Handling the Global Financial Crisis: Chinese Strategy and Policy Response

44 Pages Posted: 14 Apr 2009 Last revised: 4 May 2009

See all articles by Zhichao Zhang

Zhichao Zhang

Durham University - Durham Business School

Wei Li

East China Normal University (ECNU)

Nan Shi

Durham University - Durham Business School

Date Written: April 15, 2009

Abstract

The global financial crisis is hitting China hard with great adversity. In response, China start to formulated the plan for dealing with the financial crisis and its possible fallout in June 2008 when China was in the critical stage of putting up the Olympic Games. The Chinese leadership judges the crisis is going to be a serious disaster but not as bad as the great depression of the 1930s. An America-type crisis is unlikely to happen in the country and the main threat would be the Chinese real sector being dragged down under, which in turn sparks a crisis in the financial sector. China’s strategy for combating the crisis therefore is to deal with the immediate crisis effects in the real economy in the first place, and looks for opportunities in the meantime. The overwhelming emphasis is placed on expanding domestic demand to fuel growth.

Following this strategy, China has rolled out a comprehensive package of combating measures. The fiscal expansion hit the headlines with extensive government financial support for infrastructure and public service projects. Yet the Chinese monetary stimulus is actually more powerful. The stance of Chinese monetary policy has changed from being precautionary against inflation with flexibility to appropriate easing to promote growth. After several rounds of rate cuts, the Chinese version of quantitative easing takes the central stage. In China’s battle with the financial crisis, the monetary stimulus is playing a leading role at the moment.

The international dimensions of China’s monetary policy typify how China turns a crisis into a world of opportunity. China has taken a conservative approach to managing her reserves in which the huge international reserves are taken as self insurance rather than an avenue for international leverage. Within this framework and if safety of these foreign assets can be assured, China can provide finance to countries in crisis through international financial organisations. In addition to the Panda Bonds, the chief way for China to make funding contribution is through IMF. For this matter, China supports the motion to increase the IMF’s lending capacity and would buy the bonds it issues.

China is actively calling for reform of international financial architecture. Chinese advisers have publically argued that the increase in China’s funding contribution has to be paralleled by an increase in China’s profile in the power structure in the IMF. In many occasions, China has also acted as spokesman of the emerging and developing economies by making cases for increasing their say in world financial affairs. But on the whole, China has been cautious not to committing herself too much as she knows probably she has little to gain from international policy coordination. Against this backdrop, China has chosen to focus on regional financial cooperation proactively and considerable progress has been made in this area.

China’s dealing with the current financial crisis is unassuming. What she has done is down-to-earth common sense. However, the Chinese approach is shown signs of working. Despite the early success of crisis handling, there remain fundamental problems in China’s structure of economic growth. How to redress structural imbalances in the economy, to boost domestic demand, to calm down the property market and, above all, to create millions of jobs, are still the major huge challenges China is facing.

Keywords: China, financial crisis, international policy coordination, regional finanical cooperation

JEL Classification: C130

Suggested Citation

Zhang, Zhichao and Li, Wei and Shi, Nan, Handling the Global Financial Crisis: Chinese Strategy and Policy Response (April 15, 2009). Available at SSRN: https://ssrn.com/abstract=1377049 or http://dx.doi.org/10.2139/ssrn.1377049

Zhichao Zhang (Contact Author)

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Wei Li

East China Normal University (ECNU) ( email )

North Zhongshan Road Campus
3663 N. Zhongshan Rd.
Shanghai, 200062
China

Nan Shi

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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