Project on Chinese Economy by G.M.Arif

8/7/2019 Project on Chinese Economy by G.M.Arif

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The impacts of financial crisis on China

By

G.M.ARIF

Submitted in fulfilment of the requirements for the degree of

BA (Hons) International Business

In the Subject of

Issues in international economics

At the

London Metropolitan Business School of

London Metropolitan University

Supervisor: Stephen Smith

7th of May 2009



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Abstract

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. China has for a decade been the

primary engine of global economic growth. China's remarkable success in lowering inflation

to below 15 percent in 1995 while keeping GDP growth above 10 percent was accomplished

through a judicious combination of administrative measures and macroeconomic policies. Inthis consequence, China has changed from a centrally based country in a regionally based

country, in which different provinces produces different goods and services. This change has

encouraged the development of small enterprises, which are the main driving forces of

Chinese growth. Economic freedom has increased Ch ina‘s prosperity. The government also

established four special economic zones to attract foreign investment and boost exports and

imports. The decentralisation of economic control of various enterprises was given to

provincial and local governments. This allowed enterprises to operate more freely andcompetitively, rather be controlled by the central government.

Stabilization of the domestic economy was accompanied by further improvement in the

external accounts, the trade surplus reached US$23 billion in 2001, and the current account

surplus expanded to 2 percent of GDP Inflows of foreign direct investment climbed to

US$125 billion in 2005, and foreign exchange reserves exceeded US$ 2 trillion by year's end

of 2008. High reserves and continued strength in exports eased the need to borrow abroad.However, the current global financial crisis threatens to slow China‘s economy. China‘s

export industries and sectors are mainly dependent on foreign investment. Its major trading

partners, including the United States, UK and other western European countries, if the

economies slowdown then it will have effect on the Chinese economy. China is a major

economic power in the global economy and holds huge amounts of foreign exchange reserves

and thus it could play a major role in responding to the current crisis.



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Table of Contents

Abstract ………………………………………………………………………..……………..2

List of Charts …………………………………………………………………..……………. 4

List of Figures …………………………………………………………………..…… .……....5

Chapter 1 : Introduction…………………………………………………………....…………6

1.1: Aim …………………………...……………………………………………….…5

1.2: Objectives…………………….……………………………………………….... ..6

Chapter 2 : Literature review…………………………………………… ..……………….... ...7

1.1 : Books and economic model review………………………………………………7

1.2 : Journal review……………………………………………………………………. 8

Chapter 3 : The financial crisis……………………………………………..……………….. ..8

Chapter 4 : The Asian financial crisis and Chinese economy…………………………….. ...11

Chapter 5 : Financial crisis impa cts on China……………………………………………… .13

Chapter 6 : Chinese response to the crisis…………………………………………...…….. ..16

Chapter 7 : Comparasion with other BRIC economies………………… ..………………….18

Chapter 8 : Some recommendations for China………………………………………… ..….22

Chapter 9 : Conc lusion………………………………………………………………...…….23

Chapter 10 : References……………..………………………………………………… .…...24

Chapter 11 : Bibliography……………………..………………………………………… .....26



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List of Charts:

Chart 1: The Balance of China‘s export and import in 1990 (in US billion dollar) ….…… 11

Chart 2: Structure of foreign capital flow in US billion dollar ……………………… .….... 12

Chart 3: Source: Chinese commerce Ministry via Thomson Reuters ….………………….. 13

Chart 4: Foreign Direct investment flow into China ………………… .……………………15

Chart 5: The trends of Chinese GDP ………………………………………………… .…...15

Chart 6: US dollar domination in the world economy compare with other currency ….…..17

Chart 7: World‘s major growing economy…………………………………… .……… .…..19

Chart 8: The distribution of Chinese Stimulus package in the 2008 …… .…………… .…...20

Chart 9: China has USD2 trillion in Foreign Reserves ……………………………… .…… 21



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List of Figures :

Figure 1: Major economies‘ projected growth rate. Source: IMF ….……………………… .9

Figure 2: Chinese selected economic sectors indicator in the global financial crisis ……… 10

Figure 3: US and China GDP growth potential in the Twenty-first century …………… ..…10

Figure 4: US and China GDP growth potential in the Twenty-first century …………… ..…14



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What are the impacts of the current globalfinancial crisis on the Chinese economy?

