China and the Global Financial Crisis

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China and the Global Financial Crisis: Implications for the United States Wayne M. Morrison Specialist in Asian Trade and Finance June 3, 2009

Congressional Research Service 7-5700 www.crs.gov RS22984

CRS Report for Congress
Prepared for Members and Committees of Congress

China and the Global Financial Crisis: Implications for the United States

Summary
Over the past several years, China has enjoyed one of the world’s fastest growing economies and has been a major contributor to world economic growth. However, the current global financial crisis threatens to significantly slow China’s economy. Several Chinese industries, particularly the export sector, have been hit hard by crisis, and millions of workers have reportedly been laid off. This situation is of great concern to the Chinese government, which views rapid economic growth as critical to maintaining social stability. China is a major economic power and holds huge amounts of foreign exchange reserves, and thus its policies could have a major impact on the global economy. For example, the Chinese government in November 2008 announced plans to implement a $586 billion package to help stimulate the domestic economy. If successful, this plan could also boost Chinese demand for imports. In addition, in an effort to help stabilize the U.S. economy, China might boost its holdings of U.S. Treasury securities, which would help fund the Federal Government’s borrowing needs to purchase troubled U.S. assets and to finance economic stimulus packages. However, some U.S. policymakers have expressed concerns over the potential political and economic implications of China’s large and growing holdings of U.S. Government debt securities. This report will be updated as events warrant.

Congressional Research Service

China and the Global Financial Crisis: Implications for the United States

Contents
China’s Stake in the Current Crisis ..............................................................................................1 China’s Exposure to the Global Financial Crisis ..........................................................................2 China’s Response to the Crisis ....................................................................................................5 China’s Stimulus Program.....................................................................................................5 Has China’s Economy Bottomed Out?...................................................................................7 China’s Potential Role and Implications for the United States......................................................7

Figures
Figure 1. Chinese Exports of Goods and Services as a Percent of GDP: 1985-2008 .....................1 Figure 2. Changes in China’s Monthly Trade and FDI Inflows: April 2008-April 2009 ................5

Tables
Table 1. China’s November 2008 Domestic Stimulus Package.....................................................6

Contacts
Author Contact Information ...................................................................................................... 10

Congressional Research Service

China and the Global Financial Crisis: Implications for the United States

China’s Stake in the Current Crisis
China’s economy is heavily dependent on global trade and investment flows. In 2007, China overtook the United States to become the world’s second largest merchandise exporter after the European Union (EU). China’s net exports (exports minus imports) contributed to one-third of its GDP growth in 2007. China’s exports of goods and services as a share of GDP rose from 9.1% in 1985 to 37.8% in 2008 (see Figure 1). The Chinese government estimates that the foreign trade sector employs more than 80 million people, of which 28 million work in foreign-invested enterprises.1 Foreign direct investment (FDI) flows to China have been a major factor behind its productivity gains and rapid economic growth. FDI flows to China...
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