Why China can maintain decent economic growth during 2008 world-wide financial crisis
Introduction
The current economic crisis has a number of dimensions that are crucial. During this time there was a moment to represent break up to form interlocking arrangements to govern the world economy. There were several attempts to resolve the crises that arose from the central contradiction[1]. This was within capitalism between the creation of profits and the realization of those profits in the sphere of production, circulation and exchange. These crises have led to a build-up of debts for both corporate and household debt. The crises also destabilized the returns of the international monetary resulting in trading deficit even with the most powerful nations. The crises also affected the low commodities prices ecologically. In an attempt to maintain these crises through strategic management policy they were a drastic change that affected the economy in a more severe manner in 2008[2]. This was far the worse economy crises that affected many countries seeking for survival tactics. For China, it was a different case as it shows a remarkable growth in its economy despite the crises that threatened the economy globally[3].
During 2008 the economy experienced the worst recession which began in 2007 when the western nations especially the United States started experiencing an increase in home prices which made the sales of the houses decrease. This affected the entire American financial markets and other global financial sectors. Banking industries, investment institutions, and charted organizations were not spared. Government institution was also affected by the economic crisis that threatened any progress hence no development took place. The crisis was severe to the extent that loan and savings institution together with commercial banks were affected. Organizations and companies that relied on operated on credit facilities had their business affected. There was an erosion of market confidence which made the lending institution increase their interest rate in order to discourage borrowing as a result of high rates that were unbearable. In order to carry on with business, the American auto industry had to seek a federal bailout. This clearly shows that the crisis was the worst.
As a result of the economic crisis experienced worldwide share prices were affected. American and the western countries industries value was affected. There was a loss of industrial value of approximately 33.8 % in America industries during the recession period that had developed globally. According to a report of a research carried out the economic recession was considered the longest and the worst. During the recession period, various countries such as America, Germany, and Japan matched the economy of small nations globally. For having mooched the American real estate securities the Europeans countries suffered a blow. The Chinese economy to exclude its self from the heavy and large drawback but it exports was not spared from its manufactured goods as its main markets were affected by the crisis. As a result of the recession, demand decreased resulting in more products being held by the manufacturers since no one was able to buy the goods. This means that a lot of capital was held in goods affecting cash flows in various companies.
The economic crisis did not spare the less developed countries as they lost markets abroad, lowering foreign investment. The foreign currency gain that was gained from the foreign market attributed the capital growth in the less developed countries but it was withered due to the recession that affected these economies[4]. With the trend in 2008, none of the most powerful and strong economies was prospering in order to pull out the world from the recession. The government and the private economist predicted a rough path to recovery.
As a result of the recession in this economy policy makers together with financial institution had to take some action in order to respond to the threat. This was because even with china not being affected by the crises the world leading economy had to come up with ways to restore the economy to avoid deterioration. They took broad steps such as giving a wide range of collateral and extending the terms of liquidity, cutting down on the interest rates and improving on the fiscal measures to mitigate the downdraft in the mortgage market. This was meant to boost the American and the European markets and ensure that recapitalization and takeovers happened. This saw the pressures on liquidity, deleveraging and the assistance package improving. There was also the concern of the vulnerability in the global financial systems to create a self-sustaining spiral in growth and credit. This was meant to lower rising defaults due to the recession.
In 2008 the overall global growth had declined by 4.9 percent that made the euro currency to decelerate below 1.6 percent[5]. As a result, inflation increased and a majority of commodities prices went up without really gaining the value of it. Industrialized countries experienced a slow growth resulting to spillovers of the economy due to the limited market[6]. Emerging markets remained skewed to the downside which hindered their growth. Similarly, the equity markets suffered higher risk as their valuation was under more pressure both in advanced and emerging economies.