Introduction

Aim: The aim of this project is to analyse the current financial crisis and the impacts onChinese economy.

Objective:

1. Identify the global financial crisis

2.

Previous financial crisis in Asia and the Chinese economy3. Financial crisis in the Chinese economy

4. Chinese economic response to the crisis and comparasion with other BRIC

economies.

5. Some recommendations for the future of the Chinese economy.

Introduction:

China‘s economy is heavily dependent on global trade and investment flows. According to

the International Monetary Fund (IMF), China was the single most important contributor to

world economic growth in 2007.China‘s net exports contributed to one -third of its GDP

growth in 2007. Foreign direct investment (FDI) flows to China have been a major factor

behind its productivity gains and rapid economic growth. The Washington based Institute of

International Economics estimates that Western exports to China could raise annually by

US$21 billion. Economic reforms have transferred China into a major trading partner for

many countries. China's ranking as a trading power rose from 27th in 1979 to 10th in 1998

and 2 nd largest economy in 2008. Over recent years, China built up nearly US$ 2,000 billion

in foreign reserves to prevent the renminbi appreciating.

Over the past several years, China has enjoyed one of the wo rld‘s fastest growing economies

and has been a major contributor to world economic growth. However, the current global

financial crisis threatens to slow China‘s economy. This possibility concerns the Chinesegovernment, which views rapid economic growth as critical to maintaining social stability.



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For example, 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 purchases of

troubled U.S. assets. A global economic slowdown could have a significant negative impact

on China‘s export sector and industries that depend on FDI flows.

In this paper I am going to concentrate on the overall financial crisis and its impacts on the

Chinese economy, its exposure and response to the present crisis. Then I will discuss some

issues related to the previous Asian crisis and Chinese economy experience. After that I will

analysis on recent crisis issues and Chinese response to the crisis based on current data and

journals review. At the end I will conclude the project with some recommendation for the

Chinese economy corresponding to the global financial crisis.

Literature Review

In this section I am going to mention some of the sources of the project and related academic

theoretical models. I used couple of books related to my topic but I mainly used online

sources such as journals, periodicals and online reports and news papers for the current

affairs and news. The Krugman (1979) model, ( Krugman, 2009 ) a balance of payments

crisis arises due to domestic credit expansion by the central bank. A model of Two-Factor

economy introduced by Swedish economists Eli Heckscher and Betil Ohlin 1977 (Obstfeld,

2009). The standard trade model (Obstfeld, 2009) which is built is on for key relationship.

The effects of the terms of trade the price of a country‘s exports divided by the price of its

imports. The Factor Proportion model (Obstfeld, 2009) which consider the production of

some good that requires capital and labor as factors of production. The Dybvig-Diamond

(1983) model of a bank run, a financial panic is a case of multiple equilibrium in the financial

markets. Blanchard and Watson (1982) , Akerlof and Romer (1996) model, a moral-hazard

crisis arises because banks are able to borrow funds on the basis of implicit or explicit public

guarantees of bank liabilities. Following Sachs (1995) model , a disorderly workout occurs

when an illiquid or insolvent borrower provokes a creditor grab race and a forced liquidation

even though the borrower is worth more as an on-going enterprise. The Gravity model of

international trade (Tinbergen, 1962) which explains international trade depends on the

population and the distance between the two economies. (Obstfeld, 2009). International



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labor mobility (Obstfeld, 2009) where an analysis of trade and the relationship with the labor

movement between china and the western world breifly discussed.

