promoting economic growth,” Hu told the attendees.1 China’s state-owned media followed him throughout his stay, beaming back video of him from the conference’s venues, including the White House, where Bush hosted a dinner for the G-20 leaders.
After decades of following in America’s shadow, China was now stepping into the sunlight. Beijing was coming to the aid of the United States, and the rest of the world, a change that bolstered the confidence of China’s leaders that they had chosen the correct path to development. Gone was the notion that the United States’ economic system was superior. The Chinese model was to be emulated. Adding to Beijing’s self-assurance was a chorus of praise from Western officials and scholars on how Beijing handled its economy. Even Hillary Clinton, who as first lady in 1995 had embarrassed Chinese leaders by stressing human rights during a trip to China, gave Beijing a pat on the back in 2009. As the secretary of state, she stressed the need to work with China to tackle the financial crisis and global warming, while downplaying its rights record. 2
Some of China’s sense of triumph was surely misplaced. As became apparent a few years later, the stimulus plan also saddled China’s economy with debt and wasteful projects and turned its skies gray with smog. Still, the reception China’s stimulus efforts received was a head-spinning moment for many in Zhongnanhai, who had spent the prior two decades following U.S. advice in remaking the Chinese economy.
In the late 1990s, when big Chinese banks teetered on the brink of bankruptcy following years of unscrupulous lending, Chinese regulators paid American investment bankers to help straighten out the mess. Premier Zhu Rongji backed Wall Street plans to sell to American firms stakes in the country’s biggest four state-owned banks, whose total assets, Zhu said then, “couldn’t even match those of one single U.S. bank, Citibank.”
China sought to copy America by creating its version of Wall Street. It turned a big parcel of farmland along Shanghai’s Huangpu River into a bustling financial district with skyscrapers, a stock exchange, bank branches, and trading houses.
Later on, the Western-oriented central bank governor, Zhou Xiaochuan, instructed his underlings to study Wall Street’s “financial engineering,” such as stuffing securities with mortgages that could be bought and sold similar to stocks and bonds. Those securities had led to rapid growth in home ownership in the United States, but also were to lead to shady lending that would help bring the nation’s financial system to the verge of collapse.
Zhou’s question to his staffers at the People’s Bank of China (PBOC), prior to the financial crisis: Should China create its own version of this popular American financial instrument to help develop its housing market?
PBOC staffers also examined whether to restructure the central bank and close its thousands of branches across China. The PBOC wanted to look more like the Federal Reserve System, with its dozen regional Fed banks located across the nation. “Then the global financial crisis broke out,” says a senior PBOC official. “That caused us to indefinitely shelve the plan.” America was no longer the model to emulate.
After the crisis hit, Beijing started thinking about how to lessen its dependence on the dollar. In March 2009, Governor Zhou published a paper on the PBOC’s website calling for replacing the U.S. dollar as the international reserve currency with a new global currency system controlled by the International Monetary Fund. While that proposal didn’t gain much traction, it did start a successful effort by Beijing to include the yuan as an official part the IMF’s reserves, a status it gained in 2016—another example of China coming into its own.
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China’s economy, which expanded rapidly during the 1980s and 1990s, rocketed after the country joined the WTO in December 2001. As the price of admission, China agreed to relax more than seven thousand tariffs, quotas, and other trade barriers and to open, albeit with limitations, nine broad sectors to foreign capital, including financial services, automobiles, and information technology. Many in China feared that foreign competition would destroy domestic industries and cause massive layoffs.
But those fears soon gave way to a sense of pride and accomplishment. Easing trade barriers made China a much more attractive place for foreign firms to invest, as did the elimination of America’s annual review of whether China qualified for Most Favored Nation trading rights. Foreign investment in China soared from $49.7 billion in 2001 to $108.8 billion in 2010, as the country became an ever-larger export platform. A Mattel executive’s reaction was typical. He told a congressional committee that his company wouldn’t invest heavily in China if there was a chance the country could lose its favored trade status. While the risk was small, “the consequences would be catastrophic,” the executive said, because Mattel’s toy imports from China would have been hit with 70 percent tariffs.3
The decade after China joined the WTO was one of the most prosperous in the country’s long history. China’s economy more than quadrupled from 2001 to 2011; total trade increased sevenfold; foreign investment in factories, shopping malls, and other hard assets more than doubled, helping to generate millions of jobs domestically. China cemented its status as the world’s factory floor for everything from clothes and toys to televisions and tires. The government maintained a visible hand in redrawing the economic landscape, combining market opportunities presented by the country’s engagement with the world with traditional state planning. China evolved from a Maoist planned economy to a hybrid state capitalism.
