TWN Global Economy Series
Financial Crisis and Asian Developing Countries
The Impact of the Global Financial Crisis on the Chinese Economy and Chinas Policy Responses YU YONGDING
Third World Network
The Impact of the Global Financial Crisis on the Chinese Economy and Chinas Policy Responses
Third World Network
The Impact of the Global Financial Crisis on the Chinese Economy and China’s Policy Responses is published by Third World Network 131 Jalan Macalister 10400 Penang, Malaysia. Website: www.twnside.org.sg
© Yu Yongding 2010
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1 INTRODUCTION 2 TRANSMISSION CHANNELS OF ECONOMIC SHOCKS FROM THE GLOBAL CRISIS Direct Losses in the American Capital Market Fluctuations in Cross-Border Capital Flows The Impact of the Global Financial Crisis via the Trade Channel 3 CHINAS MAIN POLICY RESPONSES TO THE GLOBAL SLOWDOWN Expansionary Fiscal Policy Expansionary Monetary Policy 4 STRUCTURAL PROBLEMS IN THE CHINESE ECONOMY 5 HOW TO SAFEGUARD THE VALUE OF CHINAS FOREIGN EXCHANGE RESERVES The Dollar Trap 6 REFORM OF THE INTERNATIONAL MONETARY SYSTEM Relationship Between Global Imbalances and Global Financial Crisis Creation of an International Reserve Currency IFI Governance Reform 7 CONCLUDING REMARKS References 1
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This paper was prepared as part of a Third World Network research project on financial policies in Asia directed by Yilmaz Akyüz. An earlier version was presented at the Conference on the Effects of the Global Financial Crisis on Asian Developing Countries and Policy Responses and Lessons, held in Penang, Malaysia on 18-20 August 2009 and organized by the Third World Network and Consumers Association of Penang.
THE United States subprime crisis and the consequent dramatic global slowdown after the Lehman Brothers fiasco hit the Chinese economy very badly. Following the freefall of the global economy, growth of the Chinese economy fell to 6.8 percent in the fourth quarter of 2008 from 13 percent in 2007. At the same time, inflationary pressure disappeared suddenly and was replaced by the threat of deflation. The Chinese government responded swiftly to the impacts of the global economic crisis. In November 2008, a 4 trillion yuan stimulus package was introduced. Acting in tandem, the central bank, the Peoples Bank of China (PBOC), cut interest rates deeply, and the growth rate of credit and of broad money shot up. It seems that the economy started bottoming out as early as in the first quarter of 2009, owing to the stimulus package and the extremely accommodating monetary policy. However, it is still too early to judge whether the recovery is temporary or sustainable. To a certain extent, the recovery of growth is achieved at the expense of the worsening of structural problems. It is still too early to answer the question of whether the Chinese economy will be able to come out of the crisis with a more rational structure and embark on a more sustainable growth path. This paper aims at reconstructing the unfolding of Chinas growth trajectory before and during the global financial crisis. It examines how the Chinese economy was negatively impacted by the crisis, and the effectiveness of the Chinese governments policy responses to the crisis. Since September 2008 the Chinese government has been faced with three major tasks: crisis management, structural adjustment and protecting the value of its foreign 1
exchange reserves. Chapter 2 identifies the channels through which economic shocks from the global crisis were transmitted to China. Chapter 3 introduces the Chinese governments policy responses and examines the effectiveness and consequences of these responses. Chapter 4 discusses Chinas structural problems. Chapters 5 and 6 look at the policy...
