Chinas Strategy during Global Financial Crisis - Essay Example

China’s Strategy during Global Financial Crisis By China’s Strategy during Global Financial Crisis Introduction China is the fastest one among emerging economies in the world with an average growth rate of 10% over the past 30 years. The country is ranked as the world’s largest economy by purchasing power parity and second largest economy by nominal GDP. Although China has been the largest manufacturing economy and largest exporter of goods, the whole world began to notice Chinese economy when it became one of the few countries that survived the Global Financial Crisis (GFC) successfully. A combination of several political and economic policies assisted the country to keep the economy almost unaffected of the global economic turmoil. In response to the GFC, China returned to the pre-reform economy and adopted a protectionist approach with intent to enhance the state purchase of domestic technology and other commodities. In addition, the Chinese government introduced a $586 billion economic stimulus package to boost pillar industries of the nation such as electronics and shipbuilding. The country even increased its military spending during the crisis despite strong political pressure from the United States. Such proactive policy responses really benefited the country to become the fastest growing economy during and immediately after the GFC. This paper will evaluate China’s strategy during the GFC, particularly the policy to increase defense spending instead of cutting it. The paper will also discuss how those policy initiatives influenced the success of China in several respects. Chinese strategy during global financial crisis In line with the findings of the international economists, the Chinese regulators also judged that the GFC was originated in the United States. Referring to the words of Crotty (2009), they identified inadequate financial regulation, loosening of banking policies, extreme financial innovation, and Wall Street greed as the root causes of the financial breakdown. In the United States and Europe, the crisis emerged in the financial sector and it subsequently spread to the real economy. However, the Chinese regulators believed that this pattern of crisis dynamism is not likely to happen in China mainly because of the financial reforms in the years prior to the outbreak of the GFC. According to Saez (2004), as part of financial sector reforms, China had taken aggressive measures to recapitalize major banks, restructure its corporate governance systems, and make banking regulations more stringent. It is interesting to see that China started to develop a contingent plan in June 2008, well ahead of most other international governments so as to survive the crisis unaffected (International Monetary Fund, 2011). The Chinese strategy during the GFC focused on both political and economic responses to combat the recessionary pressures. According to Tisdell (2009), one of the major political responses was the rejection of economic reform and a return to the pre-reform economy. Until GFC struck the global economy, Chinese regulators dedicated to accelerate and deepen the country’s economic reforms with intent to accomplish a market-oriented economy. In contrast to this strategic position, the Chinese economy was forced to respond to the financial crisis by slowing down market reforms and adopting a measured attitude. In addition, the country restricted foreign access to its market and various sectors of the economy in order to support the country’s traditional industries. Patrick (2009) states that China adopted a nationalist or protectionist approach as a political response to address the challenges raised by the GFC. Under this approach, government purchase of domestic technology in China is fostered. The Chinese government would purchase technology that has been exclusively developed in the country for its many public works. The country’s economic stimulus package of $586 billion promoted the government purchase of domestic products and services, and this policy significantly limited foreign sales to China. Although many industrially developed countries including US were dissatisfied with the Chinese decision to block the purchase of foreign technology for the government funded projects, they could not legally question this policy because government procurement is not covered by the World Trade Organization. In addition to the indigenous innovation policy, there were many other regulatory amendments that favored domestic Chinese industries over foreign competition. The Chinese political spectrum also encouraged many subtle and ingenuous tactics to discriminate against foreign products and companies in order to provide Chinese firms with competitive edge in the market. Another key political response was the general consolidation of Chinese foreign policy towards US in trade and politics. Although China has long been interested to keep a better relationship with the US, this diplomatic relationship is actually mixed with fear and resentment. The US has taken positions against China in its unresolved political conflicts over Taiwan and Tibet. Although China viewed those US approaches with a great deal of anger and resentment, the country did not like to involve in a direct clash with US, and hence China was forced to keep silent on such issues. With the outbreak of the GFC, the Chinese regulators thought that admiring or acting in the interests of the US was no longer needed; and, hence they withdrew many liberalized policies in trade and politics. China is a high export dependency economy, and it greatly relies on foreign direct investment to promote growth. The pressures of the GFC led to downturn in exports and FDI. Statistical evidences (as cited in Yongding, 2010) suggest that Chinese exports decreased by 2.2 percent in November 2008, and this drop reduced the GDP growth by 3 percent. If the indirect impact is also considered, the country suffered a 5% drop in its 2008 growth rate (Ibid). This adverse situation resulted in the shutting down of many businesses and an increase in unemployment. In