SPEX 57

This issue in brief:

Chinas Economic Policies during the Global Financial Crisis

The Global Financial Crisis of 2008 caused mayhem in financial markets across the globe. In this

article, Rachel Tan discusses in detail the steps which China took to navigate the crisis and the

effectiveness of these measures.

The Role of Russia in the Syrian Conflict

The Syrian refugee crisis and Civil War are issues which have dominated headlines for much of the

year. In this article, Valerie Hew discusses Russias possible motivations for intervention in Syria

and the possible consequences of such actions.

The Impending Fall of the Chinese Economy

The economic progress of China since the era of Mao Zedong have been nothing short of

extraordinary. However, are we witnessing the end of these glory days? Join Jin Zhiyan as he

discusses the reasons behind a predicted decline in the Chinese economy and the potential impact

this would have on the world at large.

Proudly sponsored by

Issue 57, SPEX SMU Economics Intelligence Club

By Rachel Tan Yi

The 2008 Global Financial Crisis (GFC) was the most severe crisis to rock the financial markets

since the Great Depression of 1929. The most evident cause of this catastrophe was the decline

in US housing prices, which led to widespread defaults in subprime mortgage lending. This

eventually led to the collapse of the Lehman Brothers, a bank which was widely regarded as

an institution that was too big to fail. Its collapse left global investors reeling and caused

increased anxiety in the financial markets. As financial institutions became less willing to lend

money, businesses cut down on spending and this resulted in a slowdown in the economy. The

effects of the GFC were devastating to many economies.

Before the start of the GFC, China had established robust economic and financial connections

following years of significant economic reform. When the GFC hit, China realised that its

heavy reliance on exports for growth, especially those from the United States and Europe, made

it exposed to economic headwinds. Chinas leadership did not believe in the decoupling

concept, which was the assertion that emerging economies in Asia could minimise their

exposure to the effects of the GFC by increasing intra-regional trade.

Figure 1: Exports of Goods and Services as a % of Chinas GDP

In response to the GFC, the Chinese government implemented several policies designed to

reduce the undesirable effects of a significant decrease in trade on Chinas economy (Figure

1). Expansionary monetary policy was one of the key policies employed by the Chinese

government. In September 2008, when the effects of the GFC became widespread, the

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Exports of Goods and Services (% of GDP)


government took several actions in order to raise the availability of loanable funds. Firstly,

lending quotas which had made it difficult for banks to meet loan demands from customers

were eliminated. Secondly, to ensure that banks would have ample funds to cater to demand

from consumers, the government lowered the required reserve ratio for banks. The interest rate

which they could impose on loans was many times higher than the rate they could earn from

interbank loans. The Chinese government also concurrently took steps to raise the demand for

loanable funds. Firstly, they lowered benchmark interest rates, which influence the interest

rates which banks impose on loans. Secondly, they dropped the rates for mortgage loans. These

measures resulted in a rapid increase in bank loans, especially mortgage lending loans. Overall,

outstanding bank loans in domestic currency increased by RMB9.59 trillion in 2009, up from

an increase in RMB4.91 trillion in 2008.

Expansionary fiscal policy was also implemented concurrently alongside monetary easing.

Soon after expansionary monetary policies were implemented in 2008, the government

announced that it would be launching a stimulus package worth US$586 billion (13.4% of

GDP) over the following two years. The rise in bank lending obtained from monetary easing

was meant to be a source of funding for the stimulus program. Other sources included central

government spending and expenditure from local governments. Government spending was

meant to serve as seed funding to draw additional investment, from local governments as

well as private funding. A significant percentage of this stimulus was assigned to the

development of physical infrastructure such as railways, roads and grids (Figure 2).

Figure 2: Sector Breakdown of the Fiscal Stimulus Package

The policies implemented by the Chinese government turned out to be tremendously effective.

China became the first of the worlds major economies to bounce back from the global

recession. Initially, the Chinas economic growth dropped to a low of 4.3 percent in the fourth

quarter of 2008. However, as the stimulus package began to take effect, Chinas GDP growth

increased to 9.5 percent in the first quarter of 2009 and 11.4 percent in the second quarter of

the same year (Chart 3). It was estimated that the stimulus package actually boosted the

increase in Chinas GDP by around 2 to 3 percent in 2009 and 2010.


