China Analysis 67
January 2009
www.chinapolitik.de The Financial Crisis and Its Impact on China
Dirk Schmidt
鸡蛋常温下能保存多久Senior Lecturer
Rearch Group on the Political Economy of China
Trier University
China Analysis is edited by
Sebastian Heilmann
Professor of Government / Political Economy of China Trier University, 54286 Trier, Germany
E-mail: china_analysis@chinapolitik.de
Dirk Schmidt∗
The Financial Crisis and Its Impact on China
In 2008, as the international financial crisis spread from the developed countries to emerging econo
mies and spilled over from the financial ctor to the real economy, two widely shared assumptions about China have been shattered: that China could decouple from a recession in the West and that it could be immune from financial turmoil by its “clod” capital account and insulated banking ctor primarily relying on deposits and not expod to risky Western financial instruments.1
This article deals with some of the immediate conquences of the financial crisis for China so far, sketches the Chine policy respons and prents two alternative scenarios for the longer-term future. It does not speculate about China’s growth rate for 2009 on which estima-tions vary enormously (from zero growth to 8%) depending on how much China’s export ra-
tio is factored in the calculation of its GDP.2 No matter which GDP growth rate for 2009 is assumed, the downturn from 13% in 2007 7% or even less in 2009 would mark the sharpest contraction of China’s economy in 20 years.
The Short-term Impact on China
The international financial crisis has already left its mark on veral aspects of China’s econ-omy although according to the official numbers the negative impact is not fully reflected in the year-on-year comparison (cf. table below). The most visible damage so far has been in-flicted on China’s exp
ort-oriented light industry in southern China. Thousands of companies have gone bust, tens of thousands of workers have been laid-off and even the official statistics reveal that 10 million migrant workers have returned to their home provinces.
In the financial ctor the stock market crash that started in October 2007 has wiped out more than two thirds of market value although this dramatic collap of the Chine stock market has many home-made reasons. The Chine banks for all their profitability have witnesd the sudden pull-out of many of their Western partners as the (Bank of America, UBS, RBS) had
to ll their minority stakes in order to retrieve capital. In how far this trend will have negative conquences for Chine banks remains to be en. The international financial crisis has definitely dealt a massive blow to China’s fledgling sovereign wealth fund (China Investment Corporation, CIC). With huge loss incurred by its engagement in Western companies the Chine public has become very critical towards the CIC’s investment strategy. As a result, the CIC’s current attitude of “cash is king” has led Western analysts to call the Chine sover-eign wealth fund the “China Not-Investing Corporation”.3
∗ Dr. Dirk Schmidt, Senior Lecturer, Trier University, Germany章宗
1 On the two assumptions e Albert Keidel: “The Global Financial Crisis: Lessons for the United States and China”, Carnegie Endowment Remarks, October 26, 2008; “The Decoupling Debate”; in: The Economist, March 6, 2008.
2 On this question e “Economic Focus: An Old Chine Myth”; in: The Economist, January 5, 2008.
3 Brad Setr: “The China Not-Investing Corporation” (January 5, 2009); in: blogs.cfr/tr/2009/01/05/the-china-not-investing-corporation/ (accesd January 25, 2009).数字牌
In China’s external economic relations November and December 2008 saw the turning of the
tides: For the first time since 2001 exports fell in November 2008 by 2,2% while imports in
December declined by more than 21%. Since China is at the centre of Asian production net-
works and a big chunk of its imports from Asia is procesd for exports, this decline of im-
ports as well as the corresponding export slumps in Taiwan (-41% in December) and South
飞鸽传输Korea (-17%) do not bide well for the coming months. Positively at least, China is one of the
major beneficiaries of the decline of commodity prizes (esp. crude oil) which has helped to
ea inflationary pressures and for the time being muted international concerns about China’s
“ruthless petro diplomacy“.
China’s economy in 2007 and 2008
2007
红烧肉鹌鹑蛋2008
GDP (billion CNY) 25731 30067
GDP growth rate (%) +13,0 +9,0
Unemployment rate (%) 4,0 4,2
Inflation rate (%) 4,8 5,9
Fiscal balance (% of GDP) 2,1 2,0*
手上只有10万怎么买房
Trade (billion US$)
Exports (billion US$)
Imports (billion US$)
Trade surplus (billion US$)
2174
1218
956
262
滑动模板2562
1429
1133
296
Current Account surplus (% of GDP) 11,3 9,7*
FDI received (billion US$) 82,7 92,4
Foreign exchange rerves at year end (billion US$) 1530 1950
Sources: Statistical Bureau of the People’s Republic of China, People’s Bank of China, WTO, IMF. *OECD projection.
Policy Respons
遇到另一个自己
At home the Hu Jintao – Wen Jiabao leadership has concentrated on means to manage the economic downturn and minimize the social costs of the crisis. A central work conference in December t the goal of 8% growth for 2009. Already in November the government revealed a 4 trillion Yuan (586 billion US$) stimulus package that is to bring about an economic re-covery in the third quarter of 2009. The fiscal measures include funding commitments for massive infrastructure in
vestments as well as tax rebates for suffering industries and have been accompanied by anti-cyclical monetary policies (the central bank cut benchmark interest rates 5 times from September to December 2008).4
China’s international respon has been in line with its traditional attitude of cultivating its image as a responsible power while avoiding responsibilities that would surpass its capacities as the “biggest developing country of the world”. Thus, Hu Jintao at the G20 summit meeting in November made it clear that China’s main contribution to international financial stability would be ensuring “steady and relatively fast growth” of its own economy.5
4 On the stimulus package e Barry Naughton: “The Scramble to Maintain Growth”, China Leadership Monitor No. 27 (Winter 2009).