order to respond to this economic situation, China adopted three strategies including a fiscal policy, monetary policy, and social programs to improve domestic consumption, and thereby balanced the decline in growth rate due to fall in exports and FDI. Referring to Morrison (2009), under this fiscal policy, China introduced a $586 billion package in November 2008 using its huge foreign currency reserves. This stimulus package was actually designed to strengthen domestic spending and to create more job opportunities with the ultimate goal of improving the GDP by 2 to 3 points. This package contained provisions for boosting the nation’s top pillar industries like electronics and information technology, automobiles, shipbuilding, steel, textiles, and machinery. According to one finding, “China is expected to provide subsidies to business entities in the form of tax cuts, tax rebates, and tax credits for exports, direct government grants, and capital funds for investment overseas” (Chow 2010). Likewise, the Chinese government also formed a liberalized monetary policy to loosen control over banks and encourage them to lend more money. In addition, the government eliminated lending limits and cut down interest rates in order to enhance lending to companies and households. The Chinese regulators offered loans at favorable rates to state-owned enterprises that engaged in the export of goods and services. In short, the Chinese government pumped more and more money into the market by stimulating banks. Finally, the country gave specific focus to social programs in health care, insurance, and pensions. For instance, in April 2009, the Chinese government announced that it would spend $124 billion over the next three years to implement a universal health care system for all citizens (Litao & Yanjie, n.d.). The government also paid particular attention to improving rural incomes so as to narrow the gap between the income levels in rural and urban areas. In addition, a number of developmental initiatives such as housing projects, infrastructure projects, and school building and teacher training projects were announced. China significantly increased its subsidies to farmers. The ultimate intention of those social programs was to foster consumer spending and hence to fuel the overall economic growth. To sum up, the Chinese government identified that consumer spending is a key driver influencing domestic consumption, and therefore it was essential to declare consumer-friendly packages. Military and defense budget policies It is really surprising to see that Chinese military spending during the GFC soared despite severe financial repercussions on the economy. The surprise increases when it comes to know that most of the other global powers such as US, UK, Germany, France, and Brazil were cutting their defense spending during this period. According to the Stockholm Institute (SIPRI), China is believed to be the world’s second largest spending country in military and defense budgets (France-Presse 2010). Although outsiders are not allowed to access official figures from China, the SIPRI estimated that China had spent roughly 100 billion dollars in the area of defense in 2009 (Ibid). The Deutsche Welle German radio (2012) stated that the Chinese government increased its defense spending by 6.7% in 2011 as compared to the previous year. While evaluating the Chinese military spending strategy, several factors influenced the country’s decision to raise its defense spending even in the midst of GFC. O’Dwyer (2013) reports that Russia, with whom China shares its border, increased its military budget by 9.7% in 2011 and reached a total of nearly 72 billion dollars. Similarly, India (another neighboring country) has been consistently increasing its military spending for the last years. In this context, China was forced to raise its defense spending so as to manage cross border threats effectively. However, one cannot argue that China was over investing in the defense sector because the Chinese military spending was still in line with the country’s economic growth. In other words, the Chinese economy had grown enough to afford to the increase in defense budgets. According to Gu Xuewu, head of the Center for Global Studies at Bonn University in Germany, "in China, spending is growing by double-digit figures in almost all sectors - not only in the military. Spending on social issues, education and research is also on the rise. Chinas military spending should therefore not be seen out of context" (as cited in Hartert-Mojdehi, Bushuev & Haiye, 2012). It is relevant to note that Chinese military budget is approximately 2% of the country’s GDP, which is still less as compared to UK or France. One of the major reasons for the increased military spending by China was that the country had planned to modernize its troops and equipments. In terms of military efficiency, the United States was nearly 20-30 years ahead of China. Furthermore, the Chinese regulators strongly believed that there had been a positive relationship between economic development and the efforts to modernize troops and equipments by investing in military research. Considering the relative strength of the Chinese economy, the defense budget policy would prove a military advantage. It is true that US is the largest military spending nation, but the country was forced to trim down its defense expenditure in order to combat the dreadful effects of the GFC. However, China was not much affected by the crisis, and hence it might have viewed the situation as an opportunity to catch up with the US. How Chinese approach during crisis influenced the success of the country today? The different measures taken by Chinese regulators to combat the dreadful effects of GFC greatly assisted the Chinese economy to survive the crisis without much damage. According to The Guardian report by Ross (2012), China fought the GFC successfully with high investment and a strong state sector. The report adds that the country achieved over 9% annual average growth throughout the four years of GFC with the help of an expansionary monetary policy combined with an