Chart 3: Real growth in Chinas GDP

Although these policies played in a critical role in growing Chinas economy substantially

during the GFC, they have not been exempt from criticism. Some have argued that the stimulus

program allowed for an unsustainable rate of growth in 2009 and 2010. The substantial increase

in loans was also believed to have several undesirable effects. The rise in loans increased the

risk of higher inflation in China and may have contributed to the period of rising inflation at

the tail-end of 2010 and 2011. During this period, inflation rates were greater than 5 per cent

yearly. In addition, the higher availability of loans resulted in the formation of asset bubbles

and a huge debt burden on the economy, which China is still grappling with presently.

The policies which China implemented in order to deal with the GFC did enable China to

ameliorate the adverse effects of the recession. However, the side effects of the stimulus and

the governments intervention on Chinas economy cannot be disregarded. To deal with the

current trend of slowing economic growth, China is currently considering rolling out a new

fiscal stimulus package of at least RMB 1.2 trillion and rolling out infrastructural projects such

as the building of railways. It would thus be prudent for the government to recognise the

importance of careful implementation and calibration of its economic policies as these will not

only affect its economic growth, but also those of its trading partners and the world economy

at large.


References:

Grant, W., Wilson, W., & Wilson, Graham K. (2012). The Consequences of the Global Financial

Crisis: The Rhetoric of Reform and Regulation, Oxford, UK: Oxford University Press.

The origins of the financial crisis: Crash Course. (2013, September 7). The Economist.

Han, M. (2012). The People's Bank of China during the global financial crisis: Policy responses

and beyond. Journal of Chinese Economic and Business Studies, 10(4), 361-390.

Lardy, N. (2012). Sustaining China's Economic Growth after the Global Financial Crisis,

Washington, DC: Peterson Institute for International Economics.

Supporting China's Infrastructure Stimulus Under the Infra Platform. (2010, June 1). Retrieved

from: http://siteresources.worldbank.org/INTSDNET/Resources/5944695-

1247775731647/INFRA_China_Newsletter.pdf

China grapples with risk of economic hard landing: Analysts. (2015, September 13). The Straits

Times. Retrieved from: http://www.straitstimes.com/asia/east-asia/china-grapples-with-risk-of-

economic-hard-landing-analysts


By Valerie Hew Kai Shuen

Post-World War I Syria

After the end of World War I, the League of Nations was formed and the mandate system was

created. In 1923, Syria became a Class A mandate placed under the rule of France. As a Class

A mandate, Syria was almost ready for independence, but only under the condition that they

received administrative guidance and help from France. During this period, the Sunni majority

in Syria did not welcome French rule. To counter this, the French recruited the Alawites, which

was a minority group, into the Syrian Army. This marked the start of the Assad familys rise

to power.

Syrian Civil War summarised

In March 2011, a pro-democracy protest was organised following the arrest of teenagers who

painted anti-establishment messages on their school walls. In retaliation, security forces opened

fire on protestors and this resulted in even greater unrest in the nation, eventually escalating

into a full-blown civil war. Since then, protestors have demanded that President Assad step

down. In light of the situation in Syria, Russia decided to intervene in order to protect its

national interests.

Russias motivations for intervention

Russia has tried to justify their intervention in Syria by claiming that these actions are in the

interest of national safety. According to Russian President Vladimir Putin, if the Islamic

extremists in Syria are not kept in check, they would eventually pose a threat to Russia. While

the threat of Islamic extremist attacks are real, this factor does not seem as important as other

factors which might explain Russias motivations for intervention. This can be seen from recent

Russian airstrike targets.

A non-ISIS area suggested to have been hit by Russian air strike


Although Russia previously claimed that they were doing so to aid Syria in combating the ISIS,

they have recently revealed that their air strikes have also hit anti-Assad militant groups. As

such, Russia also shows a keen interest in protecting President Assads position in Syria and

President Assad too was happy to have Russia working with them to combat terrorism.

Therefore, this implies that Russias motive for intervention stretches beyond national safety

concerns.

Russias political interests seem to be a bigger factor to explain their intervention. Ever since

rising to a superpower status during the Cold War, Russia has been keen on carving influence

in the world. In order to be influential in the world, Russia would require strong allies in all

continents and parts of the world. Syria, being one of their few allies left in the Middle East,

would thus be of great importance to Russia. Syrias port of Tartous is Russias only base for

its Black Sea Fleet. Moreover, Russia also operates several key air bases in Syria. As such, one

can conclude that one of Russias motivations to be involved in Syrias conflict would be to

protect their own security and defence forces.

