Impact of the Global Financial Crisis on China - Research Paper Example

Business research Table of Contents Business research Table of Contents 2 Discussion 3 Conclusion 5 Recommendations 6 References 7 Bing, Y. (2008) ‘Impact of Financial Crisis on Chinese Economy Underestimated’. The Epoch Times, December 30. 7 Chim, K. (2007) ‘Bank of China books $322 million on subprime’. Reuters, October 30. 7 Bibliography 8 Deng, Y. & Wang, F. (2005) China rising: power and motivation in Chinese foreign policy USA: Rowman & Littlefield. 8 Guthrie, D. (2008) China and Globalization: The Social, Economic and Political Transformation of Chinese Society. New York: Routledge. 8 Laurenceson, J. & Chai, C. H. (2003). Financial reform and economic development in China USA: Edward Elgar Publishing. 8 Madura, J. (2009) International Financial Management (9th Edition). USA: Cengage Learning. 8 Discussion Impact of the global financial crisis on China China being one of the fastest growing nations in the world is likely to be the one of the most vulnerable economies globally as well, especially with its success story is triggered by a persistent adherence to a rigorous export-led development strategy. Initially though, a pervasive opinion about the relative unresponsiveness of the Chinese economy to external developments, prevailed among the exponents of the Chinese growth model. Major causes behind such a popular belief were the stringent restrictions that the nation imposed on the outflow of domestic resources, which prevented the Chinese citizens from investing their money overseas. This strategy was a part of the nation’s attempt to maintain the targeted exchange rate value of its domestic currency against a basket of major and influential currencies in the world. Despite a few reports about illegal resource transfers across international premises, the Chinese managed to keep a major proportion of their total stock of financial resources with themselves through profound government intervention (Morrison, 2009). The hypothesis testing conducted in the previous section, in connection with the susceptibility of Chinese firms to impacts of the crisis, also found an insignificant effect of the same. In fact, the subtle truth is that, even though the Chinese experienced hardships on account of the financial distress, they were far better off than what the Western economies felt, where recession was declared officially. As far as statistics are concerned, the Bank of China, the largest nationalised commercial bank in the nation, was responsible for a total of $10.8 billion amount of investment in US owned mortgage-backed securities, nearly 3.5% of its total investment securities portfolio in 2006. Although this figure fell down to 1.4% by the end of 2008, yet, according to Fitch Ratings, this was the highest figure among all other Asian financial institutions (Chim, 2007). The investment into securities was a consequence of excessive stocking of US financial assets, which amounted to a sum of $2.13 trillion as on June 2009, in order to keep its exchange rate floating at the targeted level, compared to that of US dollars. The Chinese government considered it wiser to invest in US securities rather than holding such a huge quantity of money idle (Morrison & Labonte, 2009). The exposure of the Chinese economy to US financial securities however, was not limited to just mortgage backed securities; rather there were huge investments of Chinese renminbi on credit derivatives, loans and bonds. The total bond holdings of the nation by the end of 2008 amounted to $721 million in some of the largest US investment companies, including the bankrupt Lehman Brothers. The huge level of investment might indicate about the level of vulnerability of the Chinese financial sector to the subprime crisis in USA. When the Western economy surrendered to the grips of the subprime mortgage crisis and was at the verge of a collapse, it started procuring back all the financial resources that it had allowed to flow out of its premises, for direct investment purposes, in order to meet the liabilities of its foreign investors. This way China lost a big source of foreign direct investment and the total amount of external investments in the nation fell down, hampering its future growth potentials (Sun & Zhang, 2009). The Chinese growth rate which had gradually reached a historical epitome of 13% till 2007 drastically declined to a low of 7% in 2008. The worsening situation even prevented the advocates and observers from making further forecasts about the 2009 statistic (Schmidt, 2009). The most sensitive aspect of China’s dependence on USA was for trade reasons. The Western economies, especially USA, which accounted for the largest trade activities across international borders, reduced their total demand, since they were suffering from a resource crunch problem and thus had a depreciating exchange rate position that resulted to devaluation in their respective currencies. The Chinese economy experienced a 2.2% fall in their aggregate exports in 2008, compared to the previous year, which is why there was a fall in the growth of national income of the economy. Turbulences in the international trade scenario resulted to a deterioration in the current account situation of the nation. Current account surplus position fell down from 11.5% of GDP in 2007 to 8.5% of GDP in the following year (United Nations, 2009). However, despite the fall in the growth rate, there was a little impact of the same on the economic situation, since these changes were slight and were followed by some effective corrective measures. Moreover, China had been procuring foreign exchanges since a long time, which prevented it from experiencing dire consequences of the crisis. When the government saw turmoil creeping into the economic scenario, it already had the means to prevent further depression. This is the reason why, despite an apparent deterioration in the economic scenario, there was no significant effect of the same. Government Intervention The above discussion reveals the true situation about the exposure of China to financial developments in the world, especially of USA. As mentioned earlier, the Chinese government plunged forward in its full force to prevent any economic agonies on account of the financial crisis. Thus, as soon as the national authorities perceived a deteriorating situation, it attempted to dilute the