The turbulent year 2008 was amid the world financial crisis but the Chinese economy marked a success of their economic reforms after 30 years[7]. Even with the success China endured severe snowstorms when in 2008 there was a devastating earthquake that leads to many lives being lost and millions being left homeless. When the crisis hit the US and the western countries china was fighting natural disasters and most of it people focused on the relief work and the Olympics games. During this time the government turned down on preventing economic overheats but emphasized the importance to reduce inflation majoring on the export growth, the GDP growth, the import growth, the inflow of foreign direct investment and the CPI to contribute to success[8]. The success was also attributed to a successful Beijing Olympics in 2008. The central and the local government did not shy away from investing enormous amount on the games. The government did investment heavily on the infrastructure and the air quality in the direct running of the games and the construction of sports venue. With the heavy investment of the Olympics, the game makes it the most expensive game in history as it was three times more costly that Athens games which were held in 2004 contributed to a 1 percent in GDP growth. The operational side of the game organizers contributed to the growth of the GDP during the economic crisis worldwide[9]. With the heavy investment by the government, there was a construction boom in several other cities in china that were to hold the games. Properties were built to meet the demand that came with hosting the games. The demand resulted in high economic growth which resulted to rapid urbanization of the other cities in china. The game attracted large numbers of spectators that led to spurred growth in other areas such as tourism and environmental improvement. With the sustainable development plan for the Beijing games, there was a ripple effect in Chinese economy growth that added a 2.5 % in annual growth since the year 2002[10]. Before the Olympic Games, the government realized that there was a potential risk of their economy due to the western economy recession. Before the games started there the state council called for changes in china monetary policy. This was meant to safeguard its own economic growth and contain inflation. With the policies, china was able to contain inflation but there were thousands of workers who had to be laid off because tens of thousands of factories had been closed down due to lagging demand from the foreign markets. In the wake of the worse global crisis, the biggest Chinese economy worry is the serious rate of unemployment for both the unskilled and skilled workers.
Nevertheless, china managed to achieve a tremendous growth in GDP growth of 9 percent[11]. It managed to surpass Germany and the American economy which were huge at this time. When the largest economies were hit by recession china was able to maintain and strengthen its position in the world economy as the third largest. It GDP measures in current values were 4.42 trillion US dollars[12]. The fiscal revenue of china economy increased up to 19.5 percent. As a result of its growth during this year china also got a boost in its foreign investment which increased by 11.3 percent. Even with this great and respectable growth China faced deterioration in macroeconomics in the second half of 2008.
Nonetheless, the impact of the world worse economy had a smaller impact on china compared to the impact it has on the USA, the UK, German and Japan together with other key industrialized economies. The large industrialized economies were experiencing a negative growth while china economy was on an upward trend growing at a fast rate. China was able to withstand the tough economic times due to various reasons. China’s monetary and fiscal policies played an important role. These policies have been designed to achieve an 8 percent growth against any deeply depressed world economy. With the crisis, china economy created opportunities for speeding up economic convergence together with the industrialized world. The world largest economies suffered the most as they dealt with an issue that did not affect the Chinese economy. The industrialized economies have significantly underestimated the effect of the financial crisis as they place forceful monetary policies that placed a strong expansionary to the economies. They introduced large rescue plans that would prevent major banks and large car makers from collapsing. As a result, the major world leading automobiles went to a brink of bankruptcy worsening the situation. China economy did not experience the heavy impact as it did not deal with automobile industries. China fiscal plan was committed to investing heavily in agriculture, science, infrastructure to enhance growth. The fiscal policy also addresses the need to invest in environment protection, healthcare services, and education. With the fiscal plan in place, the economy realized growth that led to more investment in the particular areas. With this development, China’s economy became vulnerable to the external shocks which in turn made the Chinese economy have influence to other countries.
In 1997 china managed to avoid the Asian financial crisis which helped china in the 2008 world economy crisis. This made China not to be hit as hard as the western economies due to the relatively lower level of development in China. The crises enabled china to shorten the time required in its economy[13]. China also undertook preventive measures that helped them in their development to enhance better methods to cope with such crisis. The national balance of china foreign exchange maintains China as the world largest holder of the foreign reserve. This has helped China to maintain a symbolic level of the trade surplus for the foreign market.
In addition to coping with the current financial crisis, china has plans to invest heavily in its infrastructure especially the high-speed railway system. The budget of the system is of 1.8 trillion Yuan that is out of the 4 trillion Yuan that will be spent on the transportation infrastructure and power grid construction. With the commitment of developed forms of transportation such as highway, waterways and civil aviation will assist in coping with the financial crisis. The government has also placed on large-scale policies to support agricultural production and improving the rural living standards of its people[14]. With the plans and development China is able to overcome the challenges and make its self a prosperous and fair society[15]. Amid the bleak of the economic situation, the government has made improvements to increase energy efficiency to save on energy consumption in order to get hold of the GPD fall in this sector. The plans involve reducing the benchmark in order to create a momentum of development of the economy resulting in more energy efficiency and environmental friendliness.
