Research on Gfc Affecting Foreign Exchange

TWN Global Economy Series

25

Financial Crisis and Asian Developing Countries

The Impact of the Global Financial Crisis on the Chinese Economy and China’s Policy Responses
YU YONGDING

Third World Network

TWN

The Impact of the Global Financial Crisis on the Chinese Economy and China’s Policy Responses

YU YONGDING

Third World Network

TWN

The Impact of the Global Financial Crisis on the Chinese Economy and China’s Policy Responses is published by Third World Network 131 Jalan Macalister 10400 Penang, Malaysia. Website: www.twnside.org.sg

© Yu Yongding 2010

Printed by Jutaprint 2 Solok Sungei Pinang 3, Sg. Pinang 11600 Penang, Malaysia.

ISBN: 978-967-5412-25-7

CONTENTS
1 INTRODUCTION 2 TRANSMISSION CHANNELS OF ECONOMIC SHOCKS FROM THE GLOBAL CRISIS Direct Losses in the American Capital Market Fluctuations in Cross-Border Capital Flows The Impact of the Global Financial Crisis via the Trade Channel 3 CHINA’S MAIN POLICY RESPONSES TO THE GLOBAL SLOWDOWN Expansionary Fiscal Policy Expansionary Monetary Policy 4 STRUCTURAL PROBLEMS IN THE CHINESE ECONOMY 5 HOW TO SAFEGUARD THE VALUE OF CHINA’S FOREIGN EXCHANGE RESERVES The Dollar Trap 6 REFORM OF THE INTERNATIONAL MONETARY SYSTEM Relationship Between Global Imbalances and Global Financial Crisis Creation of an International Reserve Currency IFI Governance Reform 7 CONCLUDING REMARKS References 1

3 3 6 9

12 12 18 20

24 24 29 29 30 36 39 41

NOTE
This paper was prepared as part of a Third World Network research project on financial policies in Asia directed by Yilmaz Akyüz. An earlier version was presented at the Conference on the Effects of the Global Financial Crisis on Asian Developing Countries and Policy Responses and Lessons, held in Penang, Malaysia on 18-20 August 2009 and organized by the Third World Network and Consumers Association of Penang.

Chapter 1

INTRODUCTION

THE United States subprime crisis and the consequent dramatic global slowdown

References: Akyüz, Yilmaz. 2009. “Policy Response to the Global Financial Crisis: Key Issues for Developing Countries”, South Centre, 13 May 2009. Bergsten, C. Fred. 2007a. “How to Solve the Problem of the Dollar”, Financial Times, 11 December 2007. Bergsten, C. Fred. 2007b. “Objections Do Not Invalidate Substitution Account Benefits”, letter to the editor in the Financial Times in response to a letter by IMF historian James M. Boughton, 28 December 2007. Corden, W. Max. 2007. “The International Current Account Imbalances: A Skeptical View”, Economic Affairs, Vol. 27, No. 2, June 2007, pp. 44-48. Dooley, Michael P., David Folkerts-Landau and Peter Garber. 2003. “An Essay on the Revived Bretton Woods System”, NBER Working Paper 9971. Eichengreen, Barry. 2009. “The Dollar Dilemma”, Foreign Affairs, September/ October 2009. Perkins, Dwight H. 2006. “China’s Recent Economic Performance and Future Prospects”, Asian Economic Policy Review, Vol. 1, Issue 1, June 2006, pp. 15-40. Stiglitz, Joseph. 2006. Making Globalization Work, W.W. Norton & Company, Inc. UN Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System. 2009. Report, 21 September 2009. Yu, Yongding. 2005. “China’s Rise, Twin Surplus and the Change of China’s Development Strategy”, paper prepared for Namura Tokyo Club Conference, Kyoto, 21 November 2005. Yu, Yongding. 2006. “Global Imbalances and China”, paper prepared for Finch Lecture, Melbourne University, 17 October 2006, published in Australian Economic Review, March 2007. Yu, Yongding. 2007a. “New Challenges to China’s Economy”, unpublished note, 21 September 2007. Yu, Yongding. 2007b. “Comments on China’s Economic Situation”, Martin Wolf’s Economists’ Forum, 16 October 2007. Yu, Yongding. 2008a. “The Chinese Economy in 2008”, delivered at the 11th Credit Suisse Asian Investment Conference, Hong Kong, 1 April 2008. Yu, Yongding. 2008b. “The New Challenges of Inflation and External Imbalances Facing China”, Asian Economic Journal, Vol. 7, No. 2, Spring/Summer 2008, pp. 34-50. 41 Yu, Yongding, 2008c. The Management of Cross-Border Capital Flows and Macroeconomic Stability in China, TWN Global Economy Series No. 14, Third World Network. Zhou, Xiaochuan. 2009. “Reform the International Monetary System”, People’s Bank of China website, 23 March 2009, http://www.pbc.gov.cn/english/ detail.asp?col=6500&id=178. 42 THE IMPACT OF THE GLOBAL FINANCIAL CRISIS ON THE CHINESE ECONOMY AND CHINA’S POLICY RESPONSES China, one of the world economy’s great growth success stories, was badly hit by the global financial crisis in 2008. While adverse impacts from investments in toxic financial assets and from volatility in capital flows were relatively limited, the Chinese economy suffered a serious blow from the collapse in demand for its exports. In response to the growth slowdown, the Chinese authorities adopted expansionary fiscal and monetary policy measures, including a 4 trillion yuan stimulus package and deep interest rate cuts, which sparked an economic recovery in 2009. However, concerns about the longer-term sustainability of China’s growth persist, given the many structural problems in the economy. This paper argues the need for urgently addressing these flaws – which range from unequal income distribution to the lack of a social safety net – if China is to embark on a more sustainable growth path. Above all, the author stresses, there should be a rethink of the export- and investment-led growth model which has served China so well but which may now require adjustment. The global financial turmoil has also highlighted another major challenge facing China: safeguarding its huge stock of foreign exchange reserves against capital losses caused by a declining US dollar. This paper explores the steps that can be taken by China towards this end, including diversification of its reserve holdings and, in the longer run, rebalancing of its balance of payments. In addition, the paper also makes the case for reform of the international monetary system to address one of the root causes of this “dollar trap” and, indeed, of the global financial crisis itself. YU YONGDING is an Academician at the Chinese Academy of Social Sciences (CASS), former Director-General of the Institute of World Economics and Politics, CASS, and President of the China Society of World Economics. TWN GLOBAL ECONOMY SERIES is a series of papers published by Third World Network on the global economy, particularly on current developments and trends in the global economy, such as those involving output, income, finance and investment. It complements the TWN Trade and Development Series which focuses on multilateral trade issues. It aims to generate discussion on and contribute to appropriate policies towards fulfilling human needs, social equity and environmental sustainability. 43