Rises & Declines of Chinese Empires – A Financial Perspective (221 BC to Today)

Written By

Dan Buckley

Updated

Jul 23, 2024

China has experienced multiple cycles of its empire rising and declining – in what are known today as dynasties.

By examining the political, social, and economic/financial underpinnings of these cycles, we can extract lessons for today’s investment landscape and global order.

Chinese policymakers are also well-versed in their own history (and that of other ancient and modern cultures), so their policymaking is often informed by their historical perspectives.

While Western officials tend to be more tactical in their approach, Chinese policymakers tend to be more strategic and think over longer time horizons.

This is a case where history comes into play – Chinese history is longer and they study it more.

This is also facilitated by the cultures and political systems – the individualist, “bottom-up,” elections-based systems in the West and the collectivist, “top-down,” one-party system in China (along with other countries in the region, such as Vietnam, Laos, and the DPRK).

We’ll distill everything we could learn about the various Chinese empires (starting from 221 BC) to the present and the implications and lessons for modern traders and investors in about 4,000 words.

Key Takeaways – Rises & Declines of Chinese Empires

China’s history of rising and declining dynasties provides lessons for today’s investment landscape and global order, emphasizing the importance of sustainable fiscal policies, adaptability to external shocks, and balanced spending.

Chinese policymakers tend to think strategically and over longer time horizons compared to their Western counterparts, which can influence their approach to economic and geopolitical decisions.

Understanding the historical cycles and patterns in China’s financial and economic history can help traders, investors, and policymakers anticipate potential future challenges and opportunities.

We describe the various dynasties individually and then get into broad-themed takeaways at the end, including for policymaking and portfolio construction.

Qin Dynasty (221 BC – 206 BC)

The Qin Dynasty marked the start of the imperial era in China. It united most of the area we now call China for the first time.

This dynasty centralized power and standardized currency, weights, and measures – critical for trade.

Its rise was fueled by innovative policies promoting agriculture and rewarding military merit.

However, the Qin Dynasty fell into a rapid decline due to its tyrannical governance and heavy taxation, which ultimately triggered a rebellion.

It also accumulated significant debts from extensive construction projects like the Great Wall.

This indicated that over-ambitious infrastructure spending without sustainable financing can lead to a financial downfall.

Han Dynasty (202 BC – 220 AD)

The Han Dynasty witnessed economic prosperity due to the Silk Road trade.

The Han Dynasty is most known today for developing governance systems that are still in use today

The government’s promotion of Confucianism, which emphasized harmony, contributed to social stability, fostering economic growth.

The decline of the Han Dynasty was precipitated by economic instability from frequent wars, corruption, and heavy taxation.

The empire increasingly relied on debt to finance its military and public works, leading to public resentment and internal conflicts.

This highlights the risk of overreliance on debt-financed government spending that doesn’t pay for itself with corresponding productivity benefits.

Tang Dynasty (618 – 907)

The Tang Dynasty is often regarded as a high point of Chinese civilization.

Emperor Taizong was one of China’s great dynastic founders, taking a period of conflict and establishing institutions that set up China for future success.

China expanded its borders extensively during this period and experienced a cultural flourishing.

A period of peace lasted for roughly 150 years.

It boasted a complex canal system, which enhanced trade and contributed to economic prosperity.

Paper money was first introduced during this period, revolutionizing the financial system.

The Tang Dynasty, however, fell into decline due to political corruption, economic disparity, and a series of natural disasters.

While natural disasters, droughts, and floods tend to be underemphasized in economic history, they wipe out more civilizations than the debt problems that most of us focus on.

The An Lushan Rebellion drained the empire’s resources and led to unprecedented inflation, indicating the fragility of economies to geopolitical and external shocks.

The inflation period also shows the historical cycle that gets repeated over time between various monetary systems:

hard money (e.g., gold and/or silver based typically)
hybrid system of claims on hard money (e.g., a certain amount of money that’s convertible into a commodity that can be changed)
fiat money

This inflation led to the start of the Song Dynasty starting out on a “hard” system.

Song Dynasty (960 – 1279)

The Song Dynasty is commonly broken into the Northern Song Dynasty (960 – 1127) and Southern Song Dynasty (1127 – 1279).

The Song Dynasty saw remarkable technological advancements and the introduction of movable type printing, leading to increased literacy and a booming economy.

