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Alex Lo

The extraordinary achievements of Zhu Rongji’s market reforms and their contribution to China’s rise to global economic power are well known. Much ink has already been spilled in the news media since his death at the age of 97 was announced this week.
But if foreigners are supposedly suffering the deliberately mislabelled “China shock 2.0”, they may be more interested in whether Zhu and his reforms caused the original – and equally mislabelled – “China shock”.
Here, I start with a useful summary, from an American point of view, of “The China Shock and Its Enduring Effects”, a 2022 study by the Centre on China’s Economy and Institutions at Stanford University: “The impact of the China shock accounted for 59.3 per cent of all US manufacturing job losses between 2001 and 2019, mostly in labour-intensive manufacturing where fewer workers had college degrees.
“Laid-off workers converted nearly one for one into long-term unemployment, causing a corresponding rise in government transfer receipts per capita. Adverse impacts of the China shock lasted two decades beyond the initial trade shock and one decade following its peak intensity in 2010. Despite lower consumer prices of goods imported from China, 6.3 per cent of the US population still experienced net losses in real income due to the China shock.”
Even before Zhu successfully negotiated China’s admission to the World Trade Organization in December 2001, the country was already emerging as the go-to hub for many Western manufacturers and producers.
China then had a huge pool of young, healthy and literate labour, thanks mostly to policies that could be traced back to the Mao Zedong era. It was also undergoing the greatest and fastest urbanisation in history, as rural able bodies flooded into urban centres to find work. Their labour was already dirt cheap relative to western costs, but equally consequential was the hukou system restricting their movement and qualification for social benefits, keeping them at the mercy of urban employers.

Western multinationals, especially those from the United States, were all chasing the lowest price, and China offered it. There was no necessity to offshore production to China, deindustrialise America and destroy its once-storied manufacturing and engineering base. No one was putting a gun to multinationals’ heads.
But they always needed good numbers for the next quarterly financial report, with shareholders demanding quick profits. So they had every incentive to go to China. They were perfectly willing to sacrifice American jobs for easy profits from overseas.
Zhu’s reforms leading to WTO membership opened the floodgates for them, leading to the proverbial “China price”. That was the origin of the economic phenomenon termed “Chimerica” by historian Niall Ferguson and economist Moritz Schularick, a play on the word “chimera”.
The two academics characterised it thus: China acted as the massive manufacturer and saver, while the US was the primary consumer and borrower. China exported vast amounts of cheap goods to the US and used its resulting trade surpluses to buy US Treasury debt, which until recently, made it America’s biggest banker.
At least for a time, the merry-go-round kept up China’s fabled double-digit growth (until 2010). For the US, it crucially kept interest rates low. Sorry, that really wasn’t Alan Greenspan’s doing!

For ordinary Americans, whose real wage rises slowed down after 2000, cheap consumer goods, low borrowing costs, including mortgages, kept up their living standards, at least until the financial crisis of 2007-08.
By Ferguson’s estimate, at its peak, Chimerica accounted for roughly one-third of global gross domestic product and over half of global economic growth.
The recycling of the greenback had to be streamlined, with Chinese state financial agencies working at a much more professional level. Zhu used the State Administration of Foreign Exchange (SAFE) and sweeping structural reforms to centralise financial control, eliminate parallel currency tracking and stabilise China’s foreign reserves.
Dai Xianglong, his protege, cut his teeth as China’s central bank chief during the Asian financial crisis, and thereafter closely followed Zhu’s reform framework. Dai was succeeded by Zhou Xiaochuan, another technocrat who was also Zhu’s protege. During those years, the monetary policy of the People’s Bank of China grew in sophistication to rival the US Federal Reserve.
China shock 1.0 came to an end as Chimerica gradually broke down after the last global financial crisis. Then came China shock 2.0, under Xi Jinping. Quite simply, like every successful economy before it, China went from low skills and low tech to high skills and high tech. That’s how the game has always been played.


Remembering Zhu Rongji and understanding his legacy

Zhu Rongji’s personal touch is not easily forgotten

Chinese President Xi Jinping pays tribute to late former premier Zhu Rongji

Chinese President Xi Jinping leads party elite in final farewell for ex-premier Zhu Rongji

Zhu Rongji

Was the late Zhu Rongji responsible for the original ‘China shock’?

People walk by a shopping mall with a screen showing the news of former Chinese premier Zhu Rongji’s death, in Beijing on August 12. Photo: Reuters

Migrant workers returning from Spring Festival leave emerge from a railway station in Guangzhou in 2001. Photo: Xinhua

An employee works on a Santa Claus toy in a factory on the outskirts of Guangzhou in 2006. The economic phenomenon termed “Chimerica” involved China acting as the massive manufacturer and saver, while the US was the primary consumer and borrower. Photo: Reuters

Zhu Rongji: reformer who led China’s economic transformation through ‘minefield or abyss’

Then premier Zhu Rongji pictured with president Jiang Zemin in 1999. Photo: Xinhua

Then US president Bill Clinton listens as Chinese premier Zhu Rongji delivers his opening remarks during an official welcoming ceremony, at the White House in April 1999. Photo: Reuters

Then Colorado governor Bill Owens applauds as Chinese premier Zhu Rongji shows off a cowboy hat Owens presented to him, in Denver in 1999. Photo: Reuters

Chinese premier Zhu Rongji and Hong Kong chief executive Tung Chee-hwa in September 1997. Photo: Dickson Lee

Zhu Rongji and US vice-president Al Gore look on at the signing of an environmental agreement in April 1999 in Washington. Photo: AFP

Zhu Rongji celebrating his 92nd birthday with his wife Lao An, doctors and nurses in 2020. Photo: Handout

A strong China is the best hope for the ‘long peace’ to endure

Illustration: Henry Wong

From solar to AI: why China may be entering its ‘Go Global 3.0’ era

China’s humanoid robot sector has accelerated rapidly in recent years, with mass production and commercial deployment advancing across industries. Photo: Xinhua

Opinion

China Opinion

US and other Western multinationals were all chasing the lowest price that China offered – and willing to sacrifice jobs for easy profits


US and other Western multinationals were all chasing the lowest price that China offered – and willing to sacrifice jobs for easy profits.


China

United States

China manufacturing

US-China relations

Xi Jinping

Zhou Xiaochuan

State Administration of Foreign Exchange (China)

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

As I see it

Was the late Zhu Rongji responsible for the original ‘China shock’?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}US and other Western multinationals were all chasing the lowest price that China offered – and willing to sacrifice jobs for easy profits

US and other Western multinationals were all chasing the lowest price that China offered – and willing to sacrifice jobs for easy profits