impact through injecting a stimulus package of about $600 billion into the economy. This step was accompanied by a number of fiscal policy measures like tax rebates for the weaker industries (especially infrastructure) and other expansionary monetary policy regimes like, curtailing the rate of interest, in order to promote investment activities within the nation (Schmidt, 2009). Moreover, the budget comprised of a rise in government expenditures to 7.635 trillion yuan in 2008, about 22% rise from that of the previous year. This indicated a strategy of demand push growth model, where a rise in aggregate demand via an increase in government expenditure leads to a rise in the national income (Yongding, 2009). There were changes in the monetary policy of the nation as well, through implementation of interest rate subsidies, grants allowed to a number of weaker industries of the nation, as well as a rise in the total supply of credit into the economy. A rise in bank credit by a record RMB 7.3 trillion led to a partial solution to the credit crunch problem in the nation, and hence instigated demands among the population. Despite the little impact that the nation had on account of the financial crisis, the attempts by the national government to minimize the impact was really appreciable. In fact, had the China not been preparing itself to shield from any such crisis, the impact would have been as intensive as that on USA, given its vulnerability to the international community. Conclusion China happened to be one of the most vulnerable of all nations to have remained exposed to the impact of the global financial crisis. As discussed in the previous section, despite the nation discouraging the nationals from all sorts of overseas investment drives, the national government could not resist the prospects of profit generation through such activities, which is why the degree of exposure was multiplied beyond that of the dependence on foreign economies for trade purposes. However, China had been calculating enough to have backed up its investment drives by substantial resources, so as to guard it against any unpredicted financial distress. Though there were increases in the rate of unemployment, fall in the proportion of trade surplus, but there were very few deficits reported, as far as the macroeconomic indicators are concerned, implying that the effect of the crisis was not as significant as the Western counterparts of the nation. However low the impact was, it was further corrected through the adoption of certain government policies which were aimed at the eradication of any adverse economic situation created by the global financial crisis. The ratio between the rate of investment and the GDP growth rate of the economy was found to be greater than 6, implying a high incremental capital-output ratio, much higher in relation to the neighbouring economy of Japan, another competitor of China in terms of the rate of growth. In fact, it was on account of the stability of the Chinese economy, which resulted to a revival of other affected nations in the West. This was when the importance of the Chinese economy was felt in the global arena. Limitations of the Study The empirical study being conducted in the present paper is found to be complying with the theoretical findings as well, i.e., the impact of the financial crisis is found not to be much significant compared to what the Western economies faced during that period. Moreover, government intervention strategies led to an effective healing up of the nation from whatever injuries had been inflicted and the line of thought of the government was appreciable as well. However, a single limitation of the study can be cited as a total ignorance of the macroeconomic factors while considering the impact of the financial crisis on China. Recommendations Further researches might be conducted on a vivid description of the impact that the crisis had on the economy, through considering certain macroeconomic indicators like changes in the growth rate, per capita income, unemployment rate, etc. of the economy. A sample survey despite its power to deal with the problem has a high probability of getting biased, due to sampling fluctuations. References Bing, Y. (2008) ‘Impact of Financial Crisis on Chinese Economy Underestimated’. The Epoch Times, December 30. Morrison, W. M. (February, 2009) ‘China and the Global Financial Crisis: Implications for the United States’ CRS Report for Congress. Available at http://china.usc.edu/App_Images//crs--china-global-crisis-090209.pdf (Accessed: January 7, 2010). Morrison, W. M. & Labonte, M. (July, 2009) ‘China’s Holdings of U.S. Securities: Implications for the U.S. Economy’ CRS Report for Congress. Available at http://www.fas.org/sgp/crs/row/RL34314.pdf (Accessed: January 7, 2010) Chim, K. (2007) ‘Bank of China books $322 million on subprime’. Reuters, October 30. Schmidt, D. (January, 2009) ‘The financial crisis and its impact on China’ Available at http://www.chinapolitik.de/studien/china_analysis/no_67.pdf (Accessed: January 7, 2010). Sun, T. & Zhang, X. (August, 2009) ‘Spillovers of the U.S. Subprime Financial Turmoil to Minland China and Hong Kong SAR: Evidence from Stock Markets’ IMF Working Paper, Vol. 09(166): 5. United Nations (2009) World Economic Situation and Prospects 2009 New York: United Nations Publications. Yongding, Y. (November, 2009) ‘China’s Policy Responses to the Global Financial Crisis’, Australian Government Productivity Commission Available at http://www.pc.gov.au/__data/assets/pdf_file/0003/92595/2009-yongding.pdf (Accessed: January 7, 2010). Bibliography Avery, M., Zhu, M. & Cai, J. (2009) China’s Emerging Financial Markets: Challenges and Global Impact. USA: John Wiley & Sons. Ching, M. A. (2008) CFO Guide to doing business in China. USA: John Wiley & Sons. Deng, Y. & Wang, F. (2005) China rising: power and motivation in Chinese foreign policy USA: Rowman & Littlefield. Guthrie, D. (2008) China and Globalization: The Social, Economic and Political Transformation of Chinese Society. New York: Routledge. International Monetary Fund (April, 2008) Regional Economic Outlook: Asia and Pacific. Washington D.C.: International Monetary Fund. Laurenceson, J. & Chai, C. H. (2003). Financial reform and economic development in China USA: Edward Elgar Publishing. Madura, J. (2009) International Financial Management (9th Edition). USA: Cengage Learning. Read More