The Financial Crisis and Its Impact on China - Research Paper Example

assignment is due The Financial Crisis and Its Impact on China By the year 2008 the international financial crisis started spreading from the developed countries to the developing economies. From the financial sector the crisis started spreading to the real economies. Assumptions concerning the safety of the Chinese economy have been proven false in the tsunami of the financial crisis. China was expected to be exempted from the destructive recession in the West. It was also believed to be immune from the economic fall because of its insulated banking sector and ‘closed’ secure capital account. Chinese economy has never depended upon the risky Western financial measures. They rather treasure their deposits. In spite of this secured state, Chinese economy suffered fluctuations The global financial crisis has started shaking the Chinese economy as the ripple effect from American economy has worsened the already falling Chinese markets. Worldwide demand for their exports has been reduced. This resulted in the stopping of domestic industrial production. Factories have been closed and the employees lay off that led to unemployment and protests. Towards the end of 2008 they announced a $586 billion stimulus package targeted towards bettering growth and domestic consumption in ten different sectors of Chinese society. Infrastructure investment, disaster reconstruction, environmental safety measures are some of the sectors that have been touched. The package is expected to help iron and steel sectors, cement producers and certain other industries through the investment put on infrastructure. The new step also improved growth by taking off loan quotas on lenders and raising credit for different projects that support rural areas and small scale businesses. Government has recognized the sectors where they really felt decline and announced packages that can bring up the economy. They have made reduction in interest rates and devoted funds for infrastructure construction. Steps have also been taken to improve real estate sales. China has also announced heavy rebates on taxes put on exporters. In the third quarter of the year 2008 the growth rate was just nine percent. This is the slowest rate the nation has witnessed in the last five years. China has also faced a consecutive fall in housing prices. Other industrial sectors like textiles, information technology and electricity production have also encountered decline. China is not heavily affected by the financial crisis like other countries because of its closed financial system. They are however affected by the financial crisis in innumerable ways. Other countries that have been fallen because of crisis urge China to extend a financial help hand by raising its own exports. A small slowdown in the financial growth rate of China is expected to bring big results. Certain economics have warned that China will encounter a serious recession even if its growth rate falls slightly below six percent. Chinese should keep at least nine percent growth rate to maintain its growing labor force and take farmers to the urban sectors. The international financial crisis has wounded different aspects of Chinese economy even though the actual impact is not completely visible in the year on year comparison. The most visible impact of the crisis is the loss seen in export-oriented light industry in China. Thousands of companies have fallen; thousands of workers have lost their jobs. According to the official reports more than ten million migrant workers have lost their jobs and returned to their native provinces. Industries in China have been highly affected because of the economic crisis. It has severely affected the equipment manufacturing industry. Chinese government had to introduce equipment manufacturing adjustment and boosting plan for countering the fall. Priority is given to the equipment manufacturing sector. This sector has been upgraded and supported by government. Independent innovation has been encouraged; this is expected to uphold independence of equipment manufacturing sector. The international financial sector has brought a big fall to the nation’s equipment manufacturing industry. According to the statistics, rise in production, exports and profits of large machinery and major equipments have shown a steep fall since the second half of 2008. The demand for low grade and medium grade machinery products have also fallen sharply. The crisis has brought a reverse pressure on the equipment manufacturing industry. The industry is in a medium term of industrialization. The pressure has forced the industry to accelerate transformation and upgrade its performance. The industry is also forced to focus on independence. Chinese economy is increasingly worried about the disastrous results of global financial break down. While joining other nations in the attempt to stabilize world capitalism and American capitalism, the nation is bothered at the social, political and economic stress brought by the big economic slowdown. China’s economic state seems to be worsening as the financial crisis is getting aggravated. China’s GDP growth in 2008 (Jan-Sep) was just 9.9 percent. This is 2.3 percent lower than the same period in the year 2007. It was further reduced in 2009. The export sector of the nation suffered big blow. Chinese exports decreased sharply in the initial half of the year 2008. According to the reports more than half of China’s toy exporters closed their factories. As we look into the financial sector we can see that the stock market crash that began in the end of 2007 has destroyed more than two thirds of the market value even though this tragic collapse of the stock market has several home-made reasons. Chinese banks have seen the dramatic pull-out of several Western Banks like RBS, Bank of America and UBS. These trends are expected to bring several negative consequences on Chinese banks. The crisis has given a big blow to the nation’s fledging wealth fund, CIC China Investment Corporation. CIC has suffered big losses in its relationship with Western companies. This has made the Chinese people critical towards the investment strategy of CIC. The negative effects of the crisis are also visible in the external economic relations of China. Exports and imports declined for the first time since 2001. Chinese economy has been affected much in its exposure to the global financial crisis. China has put several restrictions on capital flows, typically outflows. This was done to manage its float currency policy. These restrictions have reduced the ability of Chinese citizens and their firms to invest the savings overseas. This made them invest their savings domestically. They were thus forced to invest in real estate, banks, business firms and stock markets. Even though there were several illegal attempts to invest funds overseas, a major portion of the funds remained in the country. Thus, the exposure of individual investors and private firms to sub-prime United States mortgages is meager. Apart from this, Chinese government entities, like the China Investment Corporation (CIC), State Administration of Foreign Exchange, state-owned enterprises and state banks have been suffering because of the fallen US mortgage securities. Chinese government entities contributed a major part of the nation’s legal capital outflows that were derived from the nation’s foreign exchange reserves. These reserves increased from $400 billion in the year 2003 to $1.95 trillion by the end of the year 2008. To gather interests on these holdings, the government of China tried investments in overseas assets. A large chunk of the nation’s reserves are in US securities like long-term Treasury debt, LT U.S. corporate debt, LT U.S. agency debt, short-term debt and LT U.S. equities. According to the June 2008 estimation of The Treasury Department, the nation’s hold of US securities will come to $1,205 billion. China is assumed to be the second largest foreign holder of US securities (Japan coming in the first position). Out of these securities, $527 billion is in LT U.S. agency securities. Certain Chinese Banks have reported their experience with the troubled sub-prime US mortgages. They however claim that their investments in the troubled mortgages are meager compared to their other investments. They further claim they liquidate those assets and have ignored the losses. They claim to be earning high profit margins. Bank of China reported that their investments in asset-backed securities supported by the sub-prime mortgages of US were more than $10 billion in the year 2006. In 2008 they reported that they reduce their holdings to $3.3 billion by September 2008. Bank of China’s funds with U.S. sub-prime-related investments have been found to be more than any other Asian financial institution. China was heavily affected by the financial crisis that affected the US economy. However, Chinese economy has been said to be more immune to the serious effects of the global financial crisis. For their economic growth they rely on trade and foreign direct investment (FDI). Numerous sectors of Chinese economy, however, have been hit by the blows of the international financial crisis. China has come up with several steps of financial stimulus that covers different sectors of the economy. The areas that expect boost include health and education, taxes, finance and incomes. These measures are expected to loosen credit restrictions and reduce taxes. This will ultimately bring massive infrastructure spending. All these are expected to bring the nation out of the catastrophe of international economic crisis. References Soros, George (2009) “The Game Changer”, Financial Times, 28th January. Stiglitz, Joseph (1997) “How to fix the Asian economies”, New York Times, 31st October The Economist, (2008a) “The Decoupling Debate”, 6th March, London: The Economist Wolf, Martin (2008) “China Changes the whole World”, Financial Times, 23rd January, pp.2: London. Read More