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. In
this 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 China‘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 and
competitively, 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 impacts 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: Conclusion………………………………………………………………...…….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 global
financial crisis on the Chinese economy?

Introduction

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

Objective:

1. Identify the global financial crisis

2. Previous financial crisis in Asia and the Chinese economy
3. 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$21 billion. Economic reforms have transferred China into a major trading partner for
many countries. China's ranking as a trading power rose from 27th in 1979 to 10th in 1998
and 2nd largest economy in 2008. Over recent years, China built up nearly US$ 2,000 billion
in foreign reserves to prevent the renminbi appreciating.

Over the past several years, China has enjoyed one of the world‘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 Chinese
government, 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, ―In our 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 slow 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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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 a
forecast 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 Chart 1:The balance of China's export and
is close to 20% in 1997. import in 1990 ( in US bilion Dollar)
200
(Yunling, October, 1998)
Besides, increasing trade surplus 150

in 1990s makes China building 100 export

up a high capacity to pay back 50 Import

the foreign debt with increasing 0

amount of foreign exchange 1990 1991 1992 1993 1994 1995 1996 1997

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
Chart 2 : Structure of foreign Capital
among the developing countries,
flow in US Billion dollar
and the second largest in foreign 60
50
direct investment (FDI) after the
40
United States in the world. Loan
30
However, China has kept a healthy 20 FDI
10 Other
structure of capital inflow since
0
long term debt accounts for the 1990 1991 1992 1993 1994 1995 1996 1997

larger 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.

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 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).

Foreign Direct investment flow in

China
Chart: 3, Source: Chinese commerce 15
Foreign
Ministry via Thomson Reuters 10 Direct
investment
flow in
5
China

0
2008 2009

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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 notably
shrinking 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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 Chart 4: The trends of Chinese GDP.
Source: IMF

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 will
be 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: 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 believed 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.

6
Other
4
currencies
Euros
2
US dollar
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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

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

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 Chinese
government 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 the
world to help the recovery of Chinese growth," Mr. Prasad said. Currently, 1% of the

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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."

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

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).

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

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

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 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. (Cuñat, 2009). During September 2008 –
January 2009, the foreign exchange reserves of Russia plummet by a whopping USD 175
billion followed by India‘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.

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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) since 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 Street
financial 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 22nd 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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