China 2008: The Global Financial Crisis
This next article in the CDT series on important issues facing China in 2008 focuses on China’s role in the global financial crisis.
To give a deeper understanding of China’s up-and-coming role on the world stage, CDT looks at articles, issues, and policies over the last six months that contributed to the current state of the Chinese economy. While this is not a comprehensive timeline, it will give a basic analysis of China’s reaction to the financial crisis and its role within it.
After starting 2008 with a double-digit growth rate, substantial trade surpluses, and over a trillion dollars in foreign reserves, it took almost half the year before China fell victim to the global financial crisis. At first some believed China might be immune; however, as banks began to collapse in the United States and Europe, China quickly found itself drawn into the financial mess.
When the U.S and Europe fell into the credit crisis earlier this year, they were forced to cut back on consumption, which fueled a massive decrease in demand for Chinese imports. China was already experiencing a economic downturn, and the lack in demand from abroad meant factory closures, resulting in high job losses all over China. Guangzhou, a major manufacturing town, lost tens of thousands of workers in 2008, forcing citizens to return to their home in the countryside. Dongguan, and the southern Pearl River Delta, also lost thousands of workers. Suddenly the great engine of China was slowing.
At the same time, China also still seems poised to “rescue” the West. With $1.9 trillion in foreign reserves, a $29.3 billion trade surplus, and potentially undervalued yuan, China still seems to be one of the most influential players in the world – at least from a fiscal perspective. But China became leery. Having been burned by previous sour investments, the country is cautious in handling its $200 billion of sovereign wealth funds abroad. For example, many thought the China Investment Corporation (CIC) would use some of these funds to purchase an additional stake in Morgan Stanley earlier this year; however, Japanese bank Mitsubishi UFJ Financial Group ended up financing the investment. The West is asking China for help, but representatives from China continually answer that the best strategy for China is to focus on its own internal growth.
The Chinese government is working on this in a variety of ways. In the beginning of 2008, the CIC invested money directly into Chinese banks, giving $20 billion to China Development Bank, and $47 to Agricultural Bank of China. The latter held $100 billion of bad loans and was the country’s fourth largest state-owned lender to have to be funded by the government. Then in mid-September, China’s Central Bank cut interest rates for the first time in six years; China wanted to keep inflation levels low, but it also needed to encourage lending. The Central Bank continued to cut rates throughout the remainder of the year. Just a few weeks later, the government introduced a series of tax cuts for new homeowners, lowering the property contract tax from three percent to one percent and decreasing the down payment on certain-sized homes. Perhaps the most well known “stimulus” for China was the $586 billion stimulus package unveiled in November; the package received plenty of speculation in terms of how much “good” it would do the real economy, but many find it difficult to argue with China’s desire to invest in infrastructure.
But most recently, the Chinese government is hoping to change habits. Many Chinese take a certain amount of pride in thriftiness, and Beijing wants to encourage consumption. Consumer spending currently accounts for 38 percent of the China’s GDP, compared to somewhere like the United States where consumer spending is almost two-thirds of the country’s GDP. Part of the previously mentioned $586 billion stimulus package includes incentives for individuals to buy cellphones, furniture, washing machines and flat-screen TVs. And lastly, we can’t forget the ever-argued “manipulation” over the value of the yuan.
Right now China says it needs to focus on keeping its economy growing. With the economic outlook looking much slower for 2009, China needs to address the increasing social unrest from rising unemployment, as well as its role in the turbulent global economy. China’s projected growth for 2009 lies anywhere from 5.5 to 9 percent, and it needs a minimum of 7 or 8 percent growth to provide jobs for the estimated 20 million people that annually enter its workforce.
So what will China do? Most recently outgoing U.S. treasury secretary Henry Paulson met with officials in Beijing to discuss the global financial crisis. At the most recent convening, China’s Central Bank governor, Zhou Xiaochuan, blamed the financial crisis on “excessive consumption and high leverage” by Americans. Yet China holds over $585 billion in United States debt (along with Japan, Great Britain, and countless others), essentially helping to finance the ability of Americans to live beyond their means over the past decade.
In the coming months, it is unclear how China will welcome the new Obama administration, and aside from several small comments, it is yet to be seen how the Obama administration will interact with China. Discussions have obviously begun, as China’s Central Bank governor, Zhou Xiaochuan, met with Mr. Paulson’s successor, Timothy Geithner, earlier this month. At a time where the financial landscape is changing daily, the United States, and the world, are looking at China for its reaction.
Analysts around the world have given their perspective of China’s role in the current economic crisis. To learn more about China’s role within the crisis, here are some additional links:
China 2008: La Repubblica’s Asia Chief Correspondent and Senior Global Columnist, Federico Rampini gave a lecture on the impact of the global economic crisis on US-China relations on November 10, 2008. His speech was followed by the remarks prepared by two discussants, and a Q&A session.
Understanding the Global Financial Crisis: Blogger from The China Vortex discusses the importance, and difference, of home owernership in China and the US.
Video: China Investment Corporation: An interview by CBS’s Lesley Stahl reveals deep insight into the workings of the the CIC by interviewing CIC President Gao Xiqing. Gao discusses the funds goals and how the rest of the world feels about the CIC.
Obama’s New Deal and the fate of migrant workers: Overseas political commentator Liang Jing wrote this essay; translated by Dr. David Kelly.
Book Review: Chinese Capitalism: A new analysis on China’s political and rural economy in the 1980s compared to the 1990s.