G-20 must co-operate to face the global crisis according to the foreign minister of China

(Johnson, 2009). The world adjusts to less Chinese trade. The rise in China‘s reserves has

made it the U.S.‘s largest creditor (Batson, 2009) . China calls for a new world reserve

currency, where Wen Jiabao, the Chinese priminister express worries over Chinan‘s

significant holdings of U.S. government bonds (Andrews, 2009). Wen Jiabao indicates that

China will have no change to its economic policies (Batson, 2009). China‘s Central bank said

that the economy is on track to hit the governments target of about 8% growth this year

(Poon, 2009 ). China‘s february exports fell nearly 26% from a year before, the fourth in a

series of worsening monthly decline (Areddy, 2009 ). China showing more willingness to aid

organisations like the international monetary funs, refecting its desire for a stronger voice in

the global affairs (Batson A. , China seeks IMF clout, 2009) . Prime Minister Wen Jiabao

said, Beijing‘s stimulus measures are helping consumer spending and growth, and whule he

warned of some ― prolonged difficulties‖ as the financial crisis spreads (Shirouzu, 2009 ).

The ongoing international financial crisis has landed the world economy in the most difficult

situation since last century's Great Depression (Jiabao, 28 January 2009) . According to an

IMF director, ―Inour discussion, Premier Zhu explained the economic strategy that his

government has employed over the past five years. We at the IMF support this strategy, in

particular the way fiscal policy has been used to support domestic demand in the face of a

global slowdown, by putting the country's resources into a major effort to upgrade the

national infrastructure, which enhances China's long-term growth potential as well as

improving the lot of poorer regions .‖ (Rato, 2004 ).

The Global Financial Crisis

In this chapter I am going to concentrate on the present global financial crisis and some

discussion about the reasons for the financial crisis and its impacts over the major economic

player particularly China. The financial crisis is currently the main issue in the global

economy. Almost every major economy in the world has been affected by the crisis. The

crisis starts from the collapse of the US sub-prime mortgage market and the reversal of the

housing boom in other industrialized economies have had a ripple effect around the world.



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China is the second largest holder of US treasury bills and holds about $2 trillion in reserves

(Wath, February,2009). Chinese real GDP growth for January through September 2008 was

9.9%, which was 2.3 percentage points lower than growth in same period in 2007. (Basu,

2008) the present crisis projected in October 2008 that China‘s GDP growth would sl ow from

11.9% in 2007 to 9.8% in 2008 and to 8.4% in 2009. (Axis, february, 2009). At the annual

global economic summit at Davos, Switzerland Chinese premier Wen Jia bao said, ―The

current crisis has inflicted a rather big impact on China's economy.

The following table is the Projection of some world leading countries economic growth

rate.

Figure 1: Major economies’ projected growth rate. Source: IMF

Furthermore, other weaknesses in the global financial system have surfaced. Some financial

products and instruments have become so complex and twisted, that as things start to unravel,

trust in the whole system started failing. The extent of this problem has been so severe that

some of the world‘s largest financial institutions have collapsed. The crisis became so severe

that after the failure and buyouts of major institutions, the Bush Administration offered a

$700 billion bailout plan for the US financial system. (Akkas, February 28, 2009). The

following figure shows the Chinese selected sectors indicators in the financial crisis.



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Figure 2: Chinese selected economic sectors indicator in the global financial crisis.

Source: World Bank, Asian development bank and TBA analysis

Twenty-first century world projected growth rate between the U.S. and China.

Figure 3: US and China GDP growth potential in the Twenty-first century. Source: IMF



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0

50

100

150

200

1990 1991 1992 1993 1994 1995 1996 1997

Chart 1:The balance of China's export and

import in 1990 ( in US bilion Dollar)

export

Import

In Europe, the Bank of England pledged US$ 87 billion in direct support to the country‘s

major financial institutions. British Prime Minister Gordon Brown‘s rescue package which

involves direct capitalization and guarantee of inter-bank lending has been adopted by other

major European countries and the U.S. government. Furthermore, central banks around the

world (Fed, ECB, Canada, Sweden, Switzerland, and China) introduced co-ordinated interest

rate cuts to lower the cost of borrowing, with the aim of restoring confidence in the global

economy. A background study by the IMF for the October 2008 World Economic Outlook

shows recessions tend to be more severe when preceded by a financial crisis and a housing

bubble. More countries will be affected through channels such as lower exports, lower

tourism receipts, lower remittances and the like. (Klein, 2009).

