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China in the global financial crisis

By George Gu - posted Thursday, 14 May 2009


Today, the world economy and the marketplace are deeply stuck in the mud of a far-reaching recession. What is China's real exposure to the global financial crisis? Can this emerging nation sustain itself during this crisis?

The answer: on one hand, China is experiencing vast pains; on the other, China can still manage the problems arising from the crisis. In short, this increasingly globalised China must take the same boat along with the rest of the world community.

China’s vast international dimensions

China's real exposure to the global financial crisis is huge and has many dimensions. First, the country's growth in this era, especially in the past two decades, has depended heavily on international trade, which accounted for US$2.56 trillion as of 2008, as well as foreign direct investment, accounting for more than $870 billion.

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Second, China's foreign reserves stand at about $1.95 trillion, with more than half invested in US government and agency bonds.

Third, more than 25 million Chinese employees now work for overseas companies inside China.

So, altogether, China's economic and political health is directly tied to the fortunes of global markets and world development. Any negative development in the global markets and economy must have adverse consequences for China. At the same time, slow growth inside the nation could be negative to the world economy.

This new crisis is like no other, for the world is highly inter-connected like never before. What then is the next stage of global development? What are the best and worst case scenarios?

There is no short-term solution. The best scenario is that the US-centered global financial crisis will be stabilised within the next 18 months. People's confidence will pick up and there will be a more rational resolution of problems. In particular, the employment picture will change for the better. Thereafter, the world's governments could focus on reform of the global financial system so that it becomes more accountable and therefore, hopefully, more stable. But people's entrepreneurship is the ultimate solution to getting out of the mud of the global financial crisis, or any other crisis.

But things could go from bad to worse. The worst scenario is this: the global financial crisis drags on for many years. What is more, the economic crisis could lead to geopolitical-economic conflicts. For example, it could promote nationalist protectionist trade barriers and conflicts. Also, if the dollar goes into free fall, or if the US government prints too many dollars as a way to deal with its astronomical debts and trade deficits, it would lead to an unstable period for the global economy and political life. This aspect requires new attention.

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China’s pains

There are no winners as a result of this recession. China's political and economic health is already deeply affected.

For China, the biggest issue is with the poor unemployment situation. Not to mention other things, shrinking international trade is causing vast pain in this part of the world. Indeed, in the first quarter of 2009, China's international trade dropped 24.9 per cent over a year earlier. This slowing international trade is to continue for the immediate future. So far, countless small- and mid-sized trading and manufacturing companies in coastal regions have gone under. More than 20 million rural migrant workers have lost their jobs. In addition, some 6 million new college graduates are having enormous trouble in securing employment. Such troubles could lead to dramatically adverse consequences.

The most fundamental issue related to sustained economic development inside China is to move decisively towards a law-based market economy, free from the deadly meddling of an unlimited bureaucratic power. The most basic requirement to achieve these ends is to have a firm separation of government from the business sphere. In such a way, the government can truly function like a government and the business entities can truly develop to become modern business organisations with the right set of owners, legal protection and governance.

Turning the political body into a truly modern service body must be carried out - the sooner the better. Unfortunately, these basic issues have yet to be resolved.

What is more unfortunate, this ongoing global financial crisis has meant a continuing delay of basic economic reforms. But without fundamental economic reforms, sustained and rational development will be challenging.

This aspect of the basic issues is little understood by the outside world, but it is fundamental for the healthy economic development of China in the long run. Simply put, all the positive economic development in the past three decades must be installed in a law-based modern institutional and legal system. That is something China has no way of avoiding if its sustained development is to be maintained.

Naturally, slow growth and lack of deepening reform in the Chinese economy and political system could have a considerable impact on the wider world, for China's economy and development are already an integral part of the world economic system.

All of us live in the same boat, something increasingly recognised thanks to the ongoing global financial crisis. As far as China is concerned, today's economic situation, regardless of how ugly it has become, is still manageable, for China has made vast economic progress during the past 30 years.

Above all, China has become increasingly integrated into world development and global markets. In this regard, resolving the deep-seated problems within China will serve as a significant contribution to the world. At the same time, China's sustained progress will positively affect global development, and vice-versa. Nonetheless, failure to change the body of Chinese government will cause infinitely more harm, than the most adverse impacts of the global financial crisis.

Travel: a sign of globalised world

The travel industry is a test case for global economic inter-connectedness. It has been affected by the ongoing crisis, but it remains a bright spot.

As far as China is concerned, inbound travel faces some reduction in the immediate future, but the scale of reduction will not be that significant. Why? Not to mention other things, overseas companies have already set up over 700,000 ventures inside China. So the economic connections are deep enough that inbound travel will continue to develop, though a small reduction is likely to continue within the next few months or so.

Outbound travel should also continue to grow, though again at a smaller growth rate for the immediate future. Why? Chinese people are passionate about seeing the outside world. Also, personal savings in China have reached more than $3 trillion, which offers an economic foundation for well-to-do Chinese travelers to see other nations. The strengthening yuan is also a positive factor. In 2008, more than 40 million Chinese went abroad, a dramatic change from 1978, when only 10,000 people went out of the country. This Chinese passion to see the world will continue to pick up steam.

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About the Author

George Zhibin Gu, a business consultant based in China, is an author of several new books on China and globalisation, including: China and the new world order, China's global reach, and Made in China. He can be reached at gzb678@yahoo.com.cn.

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