The prosperous china’s housing market has had strong gains. Though there was a sharp decline in house prices in big cities the inland cities in China still managed to get high and strong houses in 2008[16]. The price trend in china’s real estate did correspond with that of the US and the UK market. The cause for the price drop in the housing market in china was different from that of the underlying US and UK market. The housing bubbles were caused by low borrowing cost and the flaws in the financial regulatory systems. The system allowed mortgage products that led to a subprime crisis in the western countries while in china the housing boom was brought by the vast and fast economic expansion and urbanization. In China, the mortgage holders were mostly the high income and the urban middle households which were a different case in the western market. The Chinese banking system also had a regulation that required at least a minimum down payment of 30 % of the home values. Though there were adjustments made of a reduction in down payment to 20 % to respond to the sluggish housing market in China, China economy still managed. Therefore the mortgage lenders in the Chinese market exposed a smaller default risk in mortgage compared to their western counterparts[17].
With the ability of Chinese economy to withstand the world economic crisis and record a growth in its GDP there are possible future outcomes that can be seen[18]. This means that china economy has a chance of becoming the most influence economy in the world.by this china will be consulted as major stakeholders regarding the world economy due to its best acknowledged fiscal policies and the success attributed to it[19]. The Chinese economy also stands a chance the second largest economy. This means that the Chinese performances is at par and contribute to the world economy of 3.7 an average growth. 1.4 percent will be attributed to industrialized countries and 6.6 percent to the unindustrialized and emergent economies.
Conclusion
China is one country that possesses the best fiscal conditions worldwide. This has attributed to its strong economy making it the least affected country by the worst world economic crisis. It government has invested heavily in infrastructure creating sufficient room for the expansion of fiscal policies to ensure that there is growth in its economy. In order to overcome the world economic crisis, the world industrialized economies have to team up rather than compete to ensure that the loopholes in the economy crisis are addressed accordingly.
References
Bisignano, Joseph R., William C. Hunter, and George G. Kaufman. 2000. Global Financial Crises Lessons From Recent Events. Boston, MA: Springer US. http://dx.doi.org/10.1007/978-1-4615-4367-1.
Cai, Fang, and Virginia L. Conn. 2016. China's economic growth prospects from demographic dividend to reform dividend. Cheltenham: Edward Elgar Publishing. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&A N=1164402.
Knight, John B., and Sai Ding. 2012. China's remarkable economic growth. Oxford: Oxford University Press.
Lardy, Nicholas R. 2012. Sustaining China's economic growth after the global financial crisis. Washington, DC: Peterson Institute for International Economics.
Nanto, Dick K. 2009. The Global Financial Crisis: Foreign and Trade Policy Effects. Ft. Belvoir: Defense Technical Information Center. http://handle.dtic.mil/100.2/ADA497762.
Ongena, Steven, José-Luis Peydró, and Neeltje van Horen. 2015. "Shocks Abroad, Pain at Home? Bank-Firm-Level Evidence on the International Transmission of Financial Shocks." IMF Economic Review 63, no. 4: 698-750. Academic Search Premier, EBSCOhost (accessed July 7, 2016).
Pavlát, Vladislav. 2009. "Financial Stability, World Financial Crisis and Financial Markets' Regulation: Some New Issues." Economic Studies & Analyses / Acta VSFS 3, no. 1: 48- 61. Business Source Complete, EBSCOhost (accessed July 7, 2016).
Song, Ligang. 2008. China's dilemma: economic growth, the environment and climate change. Canberra ACT: Asia Pacific Press [u.a.].
Vamvakidis, Athanasios, Vivek B. Arora, and Athanasios Vamvakidis. 2010. China?s Economic Growth International Spillovers. Washington, D.C.: International Monetary Fund. http://elibrary.imf.org/view/IMF001/11136-9781455201761/11136- 9781455201761/11136-9781455201761.xml.
