The role China
might play in the global financial crisis
|The global financial crisis that took place in the latter half of
2009 is making a serious impact on the world's economy, financial
authorities in the US and Europe are all working feverishly trying
to address the problems. Due to US and European governments' attempts
to avoid credit crunch in recent months, huge sums of funds are being
injected, trying to save the financial infrastructures on the verge
of collapse. However, where do the funds come from? The first idea
that comes to mind is China, because China has the world's largest
foreign reserves. Should China invest and save the global financial
crisis? China being a developing country, is it equipped with the
ability to save the financial problems of developed countries? This
may well be a focus of discussion in the 2008 APEC leaders' meeting.
Thus, this study will look at the influence of this wave of financial
crisis on China's economy, and from the perspective of whether China
should help relief the US financial sector, to discuss the possible
roles China can play in this wave of global financial crisis.
|The influence of global financial crisis on
Due to the unfolding of the US’s sub-prime mortgage crisis, and
in conjunction with the rapid worsening of the global financial
crisis in the latter half of 2008, the impact on US and European
economies and finance is far greater than other regions. Although
the financial storm which took place in US and Europe this time
either directly or indirectly sent shock waves to countries in particular
such as China where financial markets are less developed, but the
scale of damage experienced was obviously less than US and European
countries. Yet, due to the influence of economic downturns of advanced
nations in Europe, US and Japan, after a period of five years’ rapid
growth, China’s economy will experience slight slowdowns in 2008.
According to the predictions of major international economic institutions,
China’s economy will experience continued slowdown in 2009.
Many experts believe that amidst the US financial market situation,
though China is not immune to the impact, the influence experienced
would not be that big. According to China Business News reporter
Chen Shan-Shan’s (2008) report due to China's domestic regulatory
authorities of foreign financial institutions engaged in credit
derivatives transactions controls is more stringent, China’s domestic
banks’ investment scale is not that large, thus the a direct impact
to China's economy is minimal. However, the indirect effects may
need to be evaluated more carefully, including (1) shrinking export
growth leading to prolonged slow down; (2) a weaker U.S. dollar
against appreciating RMB exchange rate impacting on China domestic
employment; (3) a weaker U.S. dollar leading to rising global commodity
prices and pushing up inflation; and (4), the Sino-U.S. carry rate
expansion, leading to a threat to financial stability of the international
floating capital. China Economic Times reporter Su Pei-Ke (2008)
also reported that if this crisis in Wall Street is allowed to induce
again the U.S. credit crisis and economic crisis, Chinese exports
that are heavily dependent on the United States consumer market
to maintain high growth will face severe challenges. In addition,
because China's plummeted stock market resulted in China's investment
confidence and consumer confidence suffering serious setbacks, plans
to start domestic demand is already even more difficult.
According to Chinese Customs statistics indications, in 2008 January
to September there was 25.2 percent growth over the same period
in the previous year, with exports growing 22.3 percent, while imports
grew 29.0 percent, the trade surplus is only reduced by 2.7 percent
over the same period of the previous year. Although the financial
crisis sparked economic growth to slow down in developed countries,
impacts on in 2008 China's exports were not so apparent. The main
reason being China's largest exporter region is in Asia, in 2008
from January to July China's exports to Asia accounted for 46.9
percent ratio, the ratio of exports to Europe accounted for 24.0%,
the ratio of exports to the United States accounted for 17.5 percent.
However, since September 2008, the world's financial markets were
influenced by investment bank Lehman Brothers’ bankruptcy, and set
off a more serious financial crisis, will it result in global economic
downturn in the fourth quarter, and then impact on Chinese exports,
it seems that may not be so out of the picture.
As the U.S. government passed the 700,000,000,000 U.S. dollars of
relief, the U.S. budget deficit is expected be worsened, the possibility
of a weakened dollar is high. If the weak dollar causes RMB to appreciate,
it will make further impact on China’s export and employment. However,
in between July and August 2008, China's central bank was worried
China's export will be affected by advanced countries’ slowing economic
growth, it already took precautions to slow down the pace of RMB
appreciation considerably or even depreciation. Coupled with the
recent outbreak of the financial crisis, it is feared that the advanced
countries will experience deepened economic slowdowns, China's central
bank is expected to continue to observe changes in the global economic
situation, with the short term priority of stabilizing the Yuan's
In regards to a weaker U.S. dollar leading to rising global commodity
prices and inflation, because of the global economic slowdown, the
growth of demand is slowed down, the chances for raised global commodities
prices pushing up inflation is low. In regards to the widening Sino-U.S.