The government initiated fiscal reforms, streamlining taxation, and improving monetary policies, which boosted trade and commerce.

During this period China was the world’s top economy.

However, the Song Dynasty collapsed under the invasion of the Mongols after it had weakened from years of military spending and corrupt governance.

High defense expenditures and a deteriorating financial situation left the Song Dynasty vulnerable, underscoring the importance of maintaining fiscal stability in the face of external threats.

Yuan Dynasty (1271 – 1368)

The Yuan Dynasty, established by the Mongols, introduced the use of paper currency as the sole medium of exchange, which initially stimulated the economy.

However, excessive printing of paper money to fund wars and public spending resulted in hyperinflation and economic turmoil.

The Yuan Dynasty’s fall was precipitated by various factors, including economic mismanagement, rebellion, and internal divisions.

The Mongols during the 1300s were the world’s most powerful empire.

However, their rise and fall was swift.

While their military power was excellent, their inexperience in governing and establishing sound institutions and economic policies led to their relatively quick demise.

The tale of the Yuan Dynasty serves as a cautionary tale of economic mismanagement.

Ming Dynasty (1368 – 1644)

The Ming Dynasty saw the establishment of state monopolies in certain industries, such as salt and tea.

The Ming Dynasty coincided with the Spanish Empire being the strongest in the West.

While these monopolies initially provided revenues, over time, they stifled innovation and contributed to the empire’s eventual decline.

The Ming Dynasty’s downfall can be attributed to fiscal difficulties due to costly wars, natural disasters, and the empire’s failure to adapt its tax base in the face of a growing economy.

The Ming Dynasty’s decline was also characterized by a decadent ruler’s focus on constructing his own lavish tomb rather than active, prudent governing.

Modern-day Chinese leaders are also very cognizant these days of the need to ensure that prosperity and economic rewards are distributed in a broad-based way.

Many Chinese emperors and dynasties have lost the plot because they didn’t ensure some level of “Common Prosperity” (as it’s commonly known today).

Qing Dynasty (1644 – 1912)

The Qing Dynasty, the last imperial dynasty of China, underwent significant economic growth.

It was during the early Qing Dynasty in the 1600s and 1700s that China’s territorial expansion was largest at more than one-third of the world’s landmass.

However, it was plagued by corruption, aggressive foreign invasions, and internal rebellions, which stressed the imperial treasury.

The Qing Dynasty’s decline was marked by economic stagnation and the inability to modernize China’s financial system to compete with the West.

Economic openness and innovation were limited, contributing to their inability to adapt to changing global economic dynamics.

The Qing Dynasty collapsed due to internal corruption, financial crises, societal unrest, increasing Western influence, and rebellions like the Taiping and Boxer Rebellions, which weakened the central authority.

A Brief History of China’s Monetary System Since 1750

The early periods of relatively stable inflation in China were predominantly due to the usage of metals (namely silver and copper) as currency, forming a “hard” monetary system, in which weights of raw metals were exchanged instead of a centrally printed currency.

Upon the collapse of the Qing Dynasty, provinces claimed their independence and began circulating their own currencies, continuing to utilize the hard monetary system, based on the weight of their silver and copper.

This method maintained value, thereby preventing excessive inflation during this tumultuous period.

However, during the 1920s and 1930s, debt increased, leading to the typical debt cycle where commitments to provide money surpassed the ability to fulfill these obligations, causing default issues.

This crisis resulted in the classic rejection of the metal standard, prohibiting metal coins and private silver ownership.

Domestic Currency vs. International Currency

Currencies serve two primary functions:

domestic transactions, which the government monopolizes and can manage through fiat and flimflam, and
international transactions, requiring currencies to hold real value for acceptance.

Generally, currencies used in international transactions are considered superior.

The actual worth of a domestic currency can be evaluated by its active international use and its equal exchange rate, domestically and internationally.

Capital Controls

Restrictions or capital controls on a currency’s free international exchange can increase its susceptibility to devaluation.

This is why the lack of capital controls is a prerequisite for a currency to serve as a reserve currency.

Hence, the imposition of capital controls on a currency, especially during a significant domestic debt crisis, is a sign to abandon that currency.

1930s Chinese Currencies

In mid-1930s China, two currencies co-existed:

a domestic-use fiat paper currency and
a gold and silver-backed currency for international payments

The domestic currency was widely printed and significantly devalued, while the territory under its issuing government was falling in size and economic scope due to the ongoing civil war, resulting in the documented hyperinflation.