Finally, consider global economic activity. In mid-October 2008 the IMF came out with aforecast of some 3 percent of global growth for 2009. That would be a significant slowdown

from over 5 percent growth in recent years but still about half a percentage point higher than

during the Asian crisis. In recent days the IMF downgraded its forecast to a little over 2

percent — based on recessions in many developed countries and a slowdown of emerging

markets from roughly 8% to 4% .

The Asian financial crisis and Chinese economy

In this section I will discuss the previous Asian financial crisis impacts over Chinese

economy where early 1980‘s the average growth rate is 9.5 in the first half of 1990s.

However, foreign trade has played a very important role in Chinese economy. High growth of

exports have been an important factor to make Chinese economy dynamic, for example, the

contribution from export to GDP

is close to 20% in 1997.(Yunling, October, 1998)

Besides, increasing trade surplus

in 1990s makes China building

up a high capacity to pay back

the foreign debt with increasing

amount of foreign exchange

reserve. Source: IMF



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Chinese government took effective steps to control the crisis impacts on Chinese economy in

1997. Emergent steps were quickly taken after July 1997 when the East-Asian financial crisis

happened, (Sachs, 1998) which include closing some irresponsible banks and credit units.

The financial crisis has caused sharp contraction in economic activities of the region. The

economies of Indonesia, South Korea, Thailand, as well as Japan had negative growth rates in

1998. The average growth rate was 9.5% in 1980s, 9.5% in the first half of 1990s. However,

the growth of the economy in 1990s is not smooth. It was in a recession since 1989, but

started to recover from 1991, with the growth rate up from 3.8% in 1990 to 9.2%.

Nevertheless, it started to be over heating since 1992, with high inflation and GDP growth

rate (14.2%). Strong measures were adopted by the Chinese government to cool down the

economy since 1993 through the controlling the bank lending, restructuring the bad loans etc.

The economy realized by the end of 1996, before the South East Asian crisis, with the growth

rate coming down under 10%, and further down to 8.8% in 1997, inflation dropping out of

sight since middle of the year. As commented by Peter Botttelier 1995, senior advisor of

World Bank, If the China had not made the difficult internal policy and institutional

adjustments that permitted a soft landing in 1996, the Asian financial crisis would probably

have dragged the economy in a much serious way China has been benefited largely from her

open policy in realizing a long term and stable high economic growth. China is the largest

recipient of foreign investment

among the developing countries,

and the second largest in foreign

direct investment (FDI) after the

United States in the world.

However, China has kept a healthy

structure of capital inflow since

long term debt accounts for thelarger proportion more than 80%

and FDI plays the major role. Source: IMF

In considering the case of the Asia financial crisis, it seems that a cautious transition towards

a full liberalization of the financial market is necessary, especially for developing countries.

Foreign trade has played a very important role in Chinese economy. High growth of exports

have been an important factor to make Chinese economy dynamic, for example, the

contribution from export to GDP was close to 20% in 1997.

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997

Chart 2 : Structure of foreign Capitalflow in US Billion dollar

Loan

FDI

Other



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0

5

10

15

2008 2009

Foreign Direct investment flow inChina

ForeignDirectinvestmentflow inChina

Especially, increasing trade surplus in 1990s makes China building up a high capacity to pay

back the foreign debt with increasing amount of foreign exchange reserve (over 140 billion

US dollars by the end of 1997). Facing the devaluation of major currencies in the region, the

exchange rate of Chinese currency, the Yuan is still stable. A high foreign exchange reserve

