Global Financial Crisis And Challenges For China

Mu Yang, Michael Siam Heng Heng

• Publisher: WSPC
• Year: 2012
• Print ISBN: 9789814282277
• eBook ISBN: 9789814434621
• Topic: Economics
• Subtopic: Finance
• Index: Economics

The book analyzes the nature of Chinese economy which enables it to go through the financial tsunami pretty unscathed. It discusses the stimulus package designed by the Chinese government to keep the economy on course, as well as its results — both positive and negative aspects in the middle and long term.

The 2008–09 financial crisis makes it very clear that we need a two-pronged approach to deal with the situation, namely governments need a) to take quick and decisive actions to stem any further deterioration in financial systems; b) to revamp their economies by refitting existing engines in the real economy. China, as the third largest economy in the world, and with its robust domestic consumption and a healthy financial system, is one of the most important drivers to pull the world out of recession.

According to the Chinese leadership, China's main contribution is to keep its own economy running smoothly. In response to the crisis, the Beijing government has poured money into the following sectors: public housing, earthquake reconstruction, physical infrastructure, social security, education and healthcare. So far, the results have helped China to maintain the targeted high growth. Given the open nature of its economy, its high growth has also benefited other countries, thereby contributing to the global economy.

The current crisis strengthens a trend that has emerged since the Asian financial crisis of 1997. And that is the enhanced economic integration of China with its East Asian neighbours and Southeast Asia. This augurs well for East Asian regionalism which may include the birth of Asian Monetary Fund.

The global environment in the wake of the crisis poses new challenges to China, for example, in the form of shrinking size of its traditional export market in the USA and Europe. China needs to modify its strategy from previous export-oriented and investment-driven strategy into one with more emphasis on consumption. There is a lot of scope for China to embark on productive consumption such as cleaning up the environment, physical infrastructure, social security, education and healthcare. If done well, they will lay a firm basis for long-term economic development. It represents an occasion for China to embark on a nation-wide effort to upgrade its economy in the key sectors. At the same time, attention needs to be paid to improving economic-legal institutional framework to support China's role as a major global player.

Contents:

• Introduction
• The 2008 Financial Crisis and the Chinese Economy
• Shanghai as an International Financial Centre
• The Renminbi Debate
• Promoting China-ASEAN Economic Cooperation
• The Flying Geese Model
• Reflections on Developmental Models
• By Way of Conclusion: Some Random Thoughts

Readership: Academics interested in Asian Studies, China's economy and the financial crisis; general public.

Chapter One

Introduction

 

This book examines a few key aspects of the Chinese economy in the aftermath of the financial crisis. Before the crisis, the economy was growing at breakneck speed. The success story can be told in terms of economic reform guided by pragmatism, stepwise introduction of a free market economy, accession to the World Trade Organization, an industrial policy geared towards export promotion and selective learning of experiences from other countries. The Chinese economy has weathered a major political upheaval in the form of the Tiananmen incident of 1989 and a major economic storm in the form of the Asian financial crisis of 1997. What is even more significant is that it has managed to emerge from the 2008 global financial crisis in good shape. But as anyone with a sense of history would caution: past success is no guarantee of future success.

Three years have passed since the 2008 financial crisis. How has the Chinese economy fared during this period? China has responded to the shortfall with fiscal and monetary stimuli, and the results so far have been positive. In so doing, it has been able to make up for the weaker demand in the Western markets.

With this as the background, what has been the salient feature of the impact of the crisis? Speaking in a general sense, there is both change and continuity. The elements of change tend to appear in the news headlines. For example, we are told time and again that there is a shift in the centre of gravity of global economic power from the West. The G8 has been replaced by the G20. The International Monetary Fund has conceded that the emerging economies deserve to have a bigger say in the running of the Fund.

The changes are certainly important; so are the continuities. In terms of per capita income at purchasing power parity, China is ranked 94th, far below many other countries.¹ This is visible to any visitor who cares to venture deep into the inner regions. There is still a big swathe of poverty. Bearing this in mind, it is easy to understand why the Beijing leadership shunned an active global leadership role in dealing with the impact of the global financial crisis. It repeatedly explained that the best way for it to play a positive role was to run its economy well. In so doing, China would provide a market for others’ products. Continuing what it has done since the Asian financial crisis, it has increased its economic integration with the ASEAN countries with the implementation of the China-ASEAN Free Trade Agreement in early 2010. While this is certainly a move in the right direction, China could also try to reduce global imbalances by investing in productive assets abroad and buying high technology. In the face of American refusal to sell the kind of high technology that China wants and its attempt to block China’s purchase of American assets, China can think of creative solutions to these problems.