Map showing Russia, Syria and the Black Sea

Others have also interpreted Russias involvement as an act out of fear. What President Putin

is afraid of is the weakening of the rule of President Assad and Western involvement in Syria.

To him, these factors could pose as a genuine threat to him as these forces might potentially

put him out of power.

Despite Russias numerous reasons to justify their actions, one definite consequences is that,

by assisting President Assad, Russia has actually intensified the Syrian protestors

dissatisfaction towards him. Thus, these undertakings by Russia may actually prove to

eventually backfire on them.

Russias motivations Economic Interests

Russian Prime Minister Dmitry Medvedev mentioned that Russias involvement in Syria is not

fuelled by economic gains, as the amount they spend in Syria way exceeds what actually gain

from being in Syria. However, if we consider economic interests from a different angle, we


might not come the same conclusion. In 2005, Russia signed six trade agreements with Syria

in the energy and transportation sector. These agreements were important for Russia as it

helped to expand in areas such as arms and oil. Their economic interests in Russia was

demonstrated when Russia and China vetoed the decision to put in place a sanction on Syria.

Thus, it could be possible explanation that Russia is actually getting involved in Syria to

safeguard their investments. However, if we were to compare this to their political and national

interests, this reason seems to hold less weight. At the end of the day, Syria is not one of

Russias key trading partners and hence their economic interests in the nation may not be of

particular significance.

What lies ahead?

It is clear that Russias involvement in Syria and their public backing of President Assad is

directly going against American ideology. Moreover, Russias decision to launch air strikes in

Syria has escalated these fears. Ultimately, with the civil war continuing, this only means more

suffering for the Syrians. Russias intervention in Syria does not seem to bring the crisis closer

to an end and might perhaps even aggravate the problem as their actions might fuel even greater

anti-Assad sentiments. As for Russia, their intervention in Syria has gone against the will of

many key Western nations, and the full effects of these actions remain to be seen.


References:

Syria: The story of the conflict. (2015, October 9). BBC News. Retrieved from:

http://www.bbc.com/news/world-middle-east-26116868

Conflict enters more perilous phase after Russia attacks Syrian rebels. (2015, September 30). The

Globe and Mail. Retrieved from: http://www.theglobeandmail.com/news/world/russian-attacks-

bring-old-cold-war-rivals-into-close-proximity-in-syria/article26604468/

Russia in Syria: Air strikes, Isis and Vladimir Putin's goals explained in 60 seconds. (2015,

October 1). International Business Times. Retrieved from: http://www.ibtimes.co.uk/russia-syria-

air-strikes-isis-vladimir-putins-goals-explained-60-seconds-1522038

Syria crisis: Where key countries stand. (2015, October 2). BBC News. Retrieved from:

http://www.bbc.com/news/world-middle-east-23849587

Putin's Syria intervention isn't grand, brilliant strategy. It's an act of fear. (2015, September 30).

Vox. Retrieved from: http://www.vox.com/2015/9/30/9419729/putin-syria-fear

Assumption of Russia's Economic Interest in Syrian Mission 'Propaganda'. (2015, October 3).

Sputnik International. Retrieved from:

http://sputniknews.com/russia/20151003/1027962542/syria-russia-interest-propaganda.html

An Alliance Built Around Trade (2015, March 16). NVC Review. Retrieved from:

http://www.nvcreview.com/an-alliance-built-around-trade-what-drives-the-relationship-between-

syria-and-the-russian-federation/


By Jin Zhiyan

Historical Background

China opened its economy to the world in 1978, and has since enjoyed three decades of year-

on-year GDP growth averaging 10%. What has been worrying these few years is the rapid fall

of this indicator: 7.7% in 2013, 7.3% in 2014, and a projected 6.7- 6.8% by 2016, according to

the OECD and IMF respectively. This article seeks to present some reasons for the predicted

decline and will also proffer some insights into the potential impact of this slowdown on the

global economy.