spread leading to the threat of international hot money on financial
stability, the United States in order to reduce the impact of the
financial crisis on its economy, has repeatedly cut the federal
funds rate, however, China in order to curb rising inflation has
repeatedly raised interest rates, resulting in the widening of Sino-U.S.
spread, leading to international hot money flowing into China, increasing
the pressure on RMB appreciation. However, during the recent rapid
deterioration of the global economy, China has in the September
2008 made rate cuts, it is expected that in the near future for
the Chinese government to maintain its economic growth, chances
are high for it to further lower its interest rate. As a result,
the possibility for further widening of Sino-U.S. spread is reduced.
In recent years, investment in the real estate market has always
been one of the major pillars for promoting China's economic growth.
Due to fears of overheating in the property market, the Government
has taken active intervention measures to restrict the developers
and buyers of loans, designed to limit the scope of opportunism
and avoid speculative bubble. Up to August 2008, housing prices
in 70 major cities rose 5.3 percent, but has relatively declined
from the beginning of the year’s 11%, real estate sales and housing
construction areas have also declined. The Financial Times writer
Dyer, Geoff (2008) pointed out that the majority of economists believe
that China's large-scale mortgage arrears are likely be lower than
many countries, because relatively high proportion of Chinese buyers
are using savings for payment. If the housing market in the coming
year really suffers a hit, the banking sectors will be implicated.
The most severe condition would be problems in the real estate industry,
as it will lead to the collapse of private sector investment.
The financial crisis which swept through the world's major industrial
economies, has caused great damage on the financial systems of these
countries, but so far since China has not been very greatly damaged
by the global financial crisis. Morgan Stanley chief economist for
Greater China, Wang Chin (2008), pointed out that the main reason
is that firstly, as in recent years, steady and substantial current
account surplus indicates that China has become a net exporter of
savings, when compared to other countries, the Chinese economy as
a whole has lower leverage. Secondly, due to the rapid accumulation
of foreign exchange reserves, China's domestic banking system still
maintains sufficient liquidity. Thirdly, thanks to the benefits
of capital controls, China's central bank, mainly invests in high-credit
grade, high liquidity financial instruments, and for the domestic
mainly in the form of foreign direct investments. The fourth reason
being the different departments in the economic system, such as
family, business, government, are financially linked mainly by traditional
commercial banks as medium. Fifth, the household sector and government
departments of the respective balance sheet is very solid. The household
sector and government departments have a very low level of liabilities,
respectively, accounting for 13% and 33% of the GDP.
In the era of global economic integration, China's economy is closely
linked to the world economy, economy continues to decline in Europe
and the United States, and the China is no exception. Since China
has a relatively sound economic foundation, it could be able to
make efforts accordingly to stabilize the world economy. China can
further enhance confidence in China's stock market to influence
the world's confidence in the stock market. China can also through
purchasing international financial enterprises to enhance confidence
in world economy.
|Should China help relief United States' financial
After the United States Congress passed 700,000,000,000 U.S.
dollars plan to rescue the market, whether China should buy this
newly issued treasury bonds by the United States in order to support
the U.S. government to rescue the market, has become the focus of
heated debate in the market. The other side of the issue is how
to assess China's own capacity, as well as China's economic prospects.
China Business News recently invited several experts to express
their views, many experts believe that China does not need to participate
in assisting the United States. Because the principal threat of
China's foreign exchange reserves investment has not yet been lifted,
the United States government bonds credit has been lowered to the
point of not worth buying, China has to worry about the rapid changes
of international capital flows, there must be enough foreign exchange
reserves to guard against capital flight, the possibility of the
United States to refuse payment of national debt does exist, as
well as the U.S. economy being four times that of China, the fundamental
solution to the crisis must rely on the United States’ self-help.
Being impacted by the financial tsunami, in today’s growing economic
globalization, China's economy though unlikely to be an exception,
but amidst current rather uncertain financial situations, investment
in the financial sector is clearly not the best policy, not to mention
China’s lack of management capability. However, there is still a
small number of experts who believe China should act within his
own capacity to help the United States and Europe restore financial
stability, and out of the crisis.
