L10 How The Global Crisis Affects China Fall 2013

undersLandlng Lhe llnanclal Crlsls
Common Core
lall 2013

1he G|oba| I|nanc|a| Cr|s|s and
|ts Lect on Ch|na
kwok-Sang (Maurlce) 1se
School of Lconomlcs and llnance
1he unlverslLy of Pong kong
kLse[hku.hk

1 k s Lse, hku
WhaL have we achleved
lnLroducuon
8ubbles and Crashes
Causes and Clobal Consequences of Lhe Crlsls
Comparlng Lhls Crlsls wlLh CLhers
rocess of Securluzauon
8lsk and 8lsk MlsmanagemenL
8egulaLory roblems and lnsuLuuonal lallures

k s Lse 2
WhaL have we achleved
llscal and MoneLary ollcy ueallng wlLh Lhe
Crlsls
llnanclal Crlsls and Lhe Clobal Lconomy
Pow Subprlme Crlsls became Luropean
Soverelgn uebL Crlsls
Pow Lhe Crlsls AecLs Chlna
k s Lse 3
8eference:
Chlna ln Lhe Clobal llnanclal Crlsls-8lslng
lnuence and 8lslng Challenges", Wllllam P.
CverholL, !"# %&'"()*+,) -.&/+#/01, !anuary
2010, pp21-34
k s Lse 4
re-Crlsls Lconomy of Chlna
1rade 8alance wlLh Lhe unlLed SLaLes
1enslons 8eLween Chlna and Lhe unlLed SLaLes
8eclprocal Spendlng by Chlna
Currency ollcles
LxporL Subsldles
lorelgn ulrecL lnvesLmenL
lmpacL of llnanclal Crlsls
Chlna's 8esponse Lo llnanclal Crlsls
ollucal
Lconomlc
oLenual 1rade lssues beLween Lhe u.S. and Chlna as a 8esulL
of Chlna's 8esponse Lo Lhe Crlsls
k s Lse 3
ConLenL
Chlna's open door pollcles came lnLo eecL sLarung ln
1983.

Slnce Lhen, Lhere has been accelerauon ln Lhe nexL Lwo
decades durlng whlch Chlna Lransformed lLs once sLauc
economy lnLo one LhaL ls now exporL drlven and
dependenL on forelgn dlrecL lnvesLmenL.

ln oLher words, Chlna's unprecedenLed economlc growLh has been
drlven by Lhe sale of exporLs Lo forelgn counLrles and by Lhe
masslve lnux of forelgn caplLal by forelgn lnvesLors (malnly
mulunauonal companles) who seek Lo use Chlna as a plauorm for
Lhe manufacLure of goods for sale ln Chlna and ln forelgn markeLs.
k s Lse 6
ln 2007, Chlna became Lhe world's second largesL
exporLer of merchandlse, surpasslng Lhe unlLed
SLaLes and second only Lo Cermany.

Chlna's neL exporLs conLrlbuLed Lo one Lhlrd of lLs
Cu growLh ln 2007.

LxporLs as a share of Cu rose from 9.1 percenL ln
1983 Lo 37.8 percenL ln 2008.
k s Lse 7
Ch|na's Lxports of Goods and Serv|ces as a ercentage of Gross Domesnc
roduct: 198S-2008
k s Lse 8
Source: LconomlsL lnLelllgence unlL
ln 2008, exporLs accounLed for 37.8 of
Chlna's Cu. ln conLrasL Lo Chlna, exporLs ln
Lhe unlLed SLaLes accounLed for 12.7 of lLs
Cu ln LhaL same year.
9.1
14.2
19.3
23.4
36.3
37.8
0.0
3.0
10.0
13.0
20.0
23.0
30.0
33.0
40.0
1983 1990 1993 2000 2003 2008
Chlna's exporL-drlven economy lndlcaLes LhaL Chlna ls heavlly
dependenL on consumpuon of lLs goods by exporL markeLs for
lLs economlc growLh.

Chlna's exporL lndusLrles serve Lhe cruclal funcuon of
provldlng employmenL for Chlna's consLanLly growlng
populauon.

Any conLracuons ln Chlna's exporL secLor would resulL ln a
slowlng down of Chlna's economy and have palnful
consequences for Lhe counLry.
k s Lse 9
Chlna's 1rade 8alance wlLh Lhe unlLed SLaLes
Chlna's swl rlse as an exporung power has
led Lo an lmbalance ln Lhe Lrade of goods
wlLh Lhe unlLed SLaLes.