(more than 140 billion US dollars by the end of the third quarter of 1998) and reasonable

foreign debt ratio (about 15% of GDP) provide a firm base for the market. Although exports

less dynamic, with growth rate only 3.9% in the first 9 months of 1998, but the trade balance

was still positive, with 15% increase of trade surplus, to 35.3 billion in the same period. So

that, market confidence for the Chinese currency is still kept firm. It was a big challenge to

make Chinese economy to grow at a rate so high in the situation of a general slowdown of the

regional economy in the Asia-pacific and the world as a whole. The growth rate is only 7% in

the first half of 1998; especially the industrial growth is well below the target, only 7.9%. The

major problem is that demand is rather weak due to a slow down of domestic consumption

and exports.

Financial crisis impacts on China

This is the primary part of my project. Here I am going to concentrate on the financial crisis

and its effects over the Chinese economy and its various sectors. The financial crisis has

impaired the flow of foreign direct investment to China. China‘s industrial production growth

in November declined to 5.4%, from 8.2% in October, (Wyk, 2009) While much of the media

coverage of the crisis has focused on factory closures and job losses in export oriented

sectors, the dramatic slowdown in heavy industrial sectors related to construction,

automotive, steel, power and metallurgy has constituted a stronger warning of deeper

systemic exposure in the Chinese economy. Nevertheless, the crisis in China is expected to be

largely manageable in 2009, (Velde, October, 2008).

Chart: 3, Source: Chinese commerce

Ministry via Thomson Reuters



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Although much of the responsibility for sustaining growth now falls on the government. As

growth falls below 7-8% we can expect bolder stimulus. Still, China will face its share of old

and new challenges in the year ahead. ―We are facing severe challenges, including notablyshrinking external demand, overcapacity in some sectors,

Difficult business conditions for enterprises, rising unemployment in urban areas and greater

downward pressure on economic growth ‖ (Jiabao W. , 2009). Foreign investment in China

fell 16% in February from a year earlier, the fifth-straight month of declining investment, as

the global downturn slows capital flows into the world's third-largest economy. The Ministry

of Commerce said direct foreign investment in February totalled $5.83 billion, bringing the

total for the first two months of the year to $13.37 billion, down 26% from the same period a

year earlier (POON, 2009). The falls in investment inflows since October have ended a long

period of rapid growth in recent years, and show the global recession isn't hurting only

Chinese exports.

Figure 4: The World Bank and the International monetary fund outlook on Chinese economy.

Source: World Bank.



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Essentially, China‘s 4 trillion Yuan ($585 billion) stimulus package– and the government-

directed lending that backs it – ensure that the country‘s investment -led economic model willbe sustained. Indeed, it was a good strategy to get infrastructure built, but it is an expensive

one to sustain. At around 35% of GDP, China‘s private consumption in 2007 was less than

those of other major countries: 71% of GDP in the U.S., 64% in the U.K. and around 56-57%

in Australia, Canada, France, Germany and Japan, according to JP Morgan.

Chart 4: The trends of Chinese GDP.

Source: IMF

Chart: 5 , Foreign Direct

investment flow into

China.

Source: China

National Bureau of

Statistics 2008



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Chinese officials are deeply concerned that the global economic downturn could spur

protectionist moves in the U.S. and elsewhere that could further damage China's trade-

dependent economy. Mr. Geithner's comments marked a significant escalation in U.S.

criticism of China's exchange-rate system. U.S. officials have long argued that China should

let its currency, the Yuan, strengthen, which could make Chinese exports relatively more

expensive and reduce China's massive trade surplus with the U.S. But the just-ended Bush

administration stopped short of calling Beijing a currency manipulator. In recent years, China

did let the Yuan strengthen, but stopped last year as its economy weakened. Some analysts

have expressed concern that Beijing might let the Yuan weaken, although Chinese officials

have ruled that out.