Lesson: Avoid Being Concentrated in Cash During Debt Crises and Wars

Fiat currencies should be avoided during debt crises and wars, as they will be extensively printed to meet debt obligations, leading to devaluation and possibly hyperinflation.

Post-World War II and civil war turbulence, the first RMB was launched in December 1948 as a tightly-supplied fiat currency to curtail the rampant hyperinflation.

There were subsequent issuances of RMB in 1955 and 1962, with a fixed exchange rate of 2.46 to the US dollar maintained from 1955 to 1971.

1972 – Present

The 1972 to late 1970s period saw China effectively controlling money and credit.

There was another high inflation round from the late 1970s to the early 90s, brought about by the 1971 global devaluation of money against gold, global inflationary pressures, the gradual removal of China’s price controls, loose credit, and the lack of expenditure controls among state-owned enterprises.

Current account items were allowed convertibility in 1996 but not for the capital account – as is typical, as we cover here.

The exchange rate to the dollar remained at 8.3 from 1997 until 2005 when the dollar peg was removed.

Modern Devaluations

Historical currency rates before modern times are highly fragmented.

There were two notable devaluations; one during the establishment of the new exchange rate in 1948 and a series from 1980 until the early 1990s.

These aimed at aiding exporters and managing current account deficits, which resulted in high inflation during this time.

Growth was relatively fast and volatile during this period until around 1978 (when Deng Xiaoping came to power).

What It Means for China Today

China’s lengthy and erratic markets and economic history have provided the Chinese, especially its economic policymakers, with great historical perspectives on money, debt, and economies.

However, there are exceptions.

On one hand, most Chinese have a strong saving instinct and a sensible understanding of risk. This leads them to invest in secure liquid assets (like cash deposits) and tangible assets (like real estate and gold).

The Chinese middle class has a significant amount of their savings wrapped up in their personal residence, and real estate is 70% of Chinese savings.

On the other hand, most Chinese investors lack experience with riskier assets like equities and riskier debt.

You see similar behavior in countries like Vietnam. And because of communist revolutions in the 20th century in these countries, their capital markets are relatively new.

In China, the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) started trading on December 19, 1990 and July 3, 1991, respectively.

The best equity and credit managers are still heavily located in the US and developed Europe.

So the Chinese can be inexperienced in these areas, but their learning rate is fast.

Regarding understanding money, credit, monetary policy, fiscal policy, and the economy, and how to restructure bad debts, China’s perspective is exceptional.

Implications for Today’s Traders and Investors

The cyclic nature of Chinese empires’ rises and declines, largely dictated by financial strategies, offers timeless lessons for modern traders and investors – especially those with a long-term orientation.

Factors such as sustainable fiscal policies, balanced spending, economic innovation, and adaptability in the face of external shocks are vital.

Recognizing the importance of these factors can guide traders/investors in identifying opportunities and risks within the current global economic landscape.

For instance, an over-reliance on debt, aggressive financial expansion, and lack of innovation may signal potential economic downturns in the future, while sustainable spending, financial stability, and adaptability often indicate potential economic growth.

Studying history can be a powerful tool in understanding what might happen next.

Studying history can help you focus on big-picture trends, cause-and-effect relationships, and the evolution of internal and external orders within and between/among countries.

This analysis can allow you to identify patterns and cycles that consistently recur.

Learning from the past

Through the study of history, we can understand how societies, economies, and political structures have evolved.

This allows us to understand the forces that led to these changes, providing us with context for where we are now.

Understanding this can help us predict future trends, based on similar circumstances in the past.

Recognizing patterns

The historical lens helps us identify patterns in human behavior, decision-making, and societal changes.

Cycles of order and disorder, shifts in world power, and struggles for wealth and power are all patterns that have persisted throughout history.

By understanding these patterns, we can make educated predictions about what might happen next.

Providing a comprehensive view

Seeing the many interlinking cases evolve together helps you see the patterns that govern them.

History doesn’t occur in isolation – different societies and civilizations influence each other, and their histories are interconnected.

Understanding these interactions can provide a more holistic view of the past, present, and potentially the future.