Bill Clinton’s hopes that political freedom would go hand in hand with economic freedom were dashed. China’s leaders pushed for market-oriented changes to create wealth and lift people’s living standard. They figured that prosperity would strengthen support for the party’s rule, not lead to political liberty. Those officials included Premier Zhu Rongji, the economic reformer admired by the West, who had sparred with President Clinton over the WTO.
In a speech to senior provincial officials in early 2002, soon after China joined the WTO, Zhu warned that “western hostile forces are continuing to promote their strategy of westernizing and breaking up our country.” A year later, during China’s annual legislative session, Zhu again stressed the government’s effort to fend off such hostile forces. “We remained vigilant against and cracked down on all infiltration, subversion, and sabotage by hostile forces at home and abroad.”
The eastern Chinese county of Guangrao, located in the fertile Yellow River Delta, illustrates the changes brought by China’s WTO entry. The county is the hometown of Sun Tzu, the Chinese general who wrote the influential work of military strategy The Art of War 2,500 years ago. But the county had little commercial significance until China’s entry into the global trading system. During the 2000s, Guangrao was designated by the government as a hub for tire manufacturing and exports. Now the county is one of the richest in the country.
Shortly after China’s WTO entry, Guangrao officials and local businesses sensed an opportunity to create a tire industry. Rich in oil, natural gas, and other resources, the county already had factories that produced rubber tubes used in oil fields and wells. As the Chinese leadership began to develop an auto industry in the 1990s, a few of those plants shifted to producing tires for trucks and sedans. When China joined the WTO, it reduced export restrictions, which gave Guangrao rubber makers additional opportunities. Shipping tires to the huge U.S. market was more profitable than competing fiercely with their peers at home.
By 2003, the county’s skyline was dominated by construction cranes hoisting up dozens of new plants. The local government herded them into an industrial park it financed, crisscrossed with roads, electricity grids, and sewage systems. Companies that set up manufacturing facilities there also received tax incentives and other forms of government support—the kinds of help that would soon kick up complaints from tire makers abroad. Peasant workers from the countryside poured in, helping to keep costs low. Before long, some one hundred tire factories were operating in the area and more were planned.
Tire sales soared, especially to the United States, and Guangrao factories ramped up production further. Town officials patted themselves on the back as local tax revenue soared. By 2005, Guangrao vaulted into the top one hundred counties in China based on tax revenue. Nationwide, China’s tire exports increased almost tenfold between 2000 and 2011, with half of the sales coming from Guangrao, now dubbed “Rubber Valley.”
The fortunes of Liu Zhanyi, a Guangrao tire boss, mirror that of Rubber Valley. In 1986, when most in Guangrao still worked on the land, Liu moved into manufacturing. With help from local officials, he leased a facility from the county government and bought a handful of extruding machines that produce long, hollow tubes of rubber, much as a meat grinder produces long strings of meat. His business was an instant hit.
A decade later, when the auto industry started to take off, he reconfigured his plant to produce tires and, after China joined the WTO, he expanded rapidly overseas. By the end of 2002, his company, Shandong Yongsheng Rubber Group, became one of China’s largest tire exporters, employing thousands of workers.
Liu worked tirelessly and lived modestly. Townspeople frequently mistook him for a tire truck driver because of the black, slip-on, cloth shoes he wore and the compact Chinese sedan he drove. (He later upgraded to a Subaru.) “He likes to keep it simple and keep the cost down,” says his son, Liu Zijun, who has taken over the company. “That’s a main reason why we’ve managed to continue to expand our business.”
But the successes of the Liu family and others in Guangrao came at the expense of American tire makers. Between 2004 and 2008, Chinese tire exports to America tripled in volume, while U.S. tire production dropped by one-fourth. Employment in the American tire industry shrank by 14 percent. Political pressure on the Obama administration from its labor allies increased so much that in 2009, the president approved duties of up to 35 percent on imports of Chinese-made tires. The action marked the first time—and the only time—that the United States used a special provision that U.S. WTO negotiators fought for, which made it easier for the United States to shut off import surges from China.
