A Brief History of Chinese Business Cycles: 1978-2023

The potential growth level is determined by the degree of resource utilization and efficiency improvement of an economy. However, from the beginning of the reform and opening up, through the transition of China’s economic status, to the process of constructing the socialist market economy system with Chinese characteristics, the definition and assessment of this potential growth level will be significantly influenced by institutional mechanism reforms. For example, during the construction of the Chinese labor market, there was a simultaneous occurrence of increased unemployment rates and overall economic efficiency improvement. It becomes difficult to determine whether the economy is above or below the potential growth level during such times. In the process of constructing the financial system, the government continuously improves the central bank system. On one hand, it restrains the expansion of monetary stock brought about by local government credit expansion; on the other hand, it also enhances the efficiency of financial resource allocation, thus avoiding the spread of excess capacity in the economy over a longer period. However, the impact of such reforms on the potential growth level is also uncertain. Due to the absence of a defined economic state foundation for potential growth levels, methods to calculate output gaps and thereby compute economic fluctuations through mathematical means are not feasible. In order to provide the most basic basis for the research in this book on the stages of economic development, we have decided to refer to the division of China’s development stages by Professor Wu Jinglian in “China Economic Reform,” which is based on the GDP growth rate and the price CPI growth rate. The prominent indicator of the construction of the socialist market economy with Chinese characteristics is the price CPI, which plays an indicative role, guiding resource allocation.

Specifically, we divide each stage into two main parts for examination. The first part mainly discusses the fluctuations in output, investment, employment, and consumption. The second part discusses monetary factors, mainly inflation, monetary stock, monetary circulation speed, and exchange rate fluctuations. The subsequent sections will focus on the historical analysis and discussion of the factors of economic development stages and monetary factors, combined with corresponding reform measures, including industrial structure transfer, employment population transfer, state-owned enterprise reform, and income distribution reform.

This book does not separately discuss issues such as major power relations and the international environment during the process of China’s opening up, but these are obviously important factors in the stages of China’s economic development. Under the new development pattern, the impact of these factors remains significant. We will unify the discussion of international relations with the reform factors in this book.

In terms of how to measure the share of labor income, there are numerous research literature and data calculations. Here, we introduce several main methods and data conclusion viewpoints. Firstly, there is the issue of data conclusions: whether the share of labor income follows a “U-shaped” development pattern, meaning whether it decreases and then increases with the level of economic development. From the perspective of national welfare, the share of labor income is not the primary focus of macroeconomic regulation because technological progress naturally leads to an increase in the share of labor income, thereby ultimately improving the overall welfare level of the entire population. The basic goal of macroeconomic regulation is to maintain the stability of economic development. To conduct research on this data indicator, it is necessary to have national income estimation data regarding the share of labor income. There is no major dispute over the definition of the share of labor income in national economic accounting globally; the key issue is whether it is relative to GDP or GNP. Here, we adopt GDP as the denominator, which is the most recent international practice.

Regarding data calculation, there are two methods: direct calculation and indirect calculation. The latter involves first estimating national wealth and then using the distribution relationship between national income and capital and labor to indirectly calculate the share of labor income. For the second method of indirect calculation, the shares of capital income and labor income will jointly affect the stages of economic development. It is worth noting that although similar to the slow variable treatment of monetary velocity, we can also treat the shares of capital income and labor income as slow variables in the short term. However, during periods of rapid technological progress, changes in the price system, and financial system reforms, this book believes that these indicators should not be treated as slow variables. During periods of economic transformation, these slow variables themselves will undergo significant changes, and between “rational expectations” and “adaptive expectations,” the expectations and perceptions of enterprises and consumers regarding slow variables will exacerbate economic volatility, posing significant challenges to macroeconomic regulation.

For the second method, it is necessary to have a good estimation of national wealth. For this book to complete the research on the stages of economic development from 1978 to 2023, calculating the level of national wealth for the stages after 1978 is a significant challenge. This book uses representative domestic and foreign research works and databases as formally cited data. Here, we briefly introduce the research results of Li Yang and other scholars in China regarding the national balance sheet. The data of this research result began around 2000 and has detailed calculations of the Chinese national balance sheet since the 21st century. This data performs well in terms of data length, quality, and international recognition. In the “China National Balance Sheet 2020,” there is a statement worth noting: “From 2000 to 2019, the compound annual growth rate of China’s nominal GDP was 12.8%, and the compound annual growth rate of social net wealth was 16.2%. Wealth growth rate is faster than nominal GDP growth rate (faster than real GDP growth rate).”

Regarding the selection of research subjects, whether to refer to the content of the national balance sheet or use the proportion of wealth distribution and labor income distribution in national income distribution research, or observe the distribution of labor income, is open to discussion. Based on the theoretical exploration of “Reflections and Exploration on Issues Related to Economic Globalization” and “Research on Currency Stability, Inequality, and Business Cycles,” this book uses the indicators of the proportion of wealth distribution and labor income in national income distribution research. This allows for the calculation of the performance of historical DPIL in China, thus exploring more possibilities and investigating the relationship between historical DPIL in China and unemployment rates, birth rates, in order to complete the performance of economic development stages.

Friedman, in “A Monetary History of the United States, 1867–1960,” employed two indicators, the velocity of money circulation and the turnover rate of currency plus demand deposits, to describe the concept of the velocity of transactions under the quantity theory of money. At present, modern monetary theory emphasizes more the debt attributes of money. Friedman proposed the monetary pyramid structure, and the relationship between the velocity of debt circulation and economic growth has become a research paradigm under modern monetary theory. This paradigm undoubtedly relies on the development of financial markets. Personal debt, through financial markets, has also achieved liquidity, especially as assets corresponding to debt, thereby altering traditional classical monetary frameworks. This book will attempt to examine the historical performance of money in the Chinese economy from the perspectives of both traditional frameworks and debt frameworks.

