Global Financial Crisis - Essay Example

GLOBAL FINANCIAL CRISIS Student’s Name Course Professor’s Name University City (State) Date Executive summary The report discussed about international economic recession affecting the performance of the global economy. It affected the economic growth of China and led to increase in inflation as well as unemployment rates. However, the government introduced fiscal stimulus package that worked well to promote the economy of the country. However, the government should have extended the reduced tax rates to private firms so that they can compete effectively with the state-owned corporations. On the same note, the government should made it easier for private investors to engage in business activities and this will contribute to improved economic come back. Therefore, the government had a responsibility of controlling and encouraging fair trade practices to both the private and the public sector. Introduction The global financial crisis that hit the world in 2007 and 2008 affected the global economies because it caused harsh economic conditions. Various governments developed various strategies to manage the effects of economic conditions. Among the effects of the global financial crisis include unemployment, loss of jobs and loss of income (Linda, 2012, 21). One of the countries the global financial crisis affected is China which is among the developed economies globally. However the condition affected its economic development in various ways. The purpose of this report is to present the economic climate of China during the financial crisis, its fiscal policy it developed and monetary policy actions and their effectiveness. Economic climate during the financial crisis The financial crisis started in the United States and spread to other economies internationally. It is because the US economy is the strongest in the world and most economies depend on its stability. It started from the real estate and spread to other sectors including financial institutions. However, China developed appropriate measures to curb the impacts of the instability (Linyue & Nan, 2012, 2). It faced issues affecting its economic growth but managed to record relatively stable development as compared to other global economies. In this regard, China recorded an economic growth rate of 9.6% in 2008 and increased to 9.6% in the year 2009. It is worth to note that most countries could wish to have such economic growth but for China it was a decline from 14.2% in 2007. In 2006, the economy of China was 12.70 with a slight increase from 11.30 in 2005. Even if China recorded an increase during the financial years, there was a sharp economic decline from the previous year’s indicating that GFC affected the growth of many economies. On the other hand, the global financial crisis affected the economic development through depreciating rates of inflation. In the first place, one can identify that the inflation rates were unstable between the 2007 and 2008 when the crisis affected the globally. For instance, in 2007, the inflation rate was 4.82%and it increased to 5.97% in 2008. It implies that global financial crisis affected the economic growth of China because of the high inflation rate that affected investments. It is important to understand that investors could want to invest in countries with stable economic growth rate and stable inflation because they understand the value of their money (Linda, 2012, 26). In this case, the inflation rate in China in 2006 was 1.65% but it increased steadily at the start of the financial crisis. It is because of the limited income with high demand increasing the circulation of money. It was the responsibility of the government to develop and implement policies that can stabilize the economy and eventually stabilize the well-being of the people. The government had to use policies and operations such as fiscal and monetary policies to regulate the supply of money in the economy to manage the demand and encourage the investment activities to increase the economic growth and create employment opportunities. On the other hand, the recession that hit the international economies affected the employment rates in China. Because of the disruption and changes in business environment, most businesses found it difficult to employ more employees. Firstly, the inflation rate in 2006 was 4.1% and it reduced to 4% in 2007. It increased to 4.2% in 2008 and further 4.3% in 2009. The unemployment rate declined to 4.1% in 2010 and remained constant to 2012. The implication from this statistics is that the global recession affected the economic development and led to high unemployment rates. Most people lost their jobs because of lack of businesses and closure of business enterprises. On the other hand, the recession affected the appetite for financial markets and this affected the business operations in the sense that it hindered development activities (Linyue & Nan, 2012, 4). As a result, the businesses did not accept the risks of engaging in the financial risks hindering the economic development and eventually loss of jobs so that the businesses can engage in sustainable activities. On the other hand, the shrinking of the growth domestic products also affected the ability of the country to create more jobs during the recession. Eventually, the economic crisis greatly affected the economic development. Fiscal policy initiatives and their effectiveness The international recession affected greatly the economic development of many nations including China. The slowdown of the economy of China in 2007 and 2007 led to a debate regarding the policies the government has developed through the financial institution such as People’s Bank of China to regulate the economic activities (Shujie & Minjia, 2009, 22). The Chinese government developed a policy to regulate the supply of money and bubbling of assets with the aim of restoring its economic pride. For instance, the policy was developed in 2003 with the aim of managing inflation rates and other economic issues. In the first place, the Chinese economy changed its strategy to handling economic issues. The government through the central government introduced monetary policies to regulate the demand and the supply of money in the society. Most importantly, it tightened measures to regulate the business about property. It is the sector global recession significantly affected and the government had the responsibility to regulate the boom in the sector (Yu, 2009, 31). As one of the monetary initiatives, the government introduced the down payment when an individual makes multiple purchases to 40%. The aim is to reduce the demand in the sector and ensure people meet minimum requirements when engaging in the business. The initiative was effective because it helped regulate the business operations in the property sector controlling the demand that can otherwise split to other sectors of the economy. Therefore, the down payment discouraged the demand in the sector thus regulating the business operations. Another initiative introduced through the monetary policy is introducing a penalty regarding the property interest rates. The central bank introduced 10% premium above the lending mark of the central bank. At the same time, it left the interest rate on mortgages at 15% to help in the benchmarking exercises. The interest rates were introduced with the aim of regulating the business operations especially in the