This issue in brief:

Chinas Economic Policies during the Global Financial Crisis

The Global Financial Crisis of 2008 caused mayhem in financial markets across the globe. In this
article, Rachel Tan discusses in detail the steps which China took to navigate the crisis and the
effectiveness of these measures.
The Role of Russia in the Syrian Conflict
The Syrian refugee crisis and Civil War are issues which have dominated headlines for much of the
year. In this article, Valerie Hew discusses Russias possible motivations for intervention in Syria
and the possible consequences of such actions.
The Impending Fall of the Chinese Economy
The economic progress of China since the era of Mao Zedong have been nothing short of
extraordinary. However, are we witnessing the end of these glory days? Join Jin Zhiyan as he
discusses the reasons behind a predicted decline in the Chinese economy and the potential impact
this would have on the world at large.

Proudly sponsored by

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By Rachel Tan Yi

The 2008 Global Financial Crisis (GFC) was the most severe crisis to rock the financial markets
since the Great Depression of 1929. The most evident cause of this catastrophe was the decline
in US housing prices, which led to widespread defaults in subprime mortgage lending. This
eventually led to the collapse of the Lehman Brothers, a bank which was widely regarded as
an institution that was too big to fail. Its collapse left global investors reeling and caused
increased anxiety in the financial markets. As financial institutions became less willing to lend
money, businesses cut down on spending and this resulted in a slowdown in the economy. The
effects of the GFC were devastating to many economies.
Before the start of the GFC, China had established robust economic and financial connections
following years of significant economic reform. When the GFC hit, China realised that its
heavy reliance on exports for growth, especially those from the United States and Europe, made
it exposed to economic headwinds. Chinas leadership did not believe in the decoupling
concept, which was the assertion that emerging economies in Asia could minimise their
exposure to the effects of the GFC by increasing intra-regional trade.

Exports of Goods and Services (% of GDP)

40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Figure 1: Exports of Goods and Services as a % of Chinas GDP

In response to the GFC, the Chinese government implemented several policies designed to
reduce the undesirable effects of a significant decrease in trade on Chinas economy (Figure
1). Expansionary monetary policy was one of the key policies employed by the Chinese
government. In September 2008, when the effects of the GFC became widespread, the

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government took several actions in order to raise the availability of loanable funds. Firstly,
lending quotas which had made it difficult for banks to meet loan demands from customers
were eliminated. Secondly, to ensure that banks would have ample funds to cater to demand
from consumers, the government lowered the required reserve ratio for banks. The interest rate
which they could impose on loans was many times higher than the rate they could earn from
interbank loans. The Chinese government also concurrently took steps to raise the demand for
loanable funds. Firstly, they lowered benchmark interest rates, which influence the interest
rates which banks impose on loans. Secondly, they dropped the rates for mortgage loans. These
measures resulted in a rapid increase in bank loans, especially mortgage lending loans. Overall,
outstanding bank loans in domestic currency increased by RMB9.59 trillion in 2009, up from
an increase in RMB4.91 trillion in 2008.
Expansionary fiscal policy was also implemented concurrently alongside monetary easing.
Soon after expansionary monetary policies were implemented in 2008, the government
announced that it would be launching a stimulus package worth US$586 billion (13.4% of
GDP) over the following two years. The rise in bank lending obtained from monetary easing
was meant to be a source of funding for the stimulus program. Other sources included central
government spending and expenditure from local governments. Government spending was
meant to serve as seed funding to draw additional investment, from local governments as
well as private funding. A significant percentage of this stimulus was assigned to the
development of physical infrastructure such as railways, roads and grids (Figure 2).

Figure 2: Sector Breakdown of the Fiscal Stimulus Package

The policies implemented by the Chinese government turned out to be tremendously effective.
China became the first of the worlds major economies to bounce back from the global
recession. Initially, the Chinas economic growth dropped to a low of 4.3 percent in the fourth
quarter of 2008. However, as the stimulus package began to take effect, Chinas GDP growth
increased to 9.5 percent in the first quarter of 2009 and 11.4 percent in the second quarter of
the same year (Chart 3). It was estimated that the stimulus package actually boosted the
increase in Chinas GDP by around 2 to 3 percent in 2009 and 2010.

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Chart 3: Real growth in Chinas GDP

Although these policies played in a critical role in growing Chinas economy substantially
during the GFC, they have not been exempt from criticism. Some have argued that the stimulus
program allowed for an unsustainable rate of growth in 2009 and 2010. The substantial increase
in loans was also believed to have several undesirable effects. The rise in loans increased the
risk of higher inflation in China and may have contributed to the period of rising inflation at
the tail-end of 2010 and 2011. During this period, inflation rates were greater than 5 per cent
yearly. In addition, the higher availability of loans resulted in the formation of asset bubbles
and a huge debt burden on the economy, which China is still grappling with presently.
The policies which China implemented in order to deal with the GFC did enable China to
ameliorate the adverse effects of the recession. However, the side effects of the stimulus and
the governments intervention on Chinas economy cannot be disregarded. To deal with the
current trend of slowing economic growth, China is currently considering rolling out a new
fiscal stimulus package of at least RMB 1.2 trillion and rolling out infrastructural projects such
as the building of railways. It would thus be prudent for the government to recognise the
importance of careful implementation and calibration of its economic policies as these will not
only affect its economic growth, but also those of its trading partners and the world economy
at large.

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References:
Grant, W., Wilson, W., & Wilson, Graham K. (2012). The Consequences of the Global Financial
Crisis: The Rhetoric of Reform and Regulation, Oxford, UK: Oxford University Press.
The origins of the financial crisis: Crash Course. (2013, September 7). The Economist.
Han, M. (2012). The People's Bank of China during the global financial crisis: Policy responses
and beyond. Journal of Chinese Economic and Business Studies, 10(4), 361-390.
Lardy, N. (2012). Sustaining China's Economic Growth after the Global Financial Crisis,
Washington, DC: Peterson Institute for International Economics.
Supporting China's Infrastructure Stimulus Under the Infra Platform. (2010, June 1). Retrieved
from: http://siteresources.worldbank.org/INTSDNET/Resources/59446951247775731647/INFRA_China_Newsletter.pdf
China grapples with risk of economic hard landing: Analysts. (2015, September 13). The Straits
Times. Retrieved from: http://www.straitstimes.com/asia/east-asia/china-grapples-with-risk-ofeconomic-hard-landing-analysts

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By Valerie Hew Kai Shuen

Post-World War I Syria
After the end of World War I, the League of Nations was formed and the mandate system was
created. In 1923, Syria became a Class A mandate placed under the rule of France. As a Class
A mandate, Syria was almost ready for independence, but only under the condition that they
received administrative guidance and help from France. During this period, the Sunni majority
in Syria did not welcome French rule. To counter this, the French recruited the Alawites, which
was a minority group, into the Syrian Army. This marked the start of the Assad familys rise
to power.

Syrian Civil War summarised

In March 2011, a pro-democracy protest was organised following the arrest of teenagers who
painted anti-establishment messages on their school walls. In retaliation, security forces opened
fire on protestors and this resulted in even greater unrest in the nation, eventually escalating
into a full-blown civil war. Since then, protestors have demanded that President Assad step
down. In light of the situation in Syria, Russia decided to intervene in order to protect its
national interests.

Russias motivations for intervention

Russia has tried to justify their intervention in Syria by claiming that these actions are in the
interest of national safety. According to Russian President Vladimir Putin, if the Islamic
extremists in Syria are not kept in check, they would eventually pose a threat to Russia. While
the threat of Islamic extremist attacks are real, this factor does not seem as important as other
factors which might explain Russias motivations for intervention. This can be seen from recent
Russian airstrike targets.

A non-ISIS area suggested to have been hit by Russian air strike

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Although Russia previously claimed that they were doing so to aid Syria in combating the ISIS,
they have recently revealed that their air strikes have also hit anti-Assad militant groups. As
such, Russia also shows a keen interest in protecting President Assads position in Syria and
President Assad too was happy to have Russia working with them to combat terrorism.
Therefore, this implies that Russias motive for intervention stretches beyond national safety
concerns.
Russias political interests seem to be a bigger factor to explain their intervention. Ever since
rising to a superpower status during the Cold War, Russia has been keen on carving influence
in the world. In order to be influential in the world, Russia would require strong allies in all
continents and parts of the world. Syria, being one of their few allies left in the Middle East,
would thus be of great importance to Russia. Syrias port of Tartous is Russias only base for
its Black Sea Fleet. Moreover, Russia also operates several key air bases in Syria. As such, one
can conclude that one of Russias motivations to be involved in Syrias conflict would be to
protect their own security and defence forces.

Map showing Russia, Syria and the Black Sea

Others have also interpreted Russias involvement as an act out of fear. What President Putin
is afraid of is the weakening of the rule of President Assad and Western involvement in Syria.
To him, these factors could pose as a genuine threat to him as these forces might potentially
put him out of power.
Despite Russias numerous reasons to justify their actions, one definite consequences is that,
by assisting President Assad, Russia has actually intensified the Syrian protestors
dissatisfaction towards him. Thus, these undertakings by Russia may actually prove to
eventually backfire on them.

Russias motivations Economic Interests

Russian Prime Minister Dmitry Medvedev mentioned that Russias involvement in Syria is not
fuelled by economic gains, as the amount they spend in Syria way exceeds what actually gain
from being in Syria. However, if we consider economic interests from a different angle, we

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might not come the same conclusion. In 2005, Russia signed six trade agreements with Syria
in the energy and transportation sector. These agreements were important for Russia as it
helped to expand in areas such as arms and oil. Their economic interests in Russia was
demonstrated when Russia and China vetoed the decision to put in place a sanction on Syria.
Thus, it could be possible explanation that Russia is actually getting involved in Syria to
safeguard their investments. However, if we were to compare this to their political and national
interests, this reason seems to hold less weight. At the end of the day, Syria is not one of
Russias key trading partners and hence their economic interests in the nation may not be of
particular significance.

What lies ahead?

It is clear that Russias involvement in Syria and their public backing of President Assad is
directly going against American ideology. Moreover, Russias decision to launch air strikes in
Syria has escalated these fears. Ultimately, with the civil war continuing, this only means more
suffering for the Syrians. Russias intervention in Syria does not seem to bring the crisis closer
to an end and might perhaps even aggravate the problem as their actions might fuel even greater
anti-Assad sentiments. As for Russia, their intervention in Syria has gone against the will of
many key Western nations, and the full effects of these actions remain to be seen.

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References:
Syria: The story of the conflict. (2015, October 9). BBC News. Retrieved from:
http://www.bbc.com/news/world-middle-east-26116868
Conflict enters more perilous phase after Russia attacks Syrian rebels. (2015, September 30). The
Globe and Mail. Retrieved from: http://www.theglobeandmail.com/news/world/russian-attacksbring