Helping us understand the future

If we accept the premise that history follows certain patterns for the same cause-effect reasons, it’s logical to conclude that we can anticipate future developments by understanding these patterns and thus they’re worth knowing and studying.

We can’t predict the future with absolute certainty, but it can give us a roadmap to potential outcomes based on past precedents.

Evaluating the effectiveness of different systems

By studying history, we can see the impacts of different political, economic, and social systems.

This can help us determine what types of systems are more likely to be successful in the future, based on their performance in the past.

History is a tool for understanding the world we live in now, and the world we might inhabit in the future.

It helps us contextualize current events, anticipate potential future challenges, and make more informed decisions about how to navigate them.

Portfolio Construction Takeaways

In light of the lessons laid out from the various Chinese dynasties, here’s an approach to constructing a modern financial asset portfolio:

1) Diversification – What mix of assets provides the best chance of delivering good returns over time through all economic environments?

This is a key strategy for lowering risk, as all assets have intrinsic environmental biases.

It involves spreading your investments across various asset classes such as cash, bonds, stocks, commodities/precious metals, alternative investments, etc.

The allocation towards each of these asset classes would depend on investor’s goals, risk tolerance, and investment horizon.

2) Currency & Geo Diversification

Just as with asset classes, diversification across different currencies and countries can help reduce risks associated with any specific currency or country’s economic downturn.

It’s generally wise to diversify across both developing and developed markets.

3) Cash Reserves

Keeping enough liquidity in terms of cash or cash equivalents allows offsetting short-term market fluctuations and provides funds for any immediate expenses or investment opportunities.

4) Bonds

Investors can also rely on bonds for a predictable income stream and to preserve capital, especially government and corporate bonds that are considered less risky.

5) Equities

Equities or stocks provide potential growth and are generally advised for long-term portfolios.

However, they also carry higher risks and volatility as a long-duration asset, so it’s important to adopt a balanced approach.

If you think of your portfolio like a recipe, having too much of any ingredient can make it out of whack.

Because of equities’ volatility, it doesn’t take a high allocation for them to begin dominating the portfolio’s movement.

6) Precious Metals

Investing in gold or other precious metals can act as a hedge against inflation and currency fluctuations.

It’s a type of inverse money.

Just like any other asset, the allocation should be in line with the investor’s risk tolerance and investment goal.

7) Regular Rebalancing

Re-evaluate your portfolio regularly to ensure it aligns with your investment goals.

This could involve buying or selling assets to maintain the desired allocation or to adjust the risk-reward profile based on changes in market conditions.

8) Risk Management

Always bear in mind that all investments carry risk.

It’s important to set realistic expectations and not put all your chips into the center on one or a small handful of trades or investments.

This is where the concept of diversification applies – spreading investments across different asset classes to manage risk.

9) Long-term Approach

As shown by the history of Chinese dynasties, economies go through cycles.

Investors are advised to adopt a long-term strategy while being adaptable to shorter-term market conditions.

10) Recognition of Financial Cycles

Understand that financial markets move in cycles and it’s beneficial to tailor investment strategies to minimize their effects on your portfolio for long-term, strategic holders.

11) Seek professional advice

Especially for beginners, it could be highly beneficial to seek advice from financial advisors with deep knowledge of markets and the dynamics involved in investment planning.

They can guide you on asset allocation strategies tailored to your personal financial goals, risk appetite, and time horizon.

12) Consider Tax Implications

Investment decisions should also involve the consideration of tax implications.

Some assets are favorably taxed compared to others.

13) Understand Your Investment

It’s important to fully understand where you’re investing – research extensively or seek advice from experts.

Summary

Learn from the patterns of history and apply their lessons to your trading and investment decisions.

This can be a powerful tool in managing portfolios effectively and building long-term wealth.

Each individual’s circumstances are unique, and their strategy should be tailored accordingly.

A wise strategic asset allocation can best position portfolios to capture returns wherever they occur.

To do so, they have to be diversified, stay disciplined, and remain patient.

Economic Policymaking Takeaways

Sustainable Fiscal Policies

From the various Chinese dynasties, the lesson is that sustainable fiscal policies are essential to ensure long-term economic prosperity.

Over-reliance on debt, aggressive financial expansion, and lack of innovation can lead to economic downturns.

Countries that remain fiscally responsible and focus on economic innovation tend to fare better in the long run.

Balanced Spending

Spending should be sustainable and in proportion to the country’s revenue.

