A Comparative Study of Policies in China and the Us Tackling the International Financial Crisis

Topics: Subprime mortgage crisis, Monetary policy, Economics Pages: 8 (2406 words) Published: April 12, 2013
A comparative study of policies in China and the US tackling the international financial crisis

In 1930s, with the financial globalization, interaction and integration, countries all around the world have gradually opened their doors to the whole world, which, means they are no longer isolated in their own financial market but now related to others. As a result, financial crisis became very contagious as well. The crisis erupted in one country affected not only the economy of itself but the area around it and even the whole world. So it could also been seen as the globalization of financial crisis.

In 2007, the sub-prime mortgage crisis that started from US swept UK, Japan,Europe,China and other developed and developing countries. This global financial crisis had tremendous damage on global economy, slowing down the economic growth rate and causing more serious problems than the case of Southeast Asian in 1997. After the crisis happening, the United States, Europe, the United Kingdom, Japan and some other countries reacted quickly to take measures to protecting their national financial systems and economy by fiscal and monetary policies:cutting the rate of interest, injecting to the market, reducing tax and increasing public spending. China was not directly impacted by the crisis as its financial market was not fully liberalized yet with capital controls. But the indirect effects were so large that China had to adopt an expansionary fiscal policy and moderately easy monetary policy to eliminate the influence and expand domestic demand to boost economic growth.

The main purpose of this paper is to find a effective way to control financial risk and illustrate how to avoid a financial crisis by analyzing policies of different countries dealing with global financial crisis and how to reach economic prosperous.

In the course of economic and financial globalization, international financial capital flow had grown markedly with an accelerating increasing rate. Banks and securities corporations created large numbers of financial derivatives in order to maximum profits and promote their competitiveness. However, financial derivatives like asset securitization had great financial risk especially when they were overused. The widespread using of financial derivatives caused expansion of financial risk and financial bubbles, which eventually resulted to a onset of a global financial crisis. This trend was unavoidable differing only in the length of time.

In August 2007, USA broke out sub-prime mortgage crisis. It then changed to a global financial crisis. A large amount of banking institutions were caught in going bankrupt or bought and the unemployment rate was jumping. Its damage was so serious that maybe it was the biggest global financial crisis ever in history.

People suffered from assets shrink and reduced PDI(personal disposable income) and consumer confidence decreased sharply. In order to promote economic growth, China, the US, Japan, the UK and Europe adopted expansive fiscal policy to improve the consumption level of residences and bolstered business investment to achieve the goal of expanding domestic demand.

Let us see the fiscal policy adopted by America and China respectively.

First of all, America proposed a tax cut to increase PDI and offered more funds needed in manufacturing and operation to small businesses. Meanwhile, China pushed forward the reform of tax system and implemented a structural tax reduction to realize expanding of domestic demand and stimulating investment to stave off recession. At the beginning of 2008, president Bush signed a package of tax cut including direct income tax relief to individuals and tax incentives to companies and also, drawback as well. In addition, the government granted a tax break to new energy, energy saving and emission reduction, transportation and raised taxes on the highest earning Americans. In...

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