The Way China Has Been Affected by the Recent Financial Crisis of 2008 - Essay Example

? Outline the way China has been affected by the recent financial crisis of 2008 and subsequent recession. Explore the economic, political and socioeconomic consequences. Assess the intervention and response of the government and evaluate if these have been adequate from your point of view. The crisis started in 2006 when the real estate market suddenly grew. Banks were looking for more profit and they decided to give mortgages even to low income groups and when the interest rates rose later, the same families were in trouble because the homes they had previously received were repossessed as the interest rate could not be paid by them. In 2008, the problem was in the sub-prime market in major investment banks in Wall Street. The turning point in 2008 in the crisis was the fall of Lehman Brothers. The world was soon involved in this crisis as many government rushed to implement nationalization policies in their countries to prevent further damage. A number of bad debts also arose during this period because there was a great deal of selling of financial assets with the mortgages that were given out and they were sold all over the world but this became a complex procedure as more and more countries were lending and banks and other financial institutions did not have an idea as to how far in the globe their loans were going. A credit crunch arose in the world which led to a break in the lending system in the world as there was no money to give. This had a detrimental effect on the entire world’s economies including China (Krugman 2009). A fall in output occurred due to the burst of this real estate bubble. This lead to nationalization all over the world as aforementioned and governments made failed attempt after failed attempt to assuage the situation. The government injected more and more money in the economy because demand had fallen and banking systems were trying to hold on. Chinese government increased their spending as well as made tax cuts wherever they could in order to improve the situation of the economy (Soros 2008). The focus of economies including China shifted in two ways. The debt was the responsibility of the public not the private sector since the government had nationalized the economy. And finance was no longer the epicenter, it was the government. Bankers were unwilling to lend and buy bonds because they were fearful of the future due to the crisis. Therefore the financial markets continued to worsen in 2009. China seems to be doing well after just a short duration of time while the other countries are still suffering the blows of the crisis. China in fact had growth of double digits even though it is vulnerable to the changes in the economies of the world. The government in China had to inject money equal to 14% of the GDP in order to boost the economy when the markets in US and Europe fell and they didn’t demand any exports. Social aspects of this injection was relatively little, only about 20% of this stimulus, and the rest went to investment in fixed asset such as concrete, steel and this also lead to the world’s speediest rail system being built in China. Even though this sector was working with excess capacity, the government considered this action to be the correct one (Goodstadt 2011). In 2009 as well, China underwent its own real estate bubble. In this bubble, the prices of apartments shot up by 50 to 60% of their original price, especially in Shanghai and Beijing. New complexes that were being built were abandoned because demand was falling, and so there were half built places all over the country, and there was no sign of growth as no one was constructing which is the first step in order to have a house to sell (McLean & Nocera 2010). The prices of houses were also way beyond the incomes of people and households in the economy. This lead to expansion of credit in China, but one which was cheap, and wages were bogged down artificially so that household transferred their income to businesses and rather than consuming, people were investing. As a result, there was a great deal of output in the economy and no consumption which lead to a gap between investment as well as consumption. As a result, China’s economy became extremely dependant on the export sector, more so than before, so that they could control the issues of the excess output, which has already plagued the unbalanced global economy (Phillips 2008). In 2007, the situation in China had already improved with exports leading over imports by about 10%. This led to an increase in foreign reserves as well, primarily because China bought some of the debt of the US government. This also led to high foreign exchange from 2001 to 2008 as a percentage of the GDP of China. US dollars were typically recycled to ensure that Chinese exports would continue to increase over time and the value of the dollar was also maintained and overall, the Chinese economy would manage to be competitive in the global market (Kissinger 2011). The injection of money into the economy worsened the crisis however, and this lead to global instability and there continued to be tension between China and the US and their governments. China had initially entered into this crisis because of its dependence. This was also called the agrarian crisis. China had a surplus of labor and labor intensive and agricultural policies of the government maintained that. China also maintained competitive wages. However these policies precedent an unnatural increase in population and these governmental policies have also bankrupted the urban area and lead to a large rural segment in China.