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Chinese Administration Response To 2008 Financial Crisis

975 words - 4 pages

Commodity boom, housing bubble, global imbalances, a subprime mortgage crisis and inflation led to the 2008 macroeconomic crisis and China's economy suffered, especially its exports industry (Yu, 2009; Zhang, 2009; Zhang, Li & Shi, 2009) . Its pre-crisis stable fiscal policy and tight monetary policy were substituted with expansionary policies. (Yang, 2011; Yu, 2009; Zhang, Tang & Lin; Zhang, Li & Shi, 2009). A fiscal package of 4 trillion yuan was announced by the government on November 2008 and a relatively eased monetary policy was implemented which led to an increment of 7.3 trillion RMB in bank credit (Lee, 2009; Yu, 2009; Zhang, Tang & Lin). China was highly decisive and its response was timely.The main features of the 4 trillion yuan package were to increase domestic consumption, ensure growth and maintain employment level and a stable society. This amount was spent mainly on infrastructure, post-earthquake reconstruction, housing, industrial structuring, medical and education in view to boost domestic consumption (Kang, 2010; Morrison, 2009). Reduced interest rates, reserve ratios and taxes, looser credit rules and export rebates were also implemented (Cook & Lam; Kang, 2010).The Chinese response was effective due to various reasons. Firstly, its Central Government system reduced obstacles to quick implementation. Large savings, strict regulatory of the financial sector and minimal bad loans also provided the required capital. Lastly, China had a good fiscal system in place. With a mere national debt of 20% in comparison to 71%, 67% and 163% for US, Euro zone and Japan respectively, as well as its low budget deficit of less than 2% of its GDP allowed the Chinese government to intervene and employ expansionary fiscal policy (Lee, 2009; McKissack & Xu, 2011; Overholt, 2010; Zhang, Tan & Lin).It is worth noting that there were vested interests behind China's help and response to the crisis. It wanted to prove its sense of responsibility and obtain global recognition, without exceeding its capacity. Also, given its high dependency on exports, China needed to bail US out of the crisis so as to ensure its own economic growth, stable employment and society (Morrison, 2009; Schmidt, 2009; Yang, 2011). Thus, Chinese response was not due to any pressure faced unlike in the cases for Thailand and Indonesia (de, 2010).The effectiveness of the Chinese stimulus package became evident as China's GDP growth in 2009 increased from 6.1% in first quarter to 9% in the last quarter. Its response was beneficial in the short term but posted critical challenges for China in the medium and long-run. Although 37.5% of its 4 trillion Yuan package was invested on infrastructure projects, such long term investment will not provide revenue streams in the near future (Kang. 2010; Yu, 2009). Structural adjustment slowdown, growing imbalances and overheating were significant consequences of its response to the crisis (McKissack & Xu, 2011;...

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