Interestingly, another aspect of continuity is that the crisis was an occasion for the Western countries to raise an old issue with the Beijing government. They complained about their trade deficits with China and exerted extra pressure on China to revise its exchange rate upwards. They accused China of using its exchange rate as a mechanism to boost its exports while continuing to build up an unprecedented huge amount of foreign exchange. China has consistently denied the charge of currency manipulation. Related to this debate on the Chinese yuan is liberalization of the financial market. China’s control of the currency flow has acted as a shield against the gales sweeping through financial systems in times of crisis. But as the Chinese economy grows to become the second largest economy and as it becomes more integrated into the global economy, the issue of financial liberalization looms larger. The issue is getting more urgent as China is gradually permitting use of the yuan as an international currency for trade and investment.

China has adapted the Japanese model since the early days of economic reform. But with the Japanese economy mired in two decades of recession, are there still useful insights to draw from the Japanese experience? Looking at the gap between Japan and China, one obvious answer is that China has yet to nurture and grow the Chinese equivalents of Mitsubishi, Toyota and the like.

Because China has also cherry-picked lessons from other East Asian countries, its development trajectory has not been a simple copy of Japan’s. This has inspired some foreign observers to describe China’s experience as the Chinese model. One of them even coined the term “Beijing Consensus” to capture the idea. Interestingly, the Chinese leadership and its leading economists have consistently denied that there is a Chinese development model. They seem more comfortable saying that they have been learning as they go along — citing the famous instruction of Deng Xiaoping of crossing the river by feeling the stones — and would prefer that other countries seek their own path of developing their economies. The BRICS countries, Indonesia and Turkey are emergent economic powers, all chalking up impressive growth in the aftermath of the financial crisis. Their people may say, “We live in an interesting time.” It is not wrong for them to feel that their economies and societies are undergoing a particularly fascinating period. Between them, their experiences can certainly be distilled to add to the body of knowledge of developmental economics.

Chinese economists are deeply concerned with the issue of future growth. The impressive economic growth has been achieved on the back of massive investment, cheap labour whose supply is dwindling, depletion of natural resources and environmental degradation. Certainly, this approach is not sustainable.

Currently, the two most urgent issues are inflation and debts incurred by local governments. Inflation requires the government to adopt restrictive economic policies or at least to pull back expansionary measures. Investment is hampered by huge debts incurred by local governments and the current concern over rising inflation. As a result, the economic growth may not be big enough to generate the employment needed to maintain social stability. It raises the question of whether China is entering a period of stagflation with Chinese characteristics.² Meanwhile, it has proved difficult to stimulate private consumption, which remains in the doldrums because of the high cost of housing and weak social welfare system.

The economic problems facing China in the years ahead are quite clear to most China watchers. What is not clear is how these problems can be overcome. As students of social studies, we do not wish to make predictions. What we can perhaps offer is a discussion of some of the relevant issues, as a tool to help understand them.

The Rest of the Book

Chapter Two looks at the state of the Chinese economy amidst the global financial crisis. The economy has demonstrated its ability to hold up despite being badly battered by the crisis. The resilience is to a large extent due to its sound fundamentals. Despite having been able to successfully adopt an export-oriented approach for economic growth, the Chinese economy is also fuelled by its huge domestic demand. As a result, by increasing domestic demand through government spending, China has been able to cushion the full impact of the financial crisis. However, for the Chinese economy to retain its resilience in the future, there is a need for certain revisions in its structure. These include moving the economy up the value-added production chain and increasing the contribution of domestic consumption to the country’s domestic demand.

Chapter Three discusses China’s plan to transform Shanghai into a major international financial centre, on par with Hong Kong, Singapore, New York and London by 2020. The plan was announced in March 2009 by China’s State Council. It was a timely move as it came at a time when China was assuming a greater role in global economic affairs. Indeed, China has replaced Japan as the second largest economy in the world. It is also the world’s largest manufacturing base and the biggest commodity importer. Besides holding 40 percent of the world’s foreign exchange reserves, it has the world’s top three banks in terms of market capitalization. In 2009, the country accounted for 47.8 percent of the total value of IPOs worldwide. It is becoming bolder in the internationalization of its currency and is actively exploring means to reduce its dependency on the US dollar.

Chapter Four dwells on the yuan debate. The USA and Europe claimed that China had been deliberately maintaining a cheap Chinese currency as a means to boost its exports, to the detriment of their trade balance with China. With deep interdependencies between the USA and China, a cheap yuan benefits certain sectors in both countries, just as a revalued currency would benefit other groups in the two countries.

A key problem is America’s huge trade deficit with China. It can be reduced if US companies sell what Chinese companies wish to buy. But Washington restricts such sales. A way out is for Chinese firms to buy European technologies and assets. With the money, European companies can buy American technologies and assets. This will reduce global imbalances and the dollar will recover, providing a benign environment for growth in the real economy.