ln recenL years, Lhe unlLes SLaLes has
malnLalned a huge and lncreaslng Lrade
declL ln goods wlLh Chlna. See 1able
k s Lse 10
unlLed SLaLes Merchandlse 1rade wlLh Chlna: 1980-2009 (Source: uSl1C uaLaWeb)
k s Lse 11
ear U.S. Lxports (5bns) U.S. Imports (5bns) U.S. 1rade 8a|ance
1980 3.8 1.1 2.7
1983 3.9 3.9 0.0
1990 4.8 13.2 -10.4
1993 11.7 43.6 -33.8
2000 16.3 100.1 -83.8
2001 19.2 102.3 -83.1
2002 22.1 123.2 -103.1
2003 28.4 132.4 -124.0
2004 34.7 196.7 -162.0
2003 41.8 243.3 -201.6
2006 33.2 287.8 -232.3
2007 63.2 321.3 -236.3
2008 71.3 337.8 -266.3
2009 39.2 296.9 -237.7
1he unlLed SLaLes had a Lrade surplus wlLh Chlna of $2.7
bllllon ln 1980.
ln 1983, Lhe Lrade balance was zero, slnce Lhen, Lhe unlLed
SLaLes has run a Lrade declL ln every year, wlLh Lhe Lrade
declL reachlng a sLaggerlng sum of $266 bllllon ln 2008.
1hls ls an lncrease of more Lhan LwenLy-fold slnce 1990.
1he unlLed SLaLes has noL malnLalned a Lrade surplus wlLh
Chlna for Lhree decades.

Clven Lhe growLh of Lhe Lrade declL and currenL Lrends, lL
appears LhaL Lhe unlLed SLaLes wlll conunue Lo malnLaln a
large Lrade declL wlLh Chlna for Lhe foreseeable fuLure.
k s Lse 12
noL only does Lhe unlLed SLaLes malnLaln a growlng
Lrade declL wlLh Chlna buL, Chlna has Lhe largesL
Lrade lmbalance wlLh Lhe unlLed SLaLes among lLs
ma[or Lradlng parLners. (See 1able)

1hls Lrade lmbalance gure ls greaLer Lhan Lhe u.S.
Lrade declL wlLh Lhe Luropean unlon, whlch has Lhe
world's largesL economy and conslsLs of 27 counLrles.

Chlna now accounLs for over 1/3 of Lhe unlLed SLaLes'
Lrade declL on a global basls.
k s Lse 13
unlLed SLaLes Merchandlse 1rade 8alances wlLh Ma[or
1radlng arLners: 2008
k s Lse 14
Country or
1rad|ng Group
U.S. 1rade 8a|ance
(5 b||||ons)
World -800.0
Chlna -266.3
Crganlzauon of eLroleum Lxporung CounLrles (CLC) -173.6
Luropean unlon (Lu27) -93.4
Canada -74.6
!apan -72.7
Mexlco -64.4
Assoclauon of SouLheasL Aslan nauons (ASLAn) -30.6
re-Crlsls LxporL urlven Lconomy of Chlna
Currency ollcles
LxporL Subsldles
ollucal
Lconomlc
k s Lse 13
ConLenL
1enslons beLween Chlna and Lhe u.S.
Lack of 8eclprocal Spendlng by Chlna
ln lnLernauonal Lrade, Lhe baslc concepL calls for clrcular
spendlng for all nauons Lo beneL.
8eclprocal spendlng would Lend Lo reduce Lhe Lrade
lmbalance over ume.
Crlucs argue LhaL Chlna ls noL spendlng lLs earnlngs from Lhe
sales of exporLs Lo Lhe u.S. Lo purchase lLs goods and servlces
ln reLurn.

Chlna ls hoardlng" lLs earnlngs-WhaL ls Chlna dolng wlLh lLs
earnlngs?
k s Lse 16
Chlna ls savlng lLs earnlngs by purchaslng u.S. 1reasury securlues wlLh
lLs earnlngs and has now become Lhe largesL holder of u.S. bonds.
k s Lse 17
Ch|na's no|d|ngs of U.S. Secur|nes (5b||||ons and Change)
2002 2003 2004 2003 2006 2007 2008 2002-2008 Chg
188 233 341 327 699 922 1,203 366
Source: u.S. ueparLmenL of 1reasury. u.S. securlues lnclude shorL-Lerm and long-Lerm debL,
1reasury securlues, u.S. governmenL agency securlues, corporaLe securlues, and equlues.
Ch|na's no|d|ngs of U.S. 1reasury Secur|nes: 2002-Apr|| 2009
2002 2003 2004 2003 2006 2007 2008 2009*
Chlna's Poldlngs 118.4 139.0 222.9 310.0 396.9 477.6 727.4 763.3
Poldlngs as of LoLal
lorelgn Poldlngs
9.6 10.4 12.1 13.2 18.9 20.3 23.6 23.4
Source: u.S. ueparLmenL of 1reasury
*Aprll 2009
Chlna's masslve holdlngs of u.S. securlues have several
lmporLanL consequences for u.S.-Chlna economlc relauons.
k s Lse 18
Chlna purchases u.S.
governmenL securlues,
lend money Lo Lhe
u.S., help Lhe u.S. fund
Lhe federal declL
WlLhouL Lhe lnfuslon of funds
from Chlna, u.S. governmenL
would need Lo nd oLher ways
Lo ralse revenue, or engage ln
palnful budgeL cuLs!
u.S. governmenL can forego
ralslng Laxes, allowlng u.S.
consumers Lo have more
funds aL Lhelr dlsposal.
Consumers use Lhese funds
Lo purchase even more
cheap lmporLs from Chlna,
addlng Lo Lhe growlng Lrade
declL.
1he cycle
appears Lo
be one
LhaL never
ends.
A second consequence ls LhaL many u.S. observers
belleve LhaL Chlna's masslve holdlngs of u.S.
securlues mlghL glve Lhe counLry lncreased leverage
over Lhe unlLed SLaLes on pollucal and economlc
lssues:

Chlna could LhreaLen Lo sell masslve amounLs of
u.S. securlues, Lhereby Lrlggerlng a devaluauon of
Lhe dollar and economlc lnsLablllLy ln Lhe unlLed
SLaLes, and Lhen use LhaL as leverage on
lmporLanL pollucal lssues.
k s Lse 19
A Lhlrd consequence:
Chlna's large holdlngs creaLe a relauonshlp of
dependence by Chlna on a healLhy u.S. economy.
Chlna has an lncenuve Lo keep buylng u.S.
securlues ln order Lo proLecL lLs slgnlcanL
lnvesLmenLs ln Lhe unlLed SLaLes.
k s Lse 20
Currency ollcles
LxporL Subsldles
ollucal
Lconomlc
k s Lse 21
ConLenL
Currency ollcles
PlsLorlcally, Chlna has malnLalned a xed exchange
pegged Lo Lhe u.S. dollar wlLh very narrow ranges.
As a resulL, alLhough Lhe hlgh demand for Lhe
Chlnese currency should resulL ln an appreclauon of
Lhe 8M8 versus Lhe dollar and a correcuon ln Lhe
Lrade lmbalance beLween Lhe Lwo counLrles, Lhe
lncreased demand has noL, unul recenLly, resulLed ln
an appreclauon of Lhe 8M8 due Lo Chlna's own
scal pollcles.
k s Lse 22
Crlucs charge LhaL Lhe 8M8 ls undervalued and LhaL
Lhe purpose of undervalulng Lhe 8M8 ls Lo supporL
Chlna's exporL lndusLrles.
Chlna's 8esponse ?
k s Lse 23
Chlna's response ?

Chlna's currency pollcy ls noL meanL Lo favor exporLs over
lmporLs, raLher, lL ls deslgned Lo malnLaln economlc sLablllLy
Lhrough currency sLablllLy.

under currenL economlc condluons, an appreclauon of Lhe
8M8 would harm exporL lndusLrles by maklng exporLs more
expenslve, whlch mlghL lead Lo employmenL dlsrupuons,
worker unresL, and soclal chaos.

Chlna also belleves LhaL lLs own banklng sysLem ls Loo
underdeveloped Lo deal wlLh Lhe speculauve pressures LhaL
would come wlLh a freely converuble currency.
k s Lse 24
under lobbylng and pressure from oLher counLrles,
Chlna modled lLs currency pollcy ln 2003.

Chlna announced a new pollcy LhaL Lhe 8M8 exchange
would be a managed oaL, l.e., allowlng Lhe 8M8 Lo
appreclaLe wlLhln very narrow ranges agalnsL a baskeL
of currencles LhaL lnclude Lhe u.S. dollar, Lhe !apanese
yen, Lhe Luro, and a few oLher currencles.

unllke a Lrue oaung currency, Lhe 8M8 would be
allowed Lo ucLuaLe up Lo 0.03 (laLer changed Lo
0.03) on a dally basls.
k s Lse 23
1he 8M8 has appreclaLed from 8.11 Lo Lhe dollar on
!uly 21, 2003, Lo 6.78 by Aprll 2010.

Sull, as evldence LhaL Lhe 8M8 ls sull undervalued by
as much as 40, many crlucs polnL Lo:

Lhe sharp lncrease ln Chlna's forelgn currency
reserves (whlch grew from $400 bllllon ln 2003 Lo
$1.93 Lrllllon ln 2008)

Chlna's large and growlng Lrade surplus wlLh Lhe
unlLed SLaLes ($266 bllllon ln 2008)
k s Lse 26
Ch|na's Accumu|anon of Iore|gn Currency keserves: 2001-2009 (5 8||||ons)
k s Lse 27
212
286
304
610
819
1,066
1,328
1,946 1,934
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2001 2002 2003 2004 2003 2006 2007 2008 Mar-09
Source: Chlnese SLaLe AdmlnlsLrauon of lorelgn Lxchange
Chlna now has Lhe largesL forelgn currency
reserves ln Lhe world, allowlng Lhe counLry Lo
make global lnvesLmenLs and loans Lo furLher
lLs lnLeresLs ln bulldlng ues ln Afrlca and Lhe
Mlddle LasL, and Lo meeL lLs energy needs.
Crlucs polnL Lo Chlna's masslve forelgn currency reserves, accumulaLed ln [usL elghL years,
as anoLher lndlcauon of Chlna's unfalr Lrade pracuces based on currency manlpulauon.
900 lncrease ln lorelgn
Currency 8eserves from
2001 Lo 2009
unlLed SLaLes ls conunulng Lo puL pressure on Chlna
Lo allow Lhe 8M8 Lo appreclaLe furLher, resulung ln
lnLense Lrade Lenslons beLween Lhe Lwo counLrles.