Overambitious infrastructure projects without sufficient financial backing can lead to financial turmoil.

At the same time, neglecting necessary investment in key sectors, such as defense, could leave countries vulnerable.

Ensure Resilience from External Shocks

From the Tang and Song dynasties, it’s evident that economies should always be prepared for external shocks, geopolitical risks, and natural disasters, which can have devastating effects on economic stability.

Having a strong military is important and should be engaged in productive activities, but over-investment can cause an empire to become weaker.

Importance of Trade & Innovation

Active promotion of trade, as seen in the Han Dynasty and technological advancements as in the Song Dynasty, contribute significantly to economic prosperity.

The move towards a more international outlook allows for greater economic diversification and thus stability.

Prudent Monetary Policies

As evident from the Ming and Qing dynasties, there is a need for sound monetary policies.

FAQs – The Rises and Declines of Chinese Empires

What was the first Chinese Empire and when did it occur?

The first Chinese Empire is traditionally considered to be the Qin Dynasty, which was established in 221 BC and lasted until 206 BC.

The main event leading to the rise of the Qin Dynasty was the state of Qin’s successful conquest of other warring states during the Warring States Period.

The centralization of state power and legalism were key to its ascendancy.

The fall was marked by political instability, popular uprisings, and a succession crisis brought about by heavy taxation and forced labor.

How did financial elements influence the rise and fall of the Han Dynasty?

The Han Dynasty (202 BC – 220 AD) came to power by winning over the populace and implementing reforms to address the issues that brought down the Qin Dynasty.

They developed a strong economic base through land reforms, monopolies on salt and iron, and a well-structured taxation system.

However, their decline was precipitated by financial difficulties.

High taxes, economic inequality, corruption, and internal power struggles led to the Yellow Turban Rebellion and ultimately to the fall of the Dynasty.

What was the economic basis of the Tang Dynasty and how did it lead to their downfall?

The Tang Dynasty (618-907 AD) is often considered one of China’s golden ages.

It implemented equal-field system, which allowed for more equitable land distribution and taxation, leading to economic prosperity.

It was also a period of great technological and cultural advancement.

However, the An Lushan Rebellion severely damaged the economy, and the subsequent breakdown of the equal-field system led to wealth concentration and peasant revolts, contributing to the decline of the Tang Dynasty.

How did the Yuan Dynasty manage their economy and what led to their downfall?

The Yuan Dynasty (1271-1368) was established by the Mongols.

Despite their military prowess, the Mongols had limited experience in administration and governing.

They implemented a paper money system, but it soon led to hyperinflation due to lack of fiscal discipline and excessive warfare.

Additionally, they failed to effectively manage the canal system, leading to reduced agricultural output and famines.

Widespread discontent and rebellions resulted in the fall of the Yuan Dynasty.

What were the economic highs and lows of the Ming Dynasty?

The Ming Dynasty (1368-1644) initially had a strong economy due to agricultural reforms, state monopolies, and the promotion of industries like shipbuilding and porcelain.

However, fiscal policies such as the Single Whip Reform and high military expenditure strained the economy.

Coupled with natural disasters and the Little Ice Age affecting crop yields, the Ming Dynasty was weakened and eventually fell to the Manchu invaders, establishing the Qing Dynasty.

How did the Qing Dynasty handle their finances and what caused their decline?

The Qing Dynasty (1644-1912) initially maintained a sustainable taxation system and saw significant growth due to an expanding population and the introduction of new crops from the Americas.

However, it struggled to keep pace with modernization during the 19th century.

The Opium Wars and indemnities to foreign powers led to severe financial strain.

Government corruption, internal rebellions, and military defeats resulted in the fall of the Qing Dynasty and the end of imperial China.

How are these historical lessons relevant for today’s traders and investors?

The cyclical nature of Chinese empires, often influenced by financial dynamics, offers lessons in economic sustainability and risk management.

Understanding these patterns can inform expectations of China’s current and future economic cycles, potentially influencing capital allocation strategies.

For example, periods of rapid growth can lead to inflation and wealth concentration, which may trigger social unrest and political instability.

Additionally, inadequate financial policies or external shocks (like wars or climate events) can disrupt even the most prosperous economies.

Traders and investors today can use these historical insights to analyze China’s current financial landscape, its strengths and weaknesses, and anticipate potential economic shifts.