Chinese exposure to the global financial crisis:

The extent of China‘s exposure to the current global financial crisis, China put restrictions on

capital flows, particularly outflows, in part so that it can maintain its managed float currency

policy. These restrictions limit the ability of Chinese citizens and many firms to invest their

savings overseas, compelling them to invest those savings domestically, A large portion of

China‘s reserves are believ ed to be invested in U.S. securities, such as long-term. Treasury

debt, Long Term U.S. agency debt, Long Term U.S. corporate debt, Long Term U.S. equities,

and short-term debt. (Morrison, November 13, 2008) The extent of China‘s exposure to the

current global financial crisis, in particular from the fallout of the U.S. sub-prime mortgage

problem, is unclear. On the one hand, China places numerous restrictions on capital flows,

particularly outflows, in part so that it can maintain its managed float currency policy. These

restrictions limit the ability of Chinese citizens and many firms to invest their savings

overseas, compelling them to invest those savings domestically, although some Chinese

attempt to shift funds overseas illegally. Thus, the exposure of Chinese private sector firms

and individual Chinese investors to subprime U.S. mortgages is likely to be small. On the

other hand, Chinese government entities, such as the State Administration of Foreign

Exchange, the China Investment Corporation (a $200 billion sovereign wealth fund created in

2007), state banks, and state-owned enterprises, may have been more exposed to troubled

U.S. mortgage securities.



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Chinese government entities account for the lion‘s share of China‘s capital outflows, much of

which derives from China‘s large and growing foreign exchange reserves. These reserves

rose from $403 billion in 2003 to $1.9 trillion as of September 2008. The Chinese

government invests in overseas assets $467 billion were in LT Treasury securities, $364

billion were in LT U.S. agency securities, $29 billion in LT equities, $28 billion in LT

corporate securities, and $23 billion in ST debt. However, these were a relatively small share

of China‘s total U.S. securities holdings. Such entities have generally reported that their

exposure to troubled sub-prime U.S. mortgages has been minor relative to their total

investments, that they have liquidated such assets. For example, the Bank of China reported

in March 2008 that its investment in asset-backed securities supported by U.S. sub-prime

mortgages totalled $10.6 billion in 2006. In October 2008, it reported that it had reduced

holdings of such securities to $3.3 billion by the end of September 2008, while its holdings of

debt securities issued or backed by Freddie Mac and Fannie Mae were at $10 billion. Fitch

Ratings service reported that the Bank of China‘s exposure to U.S. sub -prime-related

investments was the largest among Asian financial institutions, and that further losses from

these investments were likely, but went on to state that the Bank of China would be able to

absorb any related losses.

Chart 6: US dollar domination in the world economy compare with other currency.

Source: World Bank

However, Chinese banks are not immune to financial problems. There are several indicators

that China‘s economy is slowing, which could present difficult challenges for the banking

system in the years ahead, such as a sharp increase in non-performing loans. For example, the

real estate market in several Chinese cities has exhibited signs of a bursting bubble, including

a slowdown in construction, falling prices, and growing levels of unoccupied buildings. This

has increased pressure on the banks to lower interest rates further to stabilize the market, but

0

2

4

6

8

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

OthercurrenciesEuros

US dollar



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has raised concerns that doing so could result in higher inflation. In addition, the value of

China‘s largest stock market, the Shanghai Stock Exchange Composite Index, fell by 67%

from January 1 to October 27, 2008. China‘s media reports that because of the financial crisis

export orders in 2008 have declined sharply. From January to August 2008 toy exports were

20.8% lower than they were during the same period in 2007.

Chinese response to the crisis:

It is no longer a matter of debate whether or not China has been affected by the global

financial crisis. In this content I am going to analyse the Chinese response to the current

crisis. China has taken a number of steps to respond to the global financial crisis. OnSeptember 27, 2008, Chinese Premier Wen Jiabao reportedly stated that ―What we can do

now is to maintain the steady and fast growth of the national economy, and ensure that no

major fluctuations will happen. That will be our greatest contribution to the world economy

under the current circumstances." (Morrison, November 13, 2008)

U.S. remains the world's largest economy, and said that China is closely watching the effects

of policies taken by U.S. President Barack Obama. "We have lent a huge amount of money to

the U.S., so of course we are concerned about the safety of our assets. I do in fact have some

worries," Mr. Wen said in response to a question. He called on the U.S. to "maintain its

credibility, honour its commitments and guarantee the safety of Chinese assets." China holds

the world's largest foreign-exchange reserves, reported at $1.946 trillion at the end of 2008.

