China and the Global Financial Crisis
by Christopher A. McNally
(http://www.eastwestcenter.org)
The East-West Center, a hub for cooperative research, education, and dialogue on critical issues of common concern to the Asia Pacific region, contributes this look at how the global financial crisis is affecting China.
The impacts of the global financial crisis are now rippling across the globe, diminishing the demand for a broad range of goods and services and therefore raising the prospect of hard landings in emerging economies dependent on exports. The case of China is illustrative of how the broader economic downturn created by the global financial crisis is reverberating in Asia.
China’s financial institutions have largely escaped the global credit contagion because of capital account controls and limited exposure to global financial markets. But China’s high export dependency and status as the world’s premier manufacturing platform create vulnerabilities as Americans and Europeans drastically reduce consumption. The net effect is a plummeting demand for Chinese exports. Indeed, one of the biggest worries for 2009 is that tight credit markets and gyrating currency markets will cause disorder and a possible contraction in world trade—a situation that will have negative implications for China.
China’s outlook is also complicated by trends underway and decisions undertaken before the start of the financial crisis. China’s economy already started to decelerate at the beginning of 2008 due to a variety of measures taken to dampen inflationary pressures and a run-up in domestic real estate prices. The effects of these earlier measures combined with the present global economic down-turn are producing a fundamental deceleration of economic activity. Recent figures reflect this: power generation declined four percent in October from a year earlier; real estate transactions are plummeting in cities along China’s prosperous seaboard; and in November 2008, China’s exports fell for the first time in seven years.
As a result, predictions for China’s fourth quarter GDP growth are down to between five and seven percent—respectable by global standards, but a stunning drop from double digit growth rates just a few months earlier. To counteract this economic deceleration, the Chinese government has launched a 180 degree about-face in economic policy: interest rates are being slashed, bank lending quotas lifted, taxes reduced, government funds injected into the stock market, and, most visible of all, the announcement of a $586 billion stimulus package. This stimulus package is an important step and will put a floor under economic deceleration.
However, if past efforts at Keynesian stimulus spending by China and Japan are any guide, efforts aimed at funding infrastructure projects will have limited immediate results other than providing some employment opportunities. Measures aimed at increasing private consumption will probably disappoint as well since Chinese households are accustomed to saving rather than spending due to uncertainties in their livelihoods. Although comprehensive social security and medical care reforms could address these uncertainties, such reforms cannot be implemented overnight.
To read more about this, please see the entire briefing, posted at the East-West Center (here).