Chlna clalms LhaL lL wlshes Lo adopL a more exlble
currency pollcy, buL aL a gradual pace.
k s Lse 28
Currency ollcles
LxporL Subsldles
ollucal
Lconomlc
k s Lse 29
ConLenL
LxporL Subsldles
A Lhlrd cause oen clLed by crlucs of Chlna's Lrade
pollcles ls LhaL Chlna's exporLs beneL from
subsldles provlded by Lhe 8C governmenL.

WhaL ls exporL subsldy?
k s Lse 30
A subsldy can be ln Lhe form of:
A dlrecL nanclal paymenL
An abaLemenL of charges (such as Laxes) LhaL
would oLherwlse be due from Lhe buslness enuLy.

lavorable buslness arrangemenLs
such as reduced renL for faclllues and reduced
prlces for uullues and oLher lnpuLs.
k s Lse 31
Many crlucs charge LhaL Chlna provldes
subsldles Lo many of lLs own sLaLe-owned
enLerprlses LhaL are Lhen allowed Lo charge
lower prlces for lLs exporLs Lo Lhe unlLed
SLaLes and, Lhereby, obLaln a compeuuve
advanLage over oLher goods LhaL do noL
beneL from Lhe subsldy.

k s Lse 32
under a recenL unlLed SLaLes ueparLmenL of
Commerce rullng, non-markeL economles, llke
Chlna, are sub[ecL Lo counLervalllng duues,
l.e., a duLy or Lax lmposed by Lhe unlLed SLaLes
CusLoms and 8order aLrol, upon an lmporL aL Lhe
border Lo oseL Lhe Lrade-dlsLorung eecL of Lhe
governmenL-provlded subsldy.
k s Lse 33
Currency ollcles
LxporL Subsldles
ollucal
Lconomlc
k s Lse 34
ConLenL
lorelgn ulrecL lnvesLmenL (lul)
lorelgn dlrecL lnvesLmenL (lul) refers Lo Lhe ln[ecuon
of caplLal lnLo Chlna by forelgn lnvesLors (malnly
mulunauonal corporauons).
An example of lul occurs when a u.S. company
esLabllshes a subsldlary ln Chlna for Lhe purpose of
conducung buslness ln Chlna.
lul ls lmporLanL Lo Chlna's economy for several
reasons.
lorms of lul ??
k s Lse 33
1. lorelgn lnvesLed LnLerprlses (llLs)

Many llLs are engaged ln exporLs of goods from
Chlna, helplng Chlna fuel lLs growlng Lrade surplus
wlLh Lhe unlLed SLaLes.

k s Lse 36
2. lul ln Lhe form of Masslve lnux of CaplLal
lL plays a cruclal growLh ln Chlna's economlc developmenL.
ln order Lo esLabllsh Lhese buslness enuues, Lhe u.S.
company wlll be requlred by Chlna Lo ln[ecL caplLal lnLo
Chlna Lo meeL Lhe buslness enuues' physlcal needs, such as
bulldlng a facLory or omce bulldlngs and purchaslng
equlpmenL and supplles.

lurLher, Lhe newly esLabllshed buslness enuLy wlll need Lo
hlre local workers, provldlng employmenL opporLunlues for
new graduaLes of Chlna's unlverslues.
k s Lse 37
3. lul ln Lhe form of 1echnology 1ransfer

ln mosL cases, Lhe forelgn lnvesLor wlll need Lo
Lransfer or llcense lLs Lechnology Lo Lhe buslness
enuLy ln Chlna ln order for Lhe buslness Lo operaLe
successfully.
k s Lse 38
Lxample: A u.S. pharmaceuucal company wlLh
a [olnL venLure ln Chlna
1he u.S. company wlll need Lo llcense lLs paLenLs
Lo Lhe [olnL venLure so LhaL Lhe [olnL venLure can
manufacLure Lhe paLenLed drugs.
WlLhouL access Lo Lhe paLenLs, Lhe Chlnese [olnL
venLure wlll be unable Lo manufacLure Lhe
producLs.
k s Lse 39
ln mosL cases, Lhe Lechnology componenL ls
Lhe mosL valuable buslness asseL of Lhe u.S.
company.
Where Lhe u.S. company ls provldlng
Lechnology, Lhe Lechnology can be valued and
LreaLed as parL of Lhe caplLal conLrlbuuon of
Lhe u.S. company ln Chlna.
k s Lse 40
lorelgn ulrecL lnvesLmenL ln Chlna, lnows ($8llllons)
k s Lse 41
62 GLOBAL BUSINESS LAW REVIEW [Vol. 1:47

