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December 2008
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.
Chuang, Chao-Jung
The influence of global financial crisis on China's economy

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 trends.
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 industry?

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.

Reference

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