The Cause

The most commonly cited reason for the projected decline of the Chinese economy is that the

current pattern of investment-driven growth is unsustainable. Since 2011, additional capital

pumped into the economy has been the primary source of any increase in output. This is

concurrent with the near-zero change in total factor productivity, which measures the change

of output per unit of input. Indeed, the incremental capital output ratio, which measures the

contribution of investments to growth, has risen and China has reaped high returns on

investments (ROI) (Figure 1). However, it is clear that investment levels even then were

already excessive and that over-investing in a large number of projects could lead to economic

inefficiency. This is clearly evinced in Chinas notorious ghost towns where unsold

residential properties are left barren and offer no ROI. As of October 2015, investment as a

share of GDP is at 46%. To maintain the current level of GDP growth, investment as a

contribution to GDP will have to increase to 60-70%. The cost of such measures could severely

undermine overall economic stability because vast overcapacity results in investment

inefficiency which would drag down the countrys long-term growth rate.

Figure 1: Investment versus Real GDP growth in OECD and BRIC Countries


Another reason for the projected decline of the Chinese economy is the massive debt overhang.

Excessive investment has come hand-in-hand with a huge expansion of debt of questionable

quality. While 97% of yuan-denominated bonds hold top-ratings of double- or triple-A

domestically, many of them are rated as junk-grade bonds internationally. Total debt has

climbed to over 250% of GDP, and although this allowed China to survive the global financial

crisis, it also saddles the nation with a huge repayment burden which could hamper growth in

the coming years. While much of this credit flowed to property developers, current unsold

home inventory has climbed to a record high. This issue worsens as the property projects for

which credit was loaned are unable to be sold off. Together, the repayment of debt and the

repercussions of unsold home inventory will lead to a massive drag on the Chinese economy.

Chinas previous growth has been powered by a large arsenal of able working-age citizens who

have provided the requisite manpower for the nations manufacturing and service industries.

Due to increased life-expectancy as well as the effects of the one-child policy, it has recently

joined the ranks of ageing economies. While only 5% of the population was over 65 in 1983,

this figure increased to 9% in 2013 and is likely to swell to around 25% by 2050. The

corresponding fall in size of its total labour force erodes Chinas traditional competitiveness in

labor-intensive industries especially when compared with other relatively young and rapidly

developing countries in the region such as India. Simultaneously, the ageing workforce also

means that China will not be able to take full advantage of the economic shift from primary to

tertiary industries due to the relatively poorer acceptance and uptake of technology by workers

of a more advanced age. This combination of factors implies that even as China is grappling

with the problem of shrinking competitiveness in its traditional niches, it requires a transition

to a younger workforce in order to stay competitive in the global economy.

Figure 2: Percentage of labour force among those aged 15 and over

71

72

73

74

75

76

77

78

79

80

Percentage of labour force among those aged 15 and over


Potential Impact on the World

In the past decade, China has contributed to a third of the global economys expansion, a far

larger proportion than that of any other individual nation. Hence, it is fair to conclude that the

key to global growth rests definitively in Chinas hands. Should Chinese growth fall to negative

or even near-zero rates, the world economy will certainly be severely affected. As the worlds

second-largest economy, any change in Chinas growth rate will lead to a domino effect on

countries all over the world. This is especially crucial as a number of other emerging economies

such as Brazil and Russia are already locked in domestic recession. In addition, a fall in

domestic GDP growth, will lead to both a fall in imports as well as a fall in exports, events

which will lead to drastic consequences for the rest of the world.

Another worrying issue which might develop would be the potentially massive decline of the

commodities industry. China is the worlds largest consumer of many of the worlds most

widely produced commodities, notably aluminum, iron ore, and copper. Even at current prices,

commodity exporters such as Kazakhstan or Venezuela are already suffering. A drop in Chinas

demand for commodities is likely to put further downward pressure on resource prices, many

of which are already at multi-year lows. The role of China in shaping commodity prices can be

seen in the consequences of the recent yuan devaluation, which caused aluminum and crude

futures to dip by 1.8% and 1.6% respectively. A decline in the Chinese economy would lead

to a far more severe and potentially catastrophic impact on the commodities industry.

Conclusion

As the second-largest economy in the world, China has a responsibility to not only its own

citizens but the rest of the world to undertake responsible economic policies to ensure its

continued growth. In recent months, the government has put in place changes such as partial

privatization of state-owned enterprises in order to allow for greater market competitiveness.

It has also introduced measures to boost demand in domestic markets, such as cutting the

minimum down payment for first-time home-buyers in many cities and cutting taxes on the

sale of small cars. With the governments aspiration to shift from its current investment-driven

growth model to a consumption-driven one, it remains to be seen whether such a move will

lead to more sustainable growth for the economy in the face of global headwinds.