TABLE 5
FOREIGN DIRECT INVESTMENT IN CHINA, INFLOWS
($BILLIONS)

Source: World Bank Indicators

In 2008, FDI inflows to China totaled $148 billion, making China the largest FDI
recipient among developing countries and the third largest recipient of FDI overall in
the world.
58
FDI has been a major factor in Chinas productivity gains and economic
growth. Most of the worlds largest multinational corporations, such as General
Motors, Procter & Gamble, and Coca-Cola, have substantial investments in China.
59

The PRC government estimates that, as of 2007, there were 286,200 approved FIEs
in China and that these FIEs employed more than 42 million people and accounted
for 31.5% of gross industrial output.
60
Annual FDI in China grew from $2 billion in
1985 to $148 billion in 2008. The total cumulative level of FDI in China at the end
of 2008 is estimated to be about $880 billion.
61
Thus, FDI has played a crucial role in
Chinas modernization and industrialization.
4. Summary
As the preceding discussion indicates, Chinas economic growth has been
heavily dependent on exports and FDI. Unlike the United States, domestic

58
Chinas FDI only trails behind the EU, the largest overall recipient, followed by the
United States in second place. See WAYNE MORRISON, CHINA AND THE GLOBAL FINANCIAL
CRISIS: IMPLICATIONS FOR THE UNITED STATES, CONG. RES. SERV. REP. RS22984, at 1 (2009)
[hereinafter MORRISON, GLOBAL FINANCIAL CRISIS].

59
See DANIEL CHOW, THE LEGAL SYSTEM OF THE PEOPLES REPUBLIC OF CHINA IN A
NUTSHELL 35 (2d ed. 2009) [hereinafter CHOW, NUTSHELL].

60
See WAYNE MORRISON, CHINAS ECONOMIC CONDITIONS, CONG. RES. SERV. REP.
RL33534, at 9 (2009) [hereinafter MORRISON, ECONOMIC CONDITIONS].

61
See Penelope B. Prime, China and India Enter Global Markets: A Review of
Comparative Economic Development and Future Prospects, 50 EURASIAN GEOGRAPHY &
ECON. 621, 630 (2009).
Source: World 8ank lndlcaLors
Annual lul ln Chlna grew from $2 bllllon ln 1983 Lo
$148 bllllon ln 2008.
1he LoLal cumulauve level of lul ln Chlna aL Lhe end
of 2008 ls esumaLed Lo be abouL $880 bllllon.
Chlna ls Lhe largesL lul reclplenL among developlng
counLrles and Lhe Lhlrd largesL reclplenL of lul
overall ln Lhe world.
lul has been a ma[or facLor ln Chlna's producuvlLy
galns and economlc growLh.
MosL of Lhe world's largesL mulunauonal corporauons, such
as Ceneral MoLors, rocLer & Camble, and Coca-Cola, have
subsLanual lnvesLmenLs ln Chlna.

Chlna governmenL esumaLes LhaL, as of 2007, Lhere
were 286,200 approved llLs ln Chlna wlLh more Lhan
42 mllllon people employed and accounLed for 31.3 of
gross lndusLrlal ouLpuL.
1hus, lul has played a cruclal role ln Chlna's
modernlzauon and lndusLrlallzauon.
k s Lse 42
Currency ollcles
LxporL Subsldles
ollucal
Lconomlc
k s Lse 43
ConLenL
lorLunaLely, Chlna's exposure Lo Lhe global nanclal
crlsls ls moderaLed by lLs lack of dlrecL exposure Lo
Lhe subprlme morLgage problem.
Chlna places numerous resLrlcuons on caplLal ows,
parucularly ouulows of caplLal Lo forelgn
desunauons.
1he 8C governmenL accounLs for Lhe bulk of forelgn
lnvesLmenL overseas, much of lL derlved from Chlna's
masslve forelgn currency reserves.
8uL Lhe 8C governmenL lnvesLs malnly ln safe low-
yleldlng lnsLrumenLs, such as u.S. 1reasury securlues.
k s Lse 44
AlLhough Chlna's dlrecL exposure Lo subprlme
morLgages may have been llmlLed, Chlna ls
nC1 lmmune Lo Lhe subprlme crlsls ln Lhe u.S.