About two-thirds of that sum is believed to be held in U.S. dollar assets, primarily Treasury

bonds. Mr. Wen repeated China's position that those investments are managed with a view to

"safety, liquidity and profitability" (Browne, 2009). Monday's proposal follows a similar one

Russia made this month during preparations for the G20 meeting. Like China, Russia

recommended that the International Monetary Fund might issue the currency, and

emphasized the need to update "the obsolescent unipolar world economic order."



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China has taken a number of steps to respond to the global financial crisis. On September 27,

2008, Chinese Premier Wen Jiabao reportedly stated that ―What we can do now is to maintain

the steady and fast growth of the national economy, and ensure that no major fluctuations will

happen. That will be our greatest contribution to the world economy under the current

circumstances."21 On October 25, a Chinese Foreign Affairs official was reported by China‘s

media as saying that China supported ―effective and comprehensive reforms‖ of the global

financial system. On October 30, another official stated: ―In the future we are also willing,

within the ambit of our abilities, to continue positively considering participating in a range of

rescue plans."

A number of initiatives were announced by the government in October 2008, including plans

to: implement a new economic stimulus package, including an acceleration of construction

projects, new export tax rebates; tax and interest rate cuts on housing transactions; increased

agriculture subsidies and new loans for small and medium-sized enterprises; and elimination

of taxes on interest income from stocks and savings. On November 9, the Chinesegovernment announced it would implement a two-year $586 billion stimulus package, mainly

dedicated to infrastructure projects. ―China has the resources to reinvigorate and reorient its

economy," said Eswar Prasad, a professor at Cornell University and former head of the

International Monetary Fund's China division. Announcing an "ambitious agenda" of higher

social spending would reassure Chinese consumers, offsetting some uncertainty the crisis has

brought, he said. "This could also have a broader payoff for China in the international arena

by providing support to global demand, rather than just relying on demand in the rest of theworld to help the recovery of Chinese growth," Mr. Prasad said. Currently, 1% of the

Chart 7: World’s major growing economy. Source: IMF and EIU 2008



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stimulus is allocated to health care and education spending and 7% to public housing, with

the rest going to corporate subsidies and infrastructure. "The original stimulus plan was

heavily focused on investment and infrastructure. There needs to be some adjustment in the

structure," said Zhuang Jian, an economist with the Asian Development Bank. "Excess

investment, particularly in heavy industry and manufacturing, could cause problems if there

isn't strong consumption to match it."

In October, 8, 2008, central bank of China announced a cut to its benchmark interest rate,

which coincided with rate cuts by the U.S. Federal Reserve and several other major central

banks. A number of initiatives were announced by the government in October 2008,including plans to: implement a new economic stimulus package, including an acceleration of

construction projects, new export tax rebates; tax and interest rate cuts on housing

transactions; increased agriculture subsidies and new loans for small and medium-sized

enterprises; and elimination of taxes on interest income from stocks and savings. (Chinese

premier's speech at World Economic Forum Annual Meeting, 2009) .On November 9, the

Chinese government announced it would implement a two-year $586 billion stimulus

package, mainly dedicated to infrastructure projects. (Shukun, 2009).

Chart 8: The distribution of Chinese Stimulus package in the 2008 Global financial crisis to support Chinese

economy.

Source: National Development and Reform Commission March 2009



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Comparison Table of economic Stimulus package between China and United States of

America.