References:

China Economic forecast summary (June 2015). OECD. Retrieved from: http://www.oecd.org/economy/china-economic-forecast-summary.htm

Walker, A. (2015, September 27). Chinas economy is stumbling, but by how much? BBC News. Retrieved from: http://www.bbc.com/news/business-34340936

Wolf, M. (2015, September 1). Column: China risks an economic discontinuity. Financial Times.

Retrieved from http://www.ft.com/intl/cms/s/0/cfe855be-5092-11e5-8642-

453585f2cfcd.html#axzz3nOC07tLw

Lee, Liu, Syed. (2012) IMF Working Paper: Is China Over-Investing and Does it Matter? Retrieved

from: https://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf

Wolf, M. (2015, September 15). Column: A New Chinese export recession risk. Financial Times. Retrieved from: http://www.ft.com/intl/cms/s/0/486bc716-5af0-11e5-9846-de406ccb37f2.html#ft-

article-comments

The Economist Hong Kong. (2006, November 2). Dim Sums: The Widely Held Belief that China

Over-invests is based on flawed figures. The Economist. Retrieved from:

http://www.economist.com/node/8108538

Law, F. (2015). Can All Chinese Debt Be Rated Top Quality? The Wall Street Journal. Retrieved

from: http://www.wsj.com/articles/can-all-chinese-debt-be-rated-a-1437942674

S.R. (2015, March 11). Why Chinas economy is slowing. The Economist. Retrieved from: http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-8

Huang, Yanzhong. (2013, November 10). Population Aging in China: A Mixed Blessing. The

Diplomat. Retrieved from: http://thediplomat.com/2013/11/population-aging-in-china-a-mixed-

blessing/

Sharma, R. (2015, August 16). A Global Recession May Be Brewing in China. The Wall Street

Journal. Retrieved from: http://www.wsj.com/articles/a-global-recession-may-be-brewing-in-china-

1439764500

Buttonwood. (2015, September 9) Forecasting a global recession. The Economist. Retrieved from:

http://www.economist.com/blogs/buttonwood/2015/09/economics

Spence, P. (2015, September 2015). China leading world towards global economic recession, warns

Citi. The Telegraph UK. Retrieved from: http://www.telegraph.co.uk/finance/china-

business/11854084/China-leading-world-towards-global-economic-recession-warns-Citi.html

Ro, S. (2015, August 11). China is the worlds largest consumer of most commodities. The Business Insider. Retrieved from: http://www.businessinsider.com/chinas-share-of-global-commodity-

consumption-2015-8?IR=T&

Mukherji, B. (2015, August 11). With Yuan Devaluation, China Digs A Hole for Commodities. The

Wall Street Journal. Retrieved from: http://www.wsj.com/articles/with-yuan-devaluation-china-digs-

a-hole-for-commodities-1439292219


Koh, GQ. (2015, May 27). China President stresses market forces in reforms: media. Reuters.

Retrieved from http://www.reuters.com/article/2014/05/27/us-china-economy-reforms-

idUSKBN0E71C320140527

Reuters in Beijing. (2015, September 13). China unveils plan for partial privatisations as economy

cools. The Guardian. Retrieved from: http://www.theguardian.com/business/2015/sep/13/china-

partial-privatisations-economy-cools

Shao, XY, Subler, J. (2015, September 30). China cuts downpayment requirement to boost property

sector. Reuters. Retrieved from: http://www.reuters.com/article/2015/09/30/us-china-economy-

property-idUSKCN0RU16420150930

The Wall Street Journal. (2015, September 22). Full Transcript: Interview With Chinese President Xi

Jinping. The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/full-transcript-

interview-with-chinese-president-xi-jinping-1442894700


Tay Qi Hang (Director, SPEX)

Undergraduate

School of Economics

Singapore Management University

[email protected]

Meghana Hari Prasad Sunku (Creative

Director)

Undergraduate

School of Economics


[email protected]

Rachel Tan Yi (Writer)

Undergraduate

School of Economics


[email protected]

Jin Zhiyan (Writer)

Undergraduate

School of Business


[email protected]

Valerie Hew Kai Shuen (Writer)

Undergraduate

School of Accountancy


[email protected]

SPEX 57

Documents

Transcript of SPEX 57