(Arestis et al. 2011). Japan, Taiwan etc. started off with a great dependency on agriculture as well, however most of them upgraded into the modern sector and improving infrastructure and diverting resources to keep up with modern times. They also worked on bridging the gap between urban and rural areas, managing to increase the household incomes in rural areas. This led to a decentralized structure in the economies of Japan and Taiwan, and especially in Taiwan, farmers worked occasionally in factories and may have lived in the city for the rest of the part or doing something else. So even when the farmers did focus on farming, they didn’t completely depend on it for their living. Taiwan then gradually moved towards manufacturing rather than the agricultural sector. Japan also focused on the rural areas by looking towards food security and other issues in these areas. Chinese governments however have focused on investment mainly in the industrial sector in urban areas while the rural areas suffer and agriculture is not invested in and is hanging behind as a result. Banks and the financial sector have also neglected the rural areas and their financing needs, while just focusing on urban areas and the industrial sector. Since the past two decades, the rural area income has never been beyond the urban area income. This is what is called the ‘urban bias’ in China. This bias has occurred due to the elite of the Southern coastal regions in China, who support the urban industrial setup and they got involved after China became part of a global economy and got into growth due to the export increase which lead to the government increasing the finance in the country as well as their political control (Sheng 2009). The parties and leading figures in China have also been in favor of giving more importance to China’s exports and foreign investment, and agriculture has been neglected. However, the situation in the big cities was not exactly sublime; in 1989, they revolted because of problems in the urban areas such as falling standards of living and high inflation rates. This bias towards the urban side of China has lead to lack of economic growth. Agriculture used to be a vital part of China and its economy and it used to earn the country revenue and provided employment. Most laborers in rural areas had to leave the rural areas for the urban areas and this lead to the demise of the rural areas, and a forceful one at that. This led to the people in the country living in a vicious cycle of poverty and China’s rural sector was also used for gains in the urban areas. Resources were transferred and the financial policies were designed as such so as to benefit the urban areas. Major borrowing started from other countries to help support China as well and they became weak and dependant, weakening the entire East Asian region as well (Belatsky 2010). China eventually regained some status by becoming adept at technology and it exported these products as well. Its neighbors were also awakened from their slumber to compete with China. China imported parts and then sold machinery and other instruments of technological sophistication. China fell because it depended on the West and their own their own falling market and this led their economies in a vulnerable state. Chinese government also took over some companies from abroad which could lead to obstacles such as protectionist policies. Hu Jintao tried to improve conditions by improving the agricultural and rural sector of the economy, and a little effort went a long way for the economy; conditions instantly began to improve in the country, especially the rural areas, and migration to cities decreased. This was the time of the ‘Lewisian turning point,’ that is, the time when the labor that was roaming unemployed was now employed and suddenly there was in fact a labor shortage in the country. This was due to the government’s policies and not because of any natural shift in the economy or the world (Kissinger 2011). The conditions further improves as the wages for the farmers and peasants improved; and inflation was also surprisingly in check; which was previously leading to riots because it had soared so high. A new labor law was also passed, which would be for the laborers in the sense that it would increase their prospects of wages and not allow them being fired so easily. The stimulus during the crisis was expected to benefit the economy, especially socially, in terms of insurance and social security purposes, as well raising the earning and spending power of households. But since such a small fraction of the budget was allocated for society; they were not benefitted as anticipated. This lead to only a certain amount of improvement in the economy after the crisis and the stimulus did little to increase consumption in the society. China however is the assembler of all the parts to create new and innovative goods which it exports and has also been a creditor to the US. It also has the potential to become the best market in the world and has economic stability as well and it has helped economies other than its own as well. The demand has increased and China has moved towards growth, however, the bond market may fall and there are risks that are to be considered in the holding of Chinese assets. The elite is also still present, which may lead to its downfall again and there needs to be a change in the balance of power in China in order to improve condition for the long run in the economy. So government policies can make or break an economy, even in the case of an economic crisis like the one in 2008. If the government hadn’t followed the trend of the fiscal stimulus, maybe it wouldn’t have been in the predicament to begin with, or had it supported the agrarian society right from the beginning, it would have supported the economy in times of trouble. It could be neither or both but the government policies also helped to rebuild the economy (Posner 2009). Works Cited Arestis, P., Sobreira, R. & Oreiro, J. L., 2011. An assessment of the global impact of the financial crisis. s.l.:s.n. Berlatsky, N., 2010. The global financial crisis. s.l.:Greenhaven Press/Gale Cengage Learning. Goodstadt, L. F., 2011. Reluctant regulators : how the West created and how China survived the global financial crisis. s.l.:Hong Kong University Press. Kissinger, H., 2011. On China. s.l.:Penguin Press. Krugman, P. R., 2009. The return of depression economics and the crisis of 2008. s.l.:Norton. McLean, B. & Nocera, J., 2010. All the devils are here : the hidden history of the financial crisis. s.l.:Penguin. Phillips, K., 2008. Bad money : reckless finance, failed politics, and the global crisis of American capitalism. s.l.:s.n. Posner, R. A., 2009. A failure of capitalism : the crisis of '08 and the descent into depression. s.l.:Harvard University Press. Sheng, A., 2009. From Asian to global financial crisis : an Asian regulator's view of unfettered finance in the 1990s and 2000s. s.l.:Cambridge University Press. Soros, G., 2008. The new paradigm for financial markets : the credit crisis of 2008 and what it means. s.l.:Public Affairs. Read More