The financial crisis has shrunk the assets of Wall Street substantially,
the China does not seem to be lacking funds, but is lacking qualified
personnel, international mergers and acquisitions, and management
experience in international financial institutions, in which case,
in fact China does not have the capability to buy U.S. financial
institutions . However, according to China Business News reporter
Zhou Jian-Gon (2008), an exclusive interview with the U.S. accounting
firm Deloitte global CEO James H. Quigley pointed out that in the
next few years, China's economy will be larger in scale, playing
more important positions in the global arena, China's economy needs
to further spread its economic risks, thus it should make overseas
investments, beginning the learning process of international financial
management experience through equity participation. Believing in
the world economy and continue to spread the risks, allowing other
economic powers to walk on the stage, to play an important role
in the world economy, is also in line with the interests of China
and the United States.
Peterson Institute for International Economics senior research fellow
Subramanian (2008) pointed out that the Chinese government can provide
up to 500,000,000,000 U.S. dollars of loans (1,800,000,000,000 U.S.
dollars from its existing foreign exchange reserves) for the U.S.
government, to help relief the financial industry of the United
States. China's assistance in the past (that is, to buy U.S. treasury
bonds) was indirect and unconditional. But this time the situation
is different, China should provide direct loans to the U.S. government
for it to cope with the current financial crisis. More importantly,
China should put forward some conditions. China should put forward
two conditions. First of all, the U.S. government should focus on
government funds to improve the bank's capital structure for bank
relief, which is the way to deal with large-scale financial crisis
in the most efficient manner. The second condition has to do with
social safety net, these funds must be devoted to alleviate impact
for real-estate businesses owners suffering hardship. This action
from China will help social equality, and will also help solve the
fundamental problem of the real estate market. For China, coming
to help with the relief of the financial crisis, if the rescue operation
is successful, it would help to prevent U.S. economy downturn, and
is beneficial to China's export.
During the 1998 Asian financial crisis, the Chinese Government has
taken a variety of policy measures, expanding domestic demand, stimulating
economic growth, and stabilizing the RMB exchange rate, which helped
to maintain a steady growth of domestic economy, and had significant
effects for the alleviation of weak economic situation in Asia,
and the economic recovery in Asia-Pacific region. Chinese International
Economic Cooperation Society vice president, Wang Hui0Yao(2008),
pointed out that in the era of global economic integration, China's
economy and the world economy is a solidarity, economy continues
to decline in Europe and the United States, China is unable to be
exempt. Since China has a relatively sound economic foundation,
it seems to be able to make corresponding efforts to stabilize the
world economy. China can further enhance confidence in China's stock
market to influence the world's confidence in the stock market.
China can also through the purchase of international financial enterprise
to enhance economic confidence of the world.
To save the U.S. economy does not seem to be the sole responsibility
of China, the Chinese economy is in transition, there are still
many urgent problems waiting to be solved, China should act within
its own capacity, in conjunction with more able Asian countries
who suffered less impacts in financial crisis to work together to
help resolve the crisis of further downturn of global economy.
|Asian countries working together to resolve
the crisis of global economic downturn
So far China has not been greatly injured by this current wave
of global financial crisis, mainly due to steady and substantial
account surplus in recent years, allowing the rapid accumulation
of foreign exchange reserves, China's domestic banking system still
maintaining adequate liquidity, on top of capital control, commercial
banks using traditional merchandize as medium, the household sector
and government departments both have very low levels of liabilities.
Although China's economy will be affected by Europe and United States’
economic recession, but strong domestic demand and sound policies
can continue to maintain high growth of the Chinese economy. At
this stage the world's major industrial countries have begun to
show economic downturn, although the U.S. government will come up
with more than 700,000,000,000 U.S. dollars of funds to rescue the
financial industry, but it is yet to actively raise funds for its
debt. Although China can buy U.S. financial companies to boost confidence
of the world economy, enhance its new image of world power, but
should Chinese enterprises grow into multinational companies it
needs to have a vision of internationalization. The 2008 Beijing
Olympic Games success has given the best evidence for large-scale
Chinese enterprises to step out. However, to save the U.S. economy
does not seem to be the sole responsibility of China, the Chinese
economy is in transition, there are still many urgent problems awaiting
solution, China should act within its own capacity, in conjunction
with more able Asian countries who suffered less impacts in financial
crisis to work together to help resolve the crisis of further downturn
of global economy.
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