Financial Crisis Impact on China

By Kevin Yee | September 22, 2009

The current financial crisis emanated from souring US subprime loans and has led to a shutdown in global credit and slowdown in world trade.  Financial markets worldwide are in disorder and most major economies have been crippled.  However, once again, China is managing better than its Asian counterparts, and the rest of the world for that matter.

The central government believes that China’s stimulus is expected to push GDP growth to 8% or more, and Premier Wen Jiaobao reiterated that the government would introduce more stimuli to further boost the economy.  The current $4 trillion Yuan stimulus (18% of GDP), contains $1.18 trillion Yuan of new spending.  With retail sales and fixed asset investments achieving double-digit growth, China may be able to achieve 8% growth in 2009.

Accolade has been given to China for its efforts to bolster its economy.  Global financier, George Soros has called China a “positive force” in the world and in the markets, and believes that China will grow faster than most expect in the near future.  He also expects China’s influence to increase along with its economic power.  While most other Asian currencies have been falling due to weak exports and less FDI, the Yuan has maintained its strength.  On the contrary, the relative strength of the Yuan negatively impacts China’s exports.

To be clear, this does not imply that China is immune to the financial crisis.  The country’s GDP has dropped from 11.2% to 9% in 2007 and 2008, respectively.  In the first quarter of 2009, GDP growth has dipped to 6.1%, well below the government’s target.  Coincidentally, a minimum of 8% GDP growth is required to absorb the new labor into the workforce and prevent unemployment from spiking to levels that would cause civil unrest.  Whether 8% GDP growth is a modestly achievable figure or a naïve political target, China’s focus is not only to emerge from the financial carnage in good shape, but also to achieve unprecedented growth during this time.

China is addressing a few key areas to overcome the financial crisis, namely: aggressive bank loans, reinforcing manufacturing exports, and a potential shift toward domestic consumption growth.