Chapter Five discusses the China-ASEAN Free Trade Agreement (CAFTA) which was implemented in January 2010. It marks an important milestone in the relations between China and ASEAN. CAFTA builds on and extends the growing economic relationships between the two sides. The agreement is expected to further promote China-ASEAN trade alongside intra-regional direct investment and extra-regional FDI. However, as a result of the 2008 financial crisis, global economic conditions have changed significantly from those prevailing at the time of drafting the agreement. This may represent new opportunities and challenges. Its future success depends on how its signatory members can work together to overcome the challenges and make good use of the opportunities. Further down the road, ASEAN and China can build on CAFTA to enhance their economic cooperation and integration through coordination in monetary and fiscal policies as well as industrial policies.

Chapter Six examines the main features of the Japanese economic model and to what extent it still offers useful insights. In the 1950s Japan embarked on an export-driven developmental path that came to be known as the flying geese model. By the 1950s, many had noticed the success of the model and it was subsequently adopted by other East Asian countries. They too enjoyed decades of remarkable economic growth. An important element of the model is growth driven by exports to the USA and Europe. The bursting of the financial bubble in 1990 and Japan’s subsequent response hold lessons for China. As a result of the 2008 financial crisis, the traditional markets of the “geese” are shrinking. The new situation poses grave challenges to both the existing flying geese economies and the latecomer economies which wish to follow the model. However, there remains much for China to learn from Japan in nurturing non-state-owned transnational companies able to compete successfully in the global market.

Chapter Seven looks at the renewed interest in economic developmental models in the wake of the 2008 financial crisis and the subsequent recession. News reports and commentaries highlight the Washington Consensus and the Beijing Consensus. Why has the Beijing Consensus enjoyed lukewarm reception among Chinese policy makers and intellectuals? Unlike a model designed for natural sciences applications, an economic model needs to consider the context of its application. Looking ahead, China may find it useful to study the experiences of the Nordic countries. They are able to combine social security with economic dynamism; they have low income disparity, low crime rates, high standards of living, good healthcare and they show concern for the environment.

Chapter Eight is the concluding chapter. It emphasizes the importance of sticking to the basics of creating economic wealth in the face of competition — ideas such as value adding, productivity, production cost, innovation and efficient use of natural resources. These are ideas that apply to any economy and country. But any broad study of the Chinese economy would be inadequate without considering its continental size, both in terms of its geography and population. Its size allows China to try out different sets of industrial policies at the same time. It can follow the policy of nurturing chaebol-like transnational companies and the policy of supporting small and medium-sized enterprises. The chapter also offers a strategy to turn into a virtuous cycle the vicious cycle of persistent and rampant corruption, abuse of power, waste and social unrest.

 

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¹List of countries by GDP (PPP) per capita, http://en.wikipedia.org/wiki/List of countries by GDP (PPP) per capita [accessed 17 May 2011].

²Yang Mu and Yao Jielu, “Stagflation with Chinese Characteristics”, EAI Background Brief, National University of Singapore, 2011.

Chapter Two

The 2008 Financial Crisis and the Chinese Economy

The global financial crisis has had a devastating effect on the world economy. Not only has it raised high levels of doubt on the fundamentals and sustainability of the current global financial system, it has also wiped out the euphoria that came with the strong growth posted by most economies in 2007 and early 2008. China is one good example. Prior to the outbreak of the crisis in the third quarter of 2008, China’s economy had been expanding at a spectacular pace, registering double-digit growth since 2005. At one point, China’s stellar economy even seemed to be overheating, prompting Beijing to introduce a series of measures to constrict economic growth. However, the onset of the financial crisis turned the tide as plunging world demand sent China’s all-powerful economy into a downward spiral. Initially, the damage seemed to be extensive but as the world economy began to stabilize in 2009 and the huge stimulus package unveiled by Beijing took effect, China’s economic situation improved. By the end of May 2009, green shoots of recovery seemed to have sprouted in China’s economy, as illustrated by the stabilization of the decline in China’s exports and the sharp increase in bank loans. Indeed, China’s economy registered a strong growth of nearly 8 percent at the end of the second quarter of 2009. Whether these are real signs of recovery remains to be seen but they revealed the resilience of China’s economy and the potential role of domestic demand.

The objective of this chapter is to explain the state of the Chinese economy amid the global financial crisis. It argues that the Chinese economy seems to be holding up despite being badly battered by the financial crisis. The resilience that the Chinese economy is showing is to a large extent due to its sound fundamentals. Despite having been able to successfully adopt an export-oriented approach for economic growth, the Chinese economy is also fuelled by its huge domestic demand. As a result, by increasing domestic demand through government sp...

Table of contents

• Cover Page
• Halftitle
• ALSO BY YANG MU
• Title
• Copyright
• Contents
• Preface
• Chapter One     Introduction
• Chapter Two     The 2008 Financial Crisis and the Chinese Economy
• Chapter Three   Shanghai as an International Financial Centre
• Chapter Four     The Renminbi Debate
• Chapter Five      Promoting China-ASEAN Economic Cooperation
• Chapter Six       The Flying Geese Model
• Chapter Seven    Reflections on Developmental Models
• Chapter Eight      By Way of Conclusion: Some Random Thoughts
• Index