Why??

k s Lse 43
Why?
1he eecL of Lhe subprlme morLgage problem dld
aecL Chlna because lL had a slgnlcanL and harmful
lmpacL on Lhe economles of Chlna's Lwo largesL
Lradlng parLners:
Lhe unlLed SLaLes and Lhe Lu.
1he resulL of Lhe economlc downLurn ln Lhe unlLed
SLaLes, Lhe Lu, and oLher counLrles around Lhe world
conLrlbuLed Lo a slgnlcanL slowlng down of Chlna's
economy.
k s Lse 46
As a resulL of Lhe global nanclal crlsls, Chlna's largesL
LargeL exporL markeLs have conslderably slowed Lhelr
purchases of Chlnese exporLs:
Consumers ln Lhe unlLed SLaLes and Lu are noL spendlng as a resulL
of Lhe nanclal crlsls, and Chlna's exporLs have decllned
slgnlcanLly.
lul lnows Lo Chlna have also decreased sharply as cosL
cumng measures by mulu-nauonal companles (MnCs) have
resulLed ln low avallablllLy of caplLal for forelgn lnvesLmenL.

ln Aprll 2009, lul lnows Lo Chlna were down by 22.3, as
compared Lo Aprll 2008 when lul surged by over 70
k s Lse 47
Changes ln Chlna's MonLhly 1rade and lul lnows: Aprll 2008-Aprll 2009
k s Lse 48
64 GLOBAL BUSINESS LAW REVIEW [Vol. 1:47

United States, the EU, and other countries around the world contributed to a
significant slowing down of Chinas economy. As a result of the global financial
crisis, Chinas largest target export markets have considerably slowed their
purchases of Chinese exports: consumers in the United States and EU are not
spending as a result of the financial crisis, and Chinas exports have declined
significantly.
67
FDI inflows to China have also decreased sharply as cost cutting
measures by multi-national companies (MNCs) have resulted in low availability of
capital for foreign investment. In April 2009, FDI inflows to China were down by
22.5%, as compared to April 2008 when FDI surged by over 70%.
68

FIGURE 4
CHANGES IN CHINAS MONTHLY TRADE AND FDI INFLOWS: APRIL 2008-APRIL
2009

The declines in merchandise trade, the influx of FDI, and exports have led to
sharp retractions of Chinas economy. For the first four months of 2009, industrial
output rose by 5.5%, well below the 12.9% growth rate in 2008.
69
Chinas real GDP
growth was expected to slow to 6.6% in 2009.
70
This might seem like a steady rate of
growth, but this is an economy that grew at an annual rate of nearly 10% from 1979
to 2008,
71
a three decade period that began with economic reforms and ended up at

67
Chinas exports and imports were down in February 2009 by 25.7 percent and 24.1
percent respectively. See MORRISON, GLOBAL FINANCIAL CRISIS, supra note 58, at 4.

68
See id.

69
Id.

70
Id.

71
MORRISON, ECONOMIC CONDITIONS, supra note 60, at 4.
Source: Clobal lnslghL and Chlna's CusLoms AdmlnlsLrauon
1he decllnes ln merchandlse Lrade, Lhe lnux of lul, and
exporLs have led Lo sharp reLracuons of Chlna's economy.

lor Lhe rsL four monLhs of 2009, lndusLrlal ouLpuL rose by
3.3, well below Lhe 12.9 growLh raLe ln 2008.
Chlna's real Cu growLh was expecLed Lo slow Lo 6.6 ln
2009.
1hls mlghL seem llke a sLeady raLe of growLh, buL Lhls ls an
economy LhaL grew aL an annual raLe of nearly 10 from 1979
Lo 2008, a Lhree decade perlod LhaL began wlLh economlc
reforms and ended up aL lLs presenL raLe.
k s Lse 49
Some belleve LhaL Chlna's economy needs Lo
grow aL a raLe of aL leasL 8 per year because
Chlna's expandlng populauon requlres Lhe
creauon of 20 mllllon new [obs per year.
ln !anuary 2009, Chlna esumaLed LhaL Lhe
slow down ln Chlna's economy due Lo Lhe
global economlc crlsls led Lo Lhe loss of 20
mllllon [obs ln 2008.
k s Lse 30
AnoLher eecL of Lhe global nanclal crlsls ln Chlna ls
Lhe slowlng down of Chlna's real esLaLe markeL.
ln facL, ln several of Chlna's clues, Lhere are slgns of a
bubble LhaL ls bursung, lncludlng a slowlng down ln
consLrucuon and falllng prlces, and lncreases ln
uncompleLed and unoccupled bulldlngs.

