As China completes three Juglar cycles, new expansion on horizon

China is at the beginning of a new Juglar cycle, requiring a large amount of new capital, some economists believe. If true, the country's economy will face many challenges as China's current investment rate will be hard-pressed to support the cycle's initial expansion phase.

Author: Selina Cheng   

Many investors, including some economists, think that the most difficult time for the Chinese economy has already passed. The country is at the lowest point in its business cycle, they believe, and it's all uphill from here.

To understand the real Chinese economic situation, Prof. Anhua Ding, Chief Economist at China Merchants Bank and Director of China Chief Economist Forum, has been applying the idea of a "Juglar cycle" to the nation's economy, highlighting that "China went through three Juglar cycles."

A Juglar cycle, proposed by Clément Juglar in 1862, is a boom and bust investment wave, typically lasting from 7 to 11 years, as measured by levels of capital expenditure and production. Juglar also identified four phases to each wave: prosperity, crisis, liquidation, and recession.

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Ding further elaborated that during each Juglar cycle, manufacturing would upgrade their equipment to keep up with the rapid industrial development and all those upgrades fundamentally altered the way we live, work, and relate to one another. A simple metaphor for this wave is the smartphone revolution. People enjoy buying iPhones and they will continue buying the newest model. But if you have an iPhone 8, a person would not consider buying an iPhone 4.

It's the same logic with the Chinese economy. When most companies have been upgraded to Made in China Level 3, old equipment and technology will not work anymore. The rest of the manufacturing industry will be forced to enlarge their capital expenditure to upgrade their equipment and system.

For China, the country is at the beginning of a new Juglar cycle, which requires a large amount of capital injection. The current investment recovery rate would be difficult to support a new Juglar cycle, so we can expect that China's economy will face many challenges when going through the full capacity expansion phase of the Juglar cycle.