Financial Crisis Impacts on Chinese Economy

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Literature review

1 The 2008 global financial crisis

The effects on the U.S. economy have by now been widely analysed and dissected, so several economists have focused on the influences of other countries. Mishkin (2011) pointed out that the inner link between countries’ financial systems was tighter than previously realized. Naudé (2009) studied the correlation between the 2008 financial crisis and the developing countries and proposed that some developing countries were less affected and they had the possibility of recovering through the process of advancing (IMPROVING) their financial system.

The Global Financial Crisis also affected the real economy. Bank failures not only increased the unemployment rate but also affected the normal production of auto, steel and other U.S. economic pillar industries. Furceri and Zdzienicka (2011) described the effect on European economies was obvious and everlasting. Bran, et al (2011) pointed out that American financial crisis has exposed the drawbacks of liberal capitalism. After the crisis, the U.S. government strengthened macroeconomic regulation and control by took (TAKING) over a number of financial institutions and corporate entities. Besides, financial crisis shocked the international community’s confidence in dollar and the dollar hegemony suffered the second shake since the collapse of the Bretton Woods system the 1970s. Curran and Zignago (2011) found that the international financial crisis has affected international trade considerably. However, different countries and industries have suffered from different levels of influence. The electronics, base metals and machinery industries were deeply affected while some other industries did not decrease sharply in trade.

2 Financial crisis contagions

There are several experts focused on the way that financial crisis spreads from one country to another. These transduction ways can be broadly divided into three categories. In the reality of economic operation, three contagion effects are simultaneously acting. Especially the expectation conduction is always along with the whole process of contagion and plays an extremely important role.

(1) The trade channel
Gerlach and Smets (1994) studied the financial crisis conducted? by the trade links between countries. In other words, devaluation of the trading partners or competitors caused the country's economic situation (balance of payments, product competitiveness, etc.) deteriorate. It led to the changing of investors’ expectation, which may increase vulnerability of a country and increase the possibility of suffering speculative attacks. The main research has focused on the analysis of the spillover effects of the financial markets and net contagion effect. In the model of Eichengreen, Rose and Wyplosz (1996), the crisis Contagion has two explanatory variables. They estimated the probability of occurrence of the crisis from trade matrix and macroeconomic variables matrix, in which they found the impact of trade matrix on the crisis is significant. Therefore, they concluded that in the same period of the currency crisis spread, trade links is far more important than the macro factor. Glick and Rose (1998) took 5 different crises data in 1971, 1973, 1992, 1994, and 1997 as samples to analyze by using Probit model. The results showed a country contacts closer to the crisis country has greater probability of infection, which explained the trade channel very well.

(2) The finance channel

Baig, etc. (1997)proved that there are significant financial spillovers effects in the Asian financial crisis by measuring the correlation coefficient of nominal exchange rate, stock index, interest rates, and external debt interest margin. Goldfajn and Valdes (1997) thought that banks which provide liquidity assets to foreign investors face a lack of liquidity since investors withdraw when crisis happens. It will lack the liquidity supply of these banks in other markets, so that the...
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