An addluonal lndlcauon of Lhe lmpacL of Lhe global
nanclal crlsls on Lhe overall healLh of Lhe economy
ls Lhe sharp decllne ln Lhe Shanghal SLock Lxchange
ComposlLe lndex, Chlna's maln sLock markeL, whlch
losL Lwo-Lhlrds of lLs value from uecember 31, 2007
Lo uecember 31, 2008
k s Lse 31
1aken LogeLher, Lhese eecLs, especlally loss of Lhe
ablllLy Lo creaLe new [obs Lhrough Lhe growLh of Lhe
economy and Lhe loss of currenL [obs due Lo Lhe
global economlc crlsls, could creaLe a serlous soclal
problem for Chlna.
k s Lse 32
Soclal lnsLablllLy
Already, Chlna has seen, ln recenL years, a sharp lncrease ln
lncldenLs of vlolenL proLesLs by dlsgrunLled groups who
belleve LhaL Lhey are noL recelvlng Lhelr share of Lhe frulLs of
Chlna's economlc rlse.
Some of Lhese proLesLs predaLed Lhe currenL global economlc
crlsls and were dlrecLed aL Lhe percelved lnequlues generaLed
by Chlna's unprecedenLed perlod of economlc expanslon,
such as huge dlsparlues ln wealLh acqulsluon.
A loss of [obs and Lhe overall decllne of Lhe economy due Lo
Lhe global nanclal crlsls pose a ma[or LhreaL because lL mlghL
lead Lo lncreased soclal lnsLablllLy LhaL could LhreaLen Lhe
ablllLy of Lhe Chlna Lo grow.
k s Lse 33
Currency ollcles
LxporL Subsldles
ollucal
Lconomlc
k s Lse 34
ConLenL
Chlna's 8esponse Lo Lhe Crlsls
Many people ln Chlna, lncludlng Chlna's leaders, are
Lruly puzzled by whaL Lhey see as lrresponslble
nanclal behavlor ln Lhe unlLed SLaLes.

1here ls also anger because Chlna's economy ls
heavlly dependenL on Lhe unlLed SLaLes, whlch ls one
of Lhe largesL LargeL markeLs for Chlna's exporLs and
one of Lhe largesL forelgn lnvesLors ln Chlna.
k s Lse 33
Among many groups ln Chlna, Lhere ls a loL of anger
and resenLmenL dlrecLed aL Lhe unlLed SLaLes for
preclplLaung Lhe global nanclal crlsls Lhrough Lhe
subprlme morLgage problem.
ulmculL Lo belleve LhaL u.S. banks and Lhe nanclal
lndusLry could creaLe nanclal producLs LhaL no one
seemed Lo really undersLand and LhaL Lhese exouc
subprlme morLgages were packaged as securlues
and oLher nanclal producLs.
1hese producLs, ln Lurn, were sold ln huge quanuues
ln Lhe unlLed SLaLes and abroad.
k s Lse 36
Many people ln Chlna belleve LhaL Chlna was lulled lnLo creaung close
economlc ues wlLh Lhe unlLed SLaLes based on a false bellef LhaL Lhe
unlLed SLaLes economy was sLable and prosperous wlLh a world class
nanclal lndusLry, a prudenL and consclenuous governmenL, nanclal
regulaLors, and sophlsucaLed consumers.

1here was a common percepuon ln Chlna LhaL wlLh regard Lo mosL
nanclal and buslness mauers, Lhe unlLed SLaLes was far ahead of
Chlna and LhaL Chlna had much Lo learn from Lhe unlLed SLaLes.

As a resulL, Chlna felL secure ln bulldlng sLrong ues wlLh Lhe unlLed
SLaLes economy by lnvesung heavlly ln manufacLurlng exporLs Lo Lhe
unlLed SLaLes, purchaslng u.S. governmenL securlues, and welcomlng
forelgn dlrecL lnvesLmenL from u.S. companles
k s Lse 37
ollucal 8esponse
A call by hardllners for a re[ecuon of economlc
reform and a reLurn Lo Chlna's pre-reform cenLrally-
conLrolled economy lmplemenLed by Mao aer Lhe
esLabllshmenL of Lhe 8C ln 1949
A sLronger nauonallsL/proLecuonlsL amLude on
Chlna's parL, e.g. calls for Lhe governmenL purchase
of Lechnology LhaL has been developed excluslvely ln
Chlna.
A general hardenlng of amLudes Lowards Lhe unlLed
SLaLes ln Lrade and pollucs.
k s Lse 38
Lconomlc 8esponse
Chlna's ellLes belleve LhaL Chlna mlghL have been
Loo dependenL on an exporL-drlven economy and
an economy dependenL on lul for growLh.

