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...