5 “Hu Jintao Address the G 20 Summit on Financial Markets and the World Economy in Washington” (2008/11/16); in: v/eng/wjdt/zyjh/t522600.htm (January 17, 2009)
The Longer-Term Conquences: Alternative Scenarios
Under an optimistic scenario the international financial crisis would be short, China would be able to
recover starting from the middle of 2009 and in 2010 it would have reached its pre-crisis growth rate of about 10% thereby rving as an engine of growth for the world econ-omy.
As a conquence of the financial crisis the traditional US model of capitalism with minimal state intervention could be discredited and China’s reform path once again hailed as the tri-umph of the “Beijing Connsus” over the “Washington Connsus” (liberalization, privatiza-tion, deregulation). Thus, the international political and economic architecture would no longer be dominated by the US alone but would be determined by extensive Sino-American coordination (Group of 2, G2).6
There are a couple of reasons why this optimistic outlook might come true: During the 30 years period of reform and opening to the outside world (1978-2008) there has been no short-age of doomsayers who predicted a soon-to-come collap of China becau the Chine re-form path was suppod to be unsustainable. Now however, there is a growing body of ex-perts who concede that the Chine leadership has a proven record of “authoritarian resil-ience”, flexible adaptation to changing circumstances and crisis management skills.7 Even more remarkably, the Chine Communist Party leaders ud times of cris (1991, 1997/98, 2003) to push forward more ambitious reform agendas. In addition and in contrast to conven-tional wisdom, the success of the China model should neither simply be attributed to “export-led growth” or to economic factors in a stri
ctly neoclassical n (rapid ri of factors of pro-duction, productivity gains) alone. China can be considered as the prototype of a “learning authoritarian system”, one that combines lective long-term planning with an unprecedented degree of broad-bad policy experimentation.8
Furthermore, China is in a far better position to weather the current storm than most other emerging economies (Russia, in Eastern Europe, in Latin America): It has a sound ratio of external debt to GDP, a massive current account surplus and its fiscal position may allow it to spend its way out of the prent calamities.
A pessimistic scenario implies a protracted crisis with a deep recession, an ongoing decrea in foreign demand for Chine goods, a breakdown of production in the respective industries, thus rapidly rising unemployment and mounting social tensions. This would come at a time when China’s social curity system for its urban – let alone rural – population is still in its infancy.
The Chine leadership would be confronted at home with calls to speed up its efforts of re-balancing growth away from export supporting policies towards propping up private con-6 Zbigniew Brzezinski: “The Group of Two that Could Change the World”; in: Financial Times, January 13, 2009.
7 Andrew J. Nathan: “Authoritarian Resilience”; in: Journal of Democracy, Vol. 14, No. 3, January 20
03, 6-17.
8 On the interplay between planning and experimentation in China’s economic governance, e two recent stud-ies by Sebastian Heilmann: “Policy Experimentation in China’s Economic Ri”; in: Studies in Comparative International Development, Vol. 43, No. 1, March 2008, 1-26; “Authoritarian Upgrading? The Innovative Poten-tial of China’s Economic Governance”, paper prented to the conference “Three Decades of Reform and Open-ing: Where is China Headed?”, Boston University, December 2008.
sumer demand. This would be accompanied in China’s external relations by rising Western criticism to increa its imports substantially so as to reduce the global imbalances.
There are some reasons why this scenario might gain the upper hand: First of all, the Chine statistics in many respects rai more questions than they provide answers. For example, how is the news of declining Chine non-performing loans in the banking ctor or the minimal increa in its unemployment rate in 20089 to be reconciled with the many company closures at least since the 4th quarter? A more psychological aspect should also not be underestimated: The Chine public has got ud to growing welfare and demands the continuous provision of better public goods (health car
e, education, public infrastructure, communications). The ongoing rising expectations are directed at a Chine leadership that has never been going through a deep depression with no or even negative growth during the last 30 years. At worst it had to cope with a growth rate of 3,8% in 1990. The financial crisis of today thus might confront the Chine leadership and its bureaucracy with challenges they have never faced in their political life.
With regard to China’s external relations there is also reason to be worried: China has been criticized by the EU since 2006 as an “unfair trading partner”. The standard EU repertoire calls for more “reciprocity” or a “level playing field” in EU-China economic relations (in EU speak this means more imports and less bureaucratic barriers for doing business in China). In the US Congress there has already been a lot of legislative action pending against China as a “currency manipulator”.10 If China cho to depreciate the Yuan against the US$ (as it did in August 2008 for the first time since July 2005) so as to boost its export industries this could t off new calls for retaliatory protectionist action. The problems together with other ongo-ing conflicts (e.g. intellectual property rights violations) could lay the groundwork for an ex-tremely anti-China atmosphere in the West so that the bilateral relationship could easily spiral out of control.
Which of the two scenarios (or a mixture of elements from both) prevails will thus depend to a consid
erable extent on factors beyond the control of the Chine leadership. The year 2009 with its many symbolic anniversaries (1919, 1949, 1979, 1989) may in the end turn out to be a watershed in the history of the People’s Republic of China.
9 “China Banks See Sharp Decline in NPL Ratio”; in: /english/2009-01/18/content_10678253.htm (January 19, 2009); “China’s Urban Jobless Rate Ris to 4,2% at End-2008”; in: /english/2009-01/20/content_10688189.htm (January 20, 2009).
10 For an overview of current Anti-China bills in the U.S. Congress e Wayne M. Morrison: “China-U.S.Trade Issues” (Updated October 7, 2008), Washington D.C., CRS Report For Congress RL33536, 28-31.