The tariffs stalled China’s export growth in the United States for a while. But American tire wholesalers and retailers had become so dependent on Chinese goods that the sudden increase in prices when tariffs were imposed—and the sharp reduction in prices when the tariffs ended in 2012—bankrupted some businesses stuck with mispriced inventory. “We’re just biding our time here,” said Alex Alpe, a manager at a nearly empty Del-Nat Tire Corporation warehouse, in 2015. The Memphis, Tennessee, tire distributor exited the business that year. “Either someone buys us or we’re out of work,” said Alpe. “It’s wearing on all of us.”
So much export money was pouring into China that its foreign reserves soared 15-fold to $3.18 trillion at the end of 2011, as China became a major buyer of the U.S. government bonds. That turned the onetime economic basket case into America’s banker. How did that happen? As Chinese companies’ sales overseas surged, Chinese exporters sold the dollars they received to the country’s commercial banks in exchange for yuan to carry out their business operations within China. The commercial banks then sold the dollars to the central bank, which pooled all the dollars in a giant fund called foreign-exchange reserves, nicknamed the “blood and sweat” of the Chinese people.
This series of operations also helped China keep down the value of its currency as the central bank continued to release more yuan into the financial system in exchange for the dollars from the commercial banks. China’s U.S. critics long complained that Beijing simply replaced the mercantilist measures it agreed to give up to join the WTO with an undervalued yuan, which made Chinese products cheaper overseas. China’s cheap labor gave it a competitive advantage in manufacturing; it’s undervalued yuan supercharged its exports.
Across the world, China became the target of aggrieved industries that complained, with justification, that China subsidized production in ways that violated global trade rules. Chinese banks doled out cheap loans, often to companies that were already producing goods far in excess of demand, including makers of steel and aluminum. Those companies then shipped their lower-priced goods to the outside world, depressing prices globally and bankrupting producers in other countries. 4More and more, China was hit with trade complaints from around the world, alleging that Chinese companies “dumped” products at below-market prices.
Antidumping cases soared in industries marked by Chinese excess production, notes Mark Wu, a Harvard law professor who studies international trade. In 2007, before the financial crisis, twenty-three such cases were filed with the World Trade Organization, a number that more than doubled in 2011 and doubled again to reach a peak of 129 in 2016. Chinese companies, by far, were the most frequently targeted, amounting to more than one-third of the antidumping investigations during the period.
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China’s massive stimulus spurred the Chinese economy, helped pull the global economy out of recession, and won praise from the United States and international financial organizations. But it also led to a sense of hubris—and massive debt, oversupply, and economic inefficiency.
The country’s stoked-up steel mills, aluminum smelters, cement plants, glass factories, and tire producers exported their excess production at below-market prices, deepening trade battles with the United States, Europe, and Japan. China’s leaders now derisively call the 2008 plan “flood-irrigation stimulus,” referring to the ancient, destructive farming practice of flooding land to grow crops. They vow not to repeat it.
But back in November 2008, Premier Wen Jiabao publicly pressed the banking industry to “increase its support to China’s economic growth.” Factories continued in overdrive. They counted on loans from state-owned lenders to keep them afloat even if they couldn’t find buyers for their products or had to slash prices so steeply they lost money on each sale.
Some critics at the time warned that easy credit could eventually lead to disaster. Overproduction sapped profits, wasted money, worsened pollution, and started a spiraling debt problem. A 2011 report by British bank Standard Chartered estimated that more than $1 trillion of loans taken out by local governments and companies to build railways, plants, and other projects, much of it incurred between 2008 and 2010, would eventually have to be written off by banks.
But most state bankers put aside whatever doubts they may have had and continued to boost lending, as party leaders directed. Jiang Jianqing, the longtime chairman of the Industrial and Commercial Bank of China (ICBC), the country’s most profitable state lender, didn’t go along with the rest. He worried that hastily made loans would produce buckets of red ink. That decision cost him his career. In 2013, he was the only chief executive of a major state-owned bank to be passed over for promotion—another reminder to state bank officials to keep their mouths shut and follow government and party orders. “He should have done more,” a regulatory official said in early 2013. In other words, the official said, Jiang should have followed what ICBC’s largest shareholder, the Chinese government, wanted him to do.5
By then, some others in the government were beginning to recognize that the stimulus plan had created serious problems. In 2013, the Ministry of Industry and Information Technology named nineteen sectors marked by overcapacity, ranging from steel, cement, and aluminum to tires and other auto products, up from only three a decade earlier. “There was an oversupply problem even before the global financial crisis,” recalls a Chinese policy maker. “We just didn’t pay too much attention then because our focus was on how to keep the growth going, especially after the financial crisis.”
Reversing course was difficult politically. The central government ran into determined opposition from the thousands of government officials charged with carrying out its plans. Shutting down redundant factories meant that local officials would have fewer tax dollars and more problems. Unemployed workers would have to be cared for or they would cause the kind of protests that drew unwanted attention from Beijing and could threaten their careers. “We’ve always been judged on whether we hit growth targets,” says an official in Hebei province, an industrial powerhouse that produces most of the crude steel made in China.
Hebei officials did their best to keep local steel mills humming despite Beijing’s orders to do the opposite, even if the mills were operating at a loss and the local officials had to use subterfuge. In late 2013, Hebei staged an event called “Operation Sunday” in which it dispatched demolition squads to blow up blast furnaces owned by fifteen mills.6 Video of imploding furnaces was broadcast on state television. The razing reduced the province’s steel-making capacity by 6.8 million tons, the Hebei government claimed, nearly half the province’s annual goal. But all of the furnaces targeted for destruction turned out to be so outmoded that they long ago had been mothballed and could never have been turned back on.
“Do any of the blasted furnaces affect capacity at all?” asked Du Wenhua, an executive at Jinan Steel Group, a big steel company in Jinan, east of Hebei, after he watched the TV broadcast of the event. “No. They have been in limbo for a long time.”
The legacy of the stimulus spending now haunts China. Lending to state enterprises and local governments led to overcapacity and overbuilding. Empty shopping malls, half-built apartment complexes, unfinished resorts, and bridges to nowhere became commonplace. Many cities are ringed with apartment complexes that stand empty. At night, the only lights from these unpopulated neighborhoods are the air-traffic beacons on top of the buildings beeping red.
Total debt levels in China soared from 132 percent of its GDP in 2008 to 205 percent in 2013, and ballooned further to 244 percent in 2018. The International Monetary Fund said in 2018 that in the forty-three cases internationally where credit grew as rapidly as China’s over a five-year period, “only five ended without a major growth slowdown or a financial crisis in the immediate aftermath.” 7
Even so, Beijing’s success in weathering the global financial crisis left future generations of leaders, including President Xi Jinping, more assured of the government’s big role in the economy and the one-party system. Chinese leaders also felt more emboldened to speak out against their foreign critics and assert themselves more openly, a sharp contrast from the Deng Xiaoping era of the late 1970s and 1980s, when the paramount leader talked about keeping a low profile and hiding your capabilities.
In September 2012, Xi visited Mexico when he was vice president and heir-apparent to President Hu. He laid out China’s contribution to the global economy during the financial crisis. Then he lashed out at critics of China’s human rights record. “There are a few foreigners, with full bellies, who have nothing better to do than try to point fingers at our country,” he said. “China does not export revolution, hunger, poverty, nor does China cause you any headaches. Just what else do you want?”8
Two months later, he became general secretary of the Communist Party—his true source of power—and, in March 2013, president. He took pains to show he was committed to market reform, announcing in late 2013 that market forces would play a “decisive role” in the economy. But in reality that meant simply fine-tuning the country’s government-led development model. China’s economic system today is just as wedded to industrial policy, state-owned companies, and protection of homegrown industries as ever.
In a cavernous government exhibition hall in Guangrao’s Rubber Valley is the area’s Hall of Fame. Liu Zhanyi’s Shandong Yongsheng Rubber Group is featured there. An electronic display shows the major markets for the county’s tire makers: the United States remains the top destination, followed by Japan, the European Union, and countries in the Middle East, such as Saudi Arabia.
A bright red poster lists the kind of support that the Guangrao government offers the country’s tire makers: “industrial policy support” that helps companies improve their manufacturing capabilities; “financial policy support” that features a government-sponsored fund and loan guarantees to aid local tire makers; “fiscal policy support” that involves subsidies to big tire producers; and “tax policy support” that promises tax reductions for companies making acquisitions or new investments.
The Hall of Fame could have been named China Inc.