Comparison with other BRIC economies:

In this chapter I am going to show some empirical comparison with China and other BRIC

economies. In 2001, Jim O‘Neill, head of global economic research at Goldman Sachs,

predicted in his article ‗Dreaming with BRIC‘ that the combined GDP of Brazil, Russia, India

and China will surpass the GDP of the G7 economies by 2050. The fact is that BRIC

countries have experienced impressive economic growth in recent years. Between 2000 and2007, China grew at an average rate of over 10%, India and Russia at 7%, and Brazil at 3.4%

- all exceeding the world average of 3.26% and accounting for close to 30% of global

economic growth for the same period of time. (Cuñat, 2009). During September 2008 –

January 2009, the foreign exchange reserves of Russia plummet by a whopping USD 175

billion followed by Ind ia‘s decline of USD 43.2 billion. Brazil recorded a moderate fall of

USD 6 billion in its international reserves position whilst China adding USD 4 billion,

however at a diminishing pace. The BRIC together hold about 41 percent of global foreign

exchange reserves.

Chart 9: China has

USD2 trillion in

Foreign Reserves.

China Stimulus

Roughly Same Size as

US which is USD586

billion. Source: China‘s

Stimulus vs.

America‘s Bailout,

Housel 2008



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Irrespective of the occasional criticism directed at O‘Neill‘s hypothesis, the fact is that BRIC

countries have experienced impressive economic growth in recent years. Between 2000 and

2007, China grew at an average rate of over 10%, India and Russia at 7%, and Brazil at 3.4%

- all exceeding the world average of 3.26% and accounting for close to 30% of global

economic growth for the same period of time. Today, BRIC countries account for 14% of

world GDP, increasing from the 9% of ten years ago. However, the extent of the impact on

the BRIC economies will be partially determined by the intensity and duration of the

economic recession in the US and the EU. Foreign exchange reserves of Russia have fallen

by a whopping USD 175 billion (10 % of GDP) sin ce September 2008 followed by India‘s

decline of USD 43.2 billion (3.5 % of GDP). Brazil recorded a moderate decline of USD 6

billion (0.4 % of GDP) in its international reserves position whilst China adding USD 4

billion (1 % of GDP) however at a diminishing pace. (Sharma, 2009)

Some recommendations for China

Analysing key financial crisis issues and the theoretical implementation, I tried to predict

some of economic areas China should concentrate on. Eventually, before the Wall Streetfinancial crisis hit, China's export-oriented economy was under pressure. The international

community was pressuring China to raise the value of its currency. In addition, thousands of

factories in south China were shutting down due to tighter regulation of product quality and

labour and environmental standards, signalling that deep change in the economy is coming.

Huang Yi Ping, chief economist for Citigroup Asia Pacific, Andy Xie, an independent

economist, says the government's massive stimulus package of RMB 4 trillion ($586 billion)

announced in November will bring some improvement to the economy in the second half of

2009. In a statement on 22 nd of April 2009, Goldman Sachs forecasts that ―China‘s growth

this year and next, saying the government stimulus has been more aggressive and the

domestic demand response has been stronger than it expected‖.

In a note to investor, Goldman analyst said, they expect GDP growth of 8.3% in 2009, up

from a previous forecast a 10.9% rise compared with their prior view of 9.0%, largely driven

by stronger investment growth, especially from private investment. However, the

government's stimulus package does not focus on consumption for the Chinese people. The

focus should be on people's lives, the quality of growth and to make ordinary people richer.



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Conclusion

Overall, China is the major player in the global economy. The recent global financial crisis

strongly impacts on the Chinese economy as China is currently one of the largest holders of US t-bills and holds huge US dollar reserve. Although the previous Asian crisis has not

affected Chinese economy strongly but the financial crisis 2008 mainly effects Chinese

economic growth before the crisis China was under pressure for it fixed exchange rate policy

and other economic policies but the crisis has put China in a stronger position especially in

relation to the U.S. Many see China as crucial to the eventual recovery in the world economy,

indeed China recently announced about more than a trillion Yuan to support its economy in

the crisis. Chinese policy makers think it will help the economy to continue its growth.



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Project on Chinese Economy by G.M.Arif

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