investment-led stimulus (Ibid). It is surprising to note that China recorded an economic growth rate of 9.6% and 9.2% respectively in 2008 and 2009, a period where GFC was on its peak (Morrison, 2014). Evidently, the economic stimulus program greatly benefited China to sustain its economic growth. Another noticeable effect of this stimulus package was that it also helped China’s neighboring countries in economic recovery in 2010. It is relevant to note that China maintained an economic growth rate of nearly 10 percent when American and European economies were struggling terribly. The Chinese economic stimulus program provided the country funds for infrastructure and housing development projects (Harjani, 2014). It also aided local governments to extend financial assistance to state-owned companies to deal with the development of housing estates, roads, and bridges. With the support of this stimulus package, the government could create new employment opportunities in manufacturing, construction, and other sectors of the economy. Economists indicate that the political and monetary measures taken by Chinese regulators to reduce the consumption of foreign made products and services extremely benefited the country to improve the demand for domestic goods and services. As a result, the government succeeded in earning the trust of domestic industries, which in turn were encouraged to make additional investments in the Chinese economy. Hence, Chinese firms enjoyed a high level protection from intense market competition, and this favorable market environment significantly benefited Chinese marketers to generate more sales without investing additionally in promotion (Fan, 2011). This approach of the Chinese government promoted the circulation of money in the economy, and this also strengthened the country’s capital and financial markets. Similarly, the governmental assistance to Chinese business entities in the form of tax reductions and grants boosted the country’s business sector. In addition, the government’s decision to loosen regulations over banks, to eliminate lending limits, and to cut down interest rates motivated banking institutions to lend more money to companies and households. The easy availability finance fostered Chinese companies to launch new initiatives and to expand their business in spite of the negative implications of the GFC. Such measures taken by the Chinese government to increase the demand for domestic-made goods and services helped the country bridge, to some extent, the deficit caused by the downturn in the country’s export sector. With the strength of proactive policies made by China to fight GFC, the country maintained the status of fastest growing emerging market both during and immediately after the global economic downturn. According to Lardy (2011), China’s policy response to the GFC was “early, large, and well designed” considering the country’s increased reliance on the export market and FDI. The author says that Chinese private firms and family businesses gained greater access to bank loans during the GFC. In the 2009-10 periods, private firms played an inevitable role in China’s growth of exports for the first time ever. Likewise, the Chinese strategy to increase military spending even when the GFC was striking heavily led to the transformation of China into one of the major military powers today. Currently, the Chinese military force is capable of successfully defending any foreign effort to invade and seize Chinese territory (Council on Foreign Relations, n.d.). This massive military power assists the country to gain an advantage over its border conflicts with India and Russia. Today China’s military forces have become capable of challenging even the United States, the world’s largest military power. Undoubtedly, a strong defense sector is essential to support the sustainable economic growth of a fast emerging economy like China and to effectively address growing threats of terror attacks. Experts opine that increased Chinese spending in military development and modernization during GFC played a significant role in transferring the global power from the West to Asia. The Chinese efforts during the GFC to stimulate the operations of its shipbuilding industry were really paid off. Collins and Erickson (2012) report that today China’s state-backed military shipbuilders are nearly standing on equal footing with their US and Russian peers in terms of the number of warships built. In a decade, the Chinese warship building industry is likely to become second only to US in terms of total warships built (Ibid). To sum up, the different policy responses made by China during GFC can be attributed to the success of China today. Conclusion From the above discussion, it is clear that China survived GFC without much damage, and this success could be attributed to a set of brave political and economic policies formed by the country. The nationalist or protectionist approach adopted by the Chinese government played a crucial role in increasing the demand for domestic goods and services and thereby balancing the deficit caused by the decline in the export market. The GFC also assisted China to realize its actual potential, and therefore the country significantly reduced its reliance on US and other Western economies. In an effort to address the issues caused by a downturn in the export sector, Chinese regulators adopted three approaches such as a fiscal policy, monetary policy, and social programs. These thoughtful policy responses aided the country to post growth rates of 9.6% and 9.2% respectively in 2008 and 2009 when other developed economies like US experienced a negative growth rate. Surprisingly, China increased its military spending during the crisis period despite a fall in unemployment rate and overall GDP growth. Those strategic measures taken by Chinese regulators during GFC greatly assisted the country to be the fastest emerging global power. In short, risky but clever political and economic policies helped China in surviving the GFC and becoming one of the most productive economies today. 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