property sector (Shujie & Minjia, 2009, 18). From this information one can understand that the interest rate for a property owned by individuals increased significantly in 2007 by 5.50%. On the other hand, the authorities imposed a timeline to hold a private to five years so that individuals do not pay a sales tax of 5.50%. The aim of introducing these initiatives was to reduce the housing demand. The initiative was effective because it helped to reduce the demand for housing by private investors and the government was able to control the sector and this contributed to managing the effects of the recession. The monetary tightening policy was successful. Firstly, the property sales declined sharply in the last quarter of 2007. The levels of property sales continued to decline sharply through 2008. In this way, the government moderated the property prices appropriately and the prices moved from double digits to single digits towards the end of 2008 (Fang & Kam, 2009, 515). Towards the end of 2008, the prices fell significantly based on the absolute terms. The trend continued for about six months and eventually the prices fell by 5%. In this effect, the policy was effective in controlling the effects of global financial crisis. After the government had managed to control the economic crisis, it introduced easing policy. In the first place, the central bank cancelled all the lending quotas that were previously restricted and denied people an opportunity to access bank loans. The aim of this initiative was to make funds available for businesses so that they can develop their businesses (Cai, 2009, 12). The government raised the funds by reducing the deposits share that commercial banks placed at the central bank. In this way, the government managed to control the effects of economic recession. Nevertheless, China faced economic growth issues such as high inflation and unemployment but not as worse and other global economies. Fiscal policy initiatives and their effectiveness China is one of the countries that global financial crisis affected greatly. However, the government took appropriate measures to regulate the economy. Besides using the monetary policies, the government responded using fiscal policy initiatives to control the unethical economic conditions. In this regard, it used Fiscal stimulus packages that aimed to sustain the economic growth of the country (Shujie & Minjia, 2009, 24). At the end of 2009, the government introduced a two year stimulus program that focused on restoring the economic downturn. In the first place, the policy introduced domestic stimulus program that focused on protecting the domestic activities before focusing on the exports. It means that the government had to lower the taxation rates with the aim of encouraging domestic activities to increase the economic activities. Another initiative the government introduced through fiscal policy is a cut in taxes with the aim of encouraging the economic development. The government did this by rolling out the reforms in various sectors. The government wanted to encourage domestic activities first by increasing tax rebates on exports. It means that the government encouraged domestic activities to improve the well-being of its citizens before focusing on the exports (Linyue & Nan, 2012, 6). In fact, the government reduced the tax rates from 6% to 3%. In this regard, one can determine the government was committed to encourage activities to improve economic performance as well as encouraging economic growth. It encouraged small firms from engaging in business activities because of the low taxation rate so that they can compete with giant companies. Furthermore, the government introduced a policy to bail up state owned companies. Through the program, the state subsidized state-owned firms that seem to be weak in the market. The government did this through States-Owned Assets Supervision and Administration Commission. The body has a responsibility of managing the organizations as well as collecting dividends (Yu, 2009, 22). For instance, SASAC injected funds to China Southern and China Eastern Airlines which were struggling in the market because they faced financial constraints. Also, the organization had the responsibility of minimizing the remittance requirements from the state-owned corporations. The reduction of taxes to corporations the state owns is a practical way to encourage economic activities because the companies can revive their operations and compete effectively in the market and avoid close up. Besides, the fiscal stimulus package focused on developing monetary policies which are accommodative and are appropriate to meet the economic requirements to stabilize the Chinese economy. Towards the end of 2008, China was facing economic issues and aimed to increase its growth rate after the economic downturn. In the second quarter of 2008, China through the central bank introduced a reduction in lending for one year from 7.47% to 5.58%. It means that the government greatly reduced the interest rates. As a strategy to strengthen the financial market, the government introduced a financial plan reform that includes include credit techniques to small and medium sized organizations as well as new policies that regulate the real estate investment trust funds (Linyue & Nan, 2012, 6). Besides, the central bank encouraged the commercial banks to increase their lending rates as a way of encouraging investment activities. Finally, the government introduced an investment program that focused on improving the well-being of the people. The program focused on areas such as infrastructure and cost effective housing. In this regard, the initiatives were effective because the government managed to contain the effects of economic recession and managed to restore its stability. For instance, the support to state-owned corporations improved economic activities creating more jobs. Conclusion The international economic crisis that hit the world in 2007/8 affected the economic development of many countries including China. It started from the US and spread to the world. Among the effects of the economic recession include economic down turn, high inflation rates and caused unemployment because of the harsh business conditions. However, the government managed to control these effects using fiscal and monetary policies to develop strategies to accelerate economic development. For instance, it decreased interest rates and tax rates with the aim of encouraging economic developments. References Cai, F 2009, “The Consistency of China’s Statistics on Employment: Stylized Facts and Implications for Public Policies,” The Chinese Economy, Vol. 37, No. 5, pp. 74–89. Fang, C & Kam, C 2009, The Global Economic Crisis and Unemployment in China. Eurasian Geography and Economics Vol. 50, No. 5, pp. 513–531. Linda, Y 2012, China’s Strategy towards the Financial Crisis and Economic Reform. Hong Kong: Oxford University Press. Linyue, T & Nan, Z 2012, The Effects of the Global Financial Crisis on China's Financial Market and Macro economy. Retrieved on 18th January 2017 from https://www.hindawi.com/journals/ecri/2012/961694/ Shujie, Y & Minjia, C 2009, Chinese Economy 2008: A turbulent Year Amid The World Financial Crisis. Briefing Series-Issue 47: Nottingham. Yu, Y 2009, China’s Policy Responses to Global Economic Crisis and its Perspective on the Reform of International monetary system. Kiel Institution of World Economy. Read More