1he downLurn ln exporLs and Lhe lnux of lul
have caused severe repercusslons ln Chlna,
Lhereby conLrlbuung Lo a slgnlcanL rlse ln Lhe
shumng down of buslnesses and a splke ln
unemploymenL.
k s Lse 39
Lconomlc 8esponse
Chlna has adopLed Lhree sLeps deslgned Lo creaLe
economlc growLh Lhrough lncreases ln domesuc
consumpuon LhaL ls lnLended, perhaps
permanenLly or as parL of an overall pollcy, Lo
replace Lhe loss of growLh due Lo Lhe decllne ln
exporLs and lul.
k s Lse 60
Lconomlc 8esponse: llscal ollcy
ln november 2008, Chlna Lapped lnLo lLs huge
forelgn currency reserves and lnLroduced a $386
bllllon package.
1he package was deslgned Lo provlde caplLal for
domesuc spendlng and Lo sumulaLe Lhe economy by
provldlng [ob creauons and publlc works wlLh Lhe
goal of lncreaslng Cu by 2 Lo 3 polnLs.
k s Lse 61
Chlna's uomesuc Sumulus ackage
k s Lse 62
ro[ects
Ch|nese
uan
(b||||ons)
As of 1ota|
Snmu|us
ackage
As of
Ch|na's 2008
GD
1ransporL lnfrasLrucLure lnvesLmenL 1,300 37.3 3.0
osL-earLhquake reconsLrucuon 1,000 23.0 3.3
ubllc houslng 400 10.0 1.3
8ural lnfrasLrucLure 370 9.3 1.2
8&u and SLrucLural Change 370 9.3 1.2
LnvlronmenL uevelopmenL 210 3.3 0.7
PealLhcare and Lducauon 130 3.8 0.3
1oLals 4,000 100.0 13.3
Source: Clobal lnslghL
1he economlc sumulus package lncludes sLeps Lo asslsL
Chlna's Lop plllar lndusLrles (Lhose lndusLrles deemed
essenual Lo Chlna's nauonal securlLy, economlc growLh,
and long-Lerm compeuuveness), such as:
AuLomoblles
SLeel
Shlpbulldlng
1exules
Machlnery
LlecLronlcs and
lnformauon Lechnology, llghL lndusLry (consumer producLs),
peLrochemlcals, meLals, and loglsucs.
k s Lse 63
Among oLher sLeps, Chlna ls expecLed Lo provlde
subsldles Lo buslness enuues ln Lhe form of:
Lax cuL, Lax rebaLes, and Lax credlLs for exporLs,
dlrecL governmenL granLs, and caplLal funds for
lnvesLmenL overseas.
Many of Lhese measures may be consldered lllegal
subsldles by Lhe unlLed SLaLes and may creaLe Lrade
lssues.
k s Lse 64
Lconomlc 8esponse: MoneLary ollcy
Chlna's sumulus package also lncludes pollcles Lo
loosen conLrol on banks so Lhey can lend more money.
Chlna would ellmlnaLe lendlng quoLas and reduce
lnLeresL raLes so LhaL banks are able Lo lend Lo
companles and households.
Some of Lhe loans wlll be aL favorable raLes Lo sLaLe-
owned enLerprlses LhaL exporL goods and servlces.
unllke Lhe unlLed SLaLes where banks are sull unwllllng
Lo lend, Chlna's banks have responded almosL
lmmedlaLely by lendlng Lo buslness enLerprlses and
households.
k s Lse 63
Lconomlc 8esponse: Soclal rograms
Chlna has subsLanually sLepped up lLs soclal programs ln
healLh care, lnsurance, and penslons ln lLs sumulus package.
8y 2011, Lhe healLh care sysLem should be ln place and cover
mosL of Lhe populauon.
lor example, on Aprll 7, 2009, Lhe 8C governmenL announced plans Lo spend $124
bllllon over Lhe nexL Lhree years Lo creaLe a unlversal healLh care sysLem for all of lLs
cluzens.
Chlna ls also auempung Lo ralse rural lncomes and Lo narrow
Lhe gap beLween Lhe lncomes ln rural and urban areas.
lor example, slnce lebruary 2009, Lhe 8C governmenL has oered rebaLes of 13
percenL Lo rural resldenLs for Lhe purchase of household appllances. ubllc houslng
pro[ecLs, lnfrasLrucLure pro[ecLs, and plans Lo bulld schools and Lraln Leachers are all
LargeLed ln rural areas.
1he governmenL has also promlsed Lo lncrease subsldles Lo
farmers.
k s Lse 66
Lconomlc 8esponse: Soclal rograms
1hese soclal programs are deslgned Lo promoLe
consumer spendlng Lo fuel Lhe growLh of Lhe economy.
1o undersLand Lhe lmporLance of Lhese reforms, noLe
LhaL Lhe amounL of precauuonary savlngs ln Chlna ls
exLremely hlgh ln comparlson Lo oLher counLrles-
abouL 30 percenL Lo 40 percenL ln recenL years.
recauuonary savlngs occur when people belleve LhaL Lhey
need Lo provlde for Lhelr own healLh care and reuremenL
savlngs.
lf Chlna ls now provldlng Lhese servlces, Lhls wlll free
up Lhese savlngs for consumpuon LhaL wlll help drlve
growLh and producuvlLy of Lhe economy.
k s Lse 67
oLenual 1rade lssues beLween
Lhe unlLed SLaLes and Chlna
Areas of Concerns as a resulL of Chlna's response Lo
Lhe Clobal llnanclal Crlsls:
Chlna's Currency ollcy
CounLervalllng uuues on Subsldlzed LxporLs
Safeguards under Chlna's roLocol of Accesslon Lo
Lhe World 1rade Crganlzauon.
Chlna agreed Lo allow Lhe unlLed SLaLes Lo
lmpose safeguards on producLs from Chlna for
a perlod of 12 years sLarung from Lhe daLe of
Chlna's accesslon Lo Lhe W1C ln 2001.
k s Lse 68
Lnd
.
k s Lse 69

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