Zhang, Ping, Xiahui Liu, Fuhua Yuan, and Ziran Zhang. 2016. Annual report on China's economic growth: macroeconomic trends and outlook.
[1] Nanto, Dick K. 2009. The Global Financial Crisis: Foreign and Trade Policy Effects. Ft. Belvoir: Defense Technical Information Center. http://handle.dtic.mil/100.2/ADA497762.
[2] Ongena, Steven, José-Luis Peydró, and Neeltje van Horen. 2015. "Shocks Abroad, Pain at Home? Bank-Firm-Level Evidence on the International Transmission of Financial Shocks." IMF Economic Review 63, no. 4: 698-750. Academic Search Premier, EBSCOhost (accessed July 7, 2016).
[3] Lardy, Nicholas R. 2012. Sustaining China's economic growth after the global financial crisis. Washington, DC: Peterson Institute for International Economics.
[4] Pavlát, Vladislav. 2009. "Financial Stability, World Financial Crisis and Financial Markets' Regulation: Some New Issues." Economic Studies & Analyses / Acta VSFS 3, no. 1: 48-61. Business Source Complete, EBSCOhost (accessed July 7, 2016).
[5] Pavlát, Vladislav. 2009. "Financial Stability, World Financial Crisis and Financial Markets' Regulation: Some New Issues." Economic Studies & Analyses / Acta VSFS 3, no. 1: 48-61. Business Source Complete, EBSCOhost (accessed July 7, 2016).
[6] Cai, Fang, and Virginia L. Conn. 2016. China's economic growth prospects from demographic dividend to reform dividend. Cheltenham: Edward Elgar Publishing. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1164402.
[7] Zhang, Ping, Xiahui Liu, Fuhua Yuan, and Ziran Zhang. 2016. Annual report on China's economic growth: macroeconomic trends and outlook. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1177722.
[8] Lardy, Nicholas R. 2012. Sustaining China's economic growth after the global financial crisis. Washington, DC: Peterson Institute for International Economics.
[9] Knight, John B., and Sai Ding. 2012. China's remarkable economic growth. Oxford: Oxford University Press.
[10] Knight, John B., and Sai Ding. 2012. China's remarkable economic growth. Oxford: Oxford University Press.
[11] Knight, John B., and Sai Ding. 2012. China's remarkable economic growth. Oxford: Oxford University Press.
[12] Vamvakidis, Athanasios, Vivek B. Arora, and Athanasios Vamvakidis. 2010. China?s Economic Growth International Spillovers. Washington, D.C.: International Monetary Fund. http://elibrary.imf.org/view/IMF001/11136-9781455201761/11136-9781455201761/11136-9781455201761.xml.
[13] Vamvakidis, Athanasios, Vivek B. Arora, and Athanasios Vamvakidis. 2010. China?s Economic Growth International Spillovers. Washington, D.C.: International Monetary Fund. http://elibrary.imf.org/view/IMF001/11136-9781455201761/11136-9781455201761/11136-9781455201761.xml.
[14] Zhang, Ping, Xiahui Liu, Fuhua Yuan, and Ziran Zhang. 2016. Annual report on China's economic growth: macroeconomic trends and outlook. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1177722.
[15] Song, Ligang. 2008. China's dilemma: economic growth, the environment and climate change. Canberra ACT: Asia Pacific Press [u.a.].
[16] Song, Ligang. 2008. China's dilemma: economic growth, the environment and climate change. Canberra ACT: Asia Pacific Press [u.a.].
[17] Zhang, Ping, Xiahui Liu, Fuhua Yuan, and Ziran Zhang. 2016. Annual report on China's economic growth: macroeconomic trends and outlook. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1177722.
[18] Cai, Fang, and Virginia L. Conn. 2016. China's economic growth prospects from demographic dividend to reform dividend. Cheltenham: Edward Elgar Publishing. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1164402.
[19] Ongena, Steven, José-Luis Peydró, and Neeltje van Horen. 2015. "Shocks Abroad, Pain at Home? Bank-Firm-Level Evidence on the International Transmission of Financial Shocks." IMF Economic Review 63, no. 4: 698-750. Academic Search Premier, EBSCOhost (accessed July 7, 2016).