References: Akyüz, Yilmaz. 2009. “Policy Response to the Global Financial Crisis: Key Issues for Developing Countries”, South Centre, 13 May 2009. Bergsten, C. Fred. 2007a. “How to Solve the Problem of the Dollar”, Financial Times, 11 December 2007. Bergsten, C. Fred. 2007b. “Objections Do Not Invalidate Substitution Account Benefits”, letter to the editor in the Financial Times in response to a letter by IMF historian James M. Boughton, 28 December 2007. Corden, W. Max. 2007. “The International Current Account Imbalances: A Skeptical View”, Economic Affairs, Vol. 27, No. 2, June 2007, pp. 44-48. Dooley, Michael P., David Folkerts-Landau and Peter Garber. 2003. “An Essay on the Revived Bretton Woods System”, NBER Working Paper 9971. Eichengreen, Barry. 2009. “The Dollar Dilemma”, Foreign Affairs, September/ October 2009. Perkins, Dwight H. 2006. “China’s Recent Economic Performance and Future Prospects”, Asian Economic Policy Review, Vol. 1, Issue 1, June 2006, pp. 15-40. Stiglitz, Joseph. 2006. Making Globalization Work, W.W. Norton & Company, Inc. UN Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System. 2009. Report, 21 September 2009. Yu, Yongding. 2005. “China’s Rise, Twin Surplus and the Change of China’s Development Strategy”, paper prepared for Namura Tokyo Club Conference, Kyoto, 21 November 2005. Yu, Yongding. 2006. “Global Imbalances and China”, paper prepared for Finch Lecture, Melbourne University, 17 October 2006, published in Australian Economic Review, March 2007. Yu, Yongding. 2007a. “New Challenges to China’s Economy”, unpublished note, 21 September 2007. Yu, Yongding. 2007b. “Comments on China’s Economic Situation”, Martin Wolf’s Economists’ Forum, 16 October 2007. Yu, Yongding. 2008a. “The Chinese Economy in 2008”, delivered at the 11th Credit Suisse Asian Investment Conference, Hong Kong, 1 April 2008. Yu, Yongding. 2008b. “The New Challenges of Inflation and External Imbalances Facing China”, Asian Economic Journal, Vol. 7, No. 2, Spring/Summer 2008, pp. 34-50.
Yu, Yongding, 2008c. The Management of Cross-Border Capital Flows and Macroeconomic Stability in China, TWN Global Economy Series No. 14, Third World Network. Zhou, Xiaochuan. 2009. “Reform the International Monetary System”, People’s Bank of China website, 23 March 2009, http://www.pbc.gov.cn/english/ detail.asp?col=6500&id=178.
THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE CHINESE ECONOMY AND CHINA’S POLICY RESPONSES
China, one of the world economy’s great growth success stories, was badly hit by the global financial crisis in 2008. While adverse impacts from investments in toxic financial assets and from volatility in capital flows were relatively limited, the Chinese economy suffered a serious blow from the collapse in demand for its exports. In response to the growth slowdown, the Chinese authorities adopted expansionary fiscal and monetary policy measures, including a 4 trillion yuan stimulus package and deep interest rate cuts, which sparked an economic recovery in 2009. However, concerns about the longer-term sustainability of China’s growth persist, given the many structural problems in the economy. This paper argues the need for urgently addressing these flaws – which range from unequal income distribution to the lack of a social safety net – if China is to embark on a more sustainable growth path. Above all, the author stresses, there should be a rethink of the export- and investment-led growth model which has served China so well but which may now require adjustment. The global financial turmoil has also highlighted another major challenge facing China: safeguarding its huge stock of foreign exchange reserves against capital losses caused by a declining US dollar. This paper explores the steps that can be taken by China towards this end, including diversification of its reserve holdings and, in the longer run, rebalancing of its balance of payments. In addition, the paper also makes the case for reform of the international monetary system to address one of the root causes of this “dollar trap” and, indeed, of the global financial crisis itself. YU YONGDING is an Academician at the Chinese Academy of Social Sciences (CASS), former Director-General of the Institute of World Economics and Politics, CASS, and President of the China Society of World Economics.
TWN GLOBAL ECONOMY SERIES
is a series of papers published by Third World Network on the global economy, particularly on current developments and trends in the global economy, such as those involving output, income, finance and investment. It complements the TWN Trade and Development Series which focuses on multilateral trade issues. It aims to generate discussion on and contribute to appropriate policies towards fulfilling human needs, social equity and environmental sustainability.
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