For the traditional framework, many scholars have studied the velocity of money circulation from various angles, covering the definitions found in the monetary history of the United States. To ensure consistency, this book selects the concept of the velocity of money circulation mainly used in “A Monetary History of the United States, 1867–1960,” which is income velocity divided by money supply, to discuss issues related to the stages of economic development in China. It should be noted that there is significant attention paid to the definition of money supply divided by income as an important representative indicator of the degree of monetization and financialization of the Chinese economy. Numerous regression and theoretical studies on the velocity of money circulation exist, and this book mainly focuses on the determinants of the velocity of money circulation. From the study of money supply and velocity to the study of inflation and interest rate levels, the institutional basis of research has been constantly changing, and China’s economic growth pattern has also been evolving. Many important hidden factors are emerging and becoming increasingly important. With the construction of market mechanisms, many important mechanisms from history are gradually being replaced by the market, such as the planned economy ideology regarding money supply and the control mechanism of monetary interest rates.

The endogeneity and exogeneity of money supply, the historical evolution of the velocity of money circulation, are the focal points of this book, but not every aspect will be covered. The main research purpose is to explore the fluctuating factors in China’s economic development process during the reform and opening-up.

The degree of monetization and financialization in China’s economic reform process should complement the country’s economic growth model. Understanding what drives economic growth to achieve better growth rates and what causes economic growth to decline and decelerate is a complex economic reform issue. This book aims to ensure that the explanations of the changes in the major economic variables related to money and the real economy in the book are consistent and harmonious.

In “A Monetary History of the United States, 1867–1960,” the focus extends beyond the influence of money supply and velocity of money circulation on economic stages; it also addresses derivative issues concerning money. In this framework, variables like the money stock, the ratio of currency to deposits, and the reserve ratio constitute the process of central bank monetary policy derivation, which expands into discussions of monetary policy effectiveness. The author places emphasis on the money stock and discusses the determinants of the velocity of money circulation relatively less, as they believe that, in the short term, the velocity of money circulation remains almost constant. In the study of the stages of China’s economic development, issues related to money derivation will be mentioned in discussions, but they are seldom included as observational indicators in the book, as are the determinants of the velocity of money circulation. The book will focus on the evolution of significant determinants in the stages of China’s economic development. With the development of China’s economic growth model, the driving factors of China’s economy have also been evolving. The book’s focus lies in the evolutionary process of relevant factors in economic development. It’s noteworthy that in the process of constructing China’s market mechanisms, the transition from price control to free-floating prices under market forces was an important constraint on macroeconomic control during the early stages of reform and opening up. As market mechanisms improve, this important macroeconomic control indicator gradually loses its significance. Under macroeconomic control, price fluctuations are becoming smaller, and their correlation with international factors is increasing. The connection between monetary policy and international factors is also becoming closer. It can be said that the construction of a market economy has provided greater stability for price factors.

The choice between whether inflation is a monetary factor or an institutional factor in transitioning economies is a major challenge in our study of the stages of China’s economic development. The study of American monetary history lacks experience in quantifying institutional factors in transitioning economies. However, we can look to historical research on transition countries in Eastern Europe for relevant research findings. Unfortunately, these factors are too complex to be discussed using a single specialized indicator. Further discussion can be had regarding whether inflation is a very important factor in transitioning economies. In high inflation environments, market economies can experience wage-price spirals, ultimately leading to the collapse of the entire monetary system. Whether this logic holds in transitioning economies, and whether inflation may lead to a decline in overall market resource allocation efficiency, is a question worthy of discussion.

China’s market economy construction has achieved tremendous success and continues to develop. Price operations have received fundamental support from market economic foundations. The role of institutional factors in inflation is gradually weakening, and inflation analysis will mainly focus on monetary factors. In the historical process studied in this book, money deviates from the classical quantity theory of money, and issues related to assets and debts are becoming increasingly important. In terms of inflation, it represents changes in the cost factors of residents’ consumption welfare levels. As changes occur in the circulation of land factors in China, the demand for resident services is becoming increasingly prominent, shifting from commodity demand to service demand, which is an inevitable result of global development. The rising costs of service industries brought about by land factors are gradually surpassing the resident welfare issues measured by traditional inflation factors. As financial market construction deepens, the velocity of money circulation becomes a factor that we overlook. As the challenges of institutional transformation in inflation research gradually weaken, asset price factors are emerging under economic structural transformation, exerting significant impacts on resident welfare, posing new major challenges to inflation research. In our work, we provide a comprehensive analytical framework for the challenges mentioned above in “Research on Currency Stability, Inequality, and Business Cycles.” In historical analysis and reviews, we consider both old and new challenges, striving to provide a more complete depiction of economic development stages.

Finally, since the 1970s, macroeconomics has gradually shifted towards micro mechanisms. Establishing the connection between micro entities and the macroeconomy has become a consensus and an important paradigm to follow in macroeconomic data analysis. In the study of American monetary history, there are numerous descriptions of historical events and careful discussions of institutional reforms, but due to the lack of historical data, there is a shortage of studies explaining the movement of important development stages from the perspective of micro data from households and enterprises. In our work, we strive to compensate for the deficiencies in micro data. In the current development of macroeconomic research, we are making efforts to uncover a small part of the veil covering micro data.