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Financial Crisis And Its Impact On China

1824 words - 8 pages

In the year 2008 the world saw one of the greatest financial crisis since the great depression of the 1930s. This financial crisis also known as the “Great Recession” caused various problems for different economies worldwide. The collapse of the Lehman Brothers bank, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Large sums of tax payer based bail-outs were needed in order to shore up the company. However, the issuing credit crunch made matters worse as it turns the global financial crisis into the worst resection of the last eighty years (The Economist, 2013). The case of the global financial crisis was based upon the bank’s ...view middle of the document...

In 2008 during the financial crisis two widely believed assumptions about China was shattered. The first being that China would not be affected by a recession in the West and the second, that China would be immune to a recession due to its closed capital account and insulated banking sector primarily depending on deposited and not risky Western financial instruments.
Short-term effects on China
The international financial crisis has left its mark on China where the changes due to the financial crisis are listed in the table below. The most affected areas are China’s exports and its inflation. Also, due to the financial crisis, thousands of businesses have closed, tens of thousands of workers have been laid off and official statistics have revealed that tem million migrant workers have returned to their home provinces. In the financial sector the stock market crash had a major impact on China, however, the crash of the Chinese stock market has many homemade reasons (Financial Times, 2015). Although the Chinese banks have been rather profitable, they have seen the pull out of major Western banks and because of this the Chinese banks have had to sell minority shares in order to retrieve capital. China’s statistics for the years 2007 and 2008 are shown below, showcasing the short term impact that the financial crisis had on China.

2007 2009
GDP (billion CNY) 25731 30056
GDP growth rate (%) +13,0 +9,0
Unemployment rate (%) 4,0 4,2
Inflation rate (%) 4,8 5,9
Fiscal balance (%GDP) 2,1 2,0
Trade (US$ billion)
Exports (US$ billion)
Imports (US$ billion)
Trade surplus (US$ billion) 2174
262 2562
Current account surplus (% GDP) 11,3 9,7
FDI received billion (US$) 82,7 92,4
Foreign exchange reserves at end of year (billions US$) 1530 950
Source: information adapted from
Long Term effects on China
Under an optimistic stand point, the global recession’s effect on China was not that bad as it was able to recover between 2009 and 2010. This is because, during the thirty years of reform and opening to the outside world, China’s was supposedly unsustainable. However, China has a proven record of flexible learning and crisis management skills as well as being a prototype of a learning authoritarian system, meaning that they combine selective long term planning with an unprecedented degree of broad based policy experimentation (Financial Times, 2015). This is how China was able to rebound so quickly after the recession, they were in a far better position to undergo a recession than any of the other BRIC nations and emerging economies. This is because China has a god ratio of external debt to Gross Domestic Product (GDP), a massive current account surplus and the ability to spend its way of the recession. In this way, even though the recession hit China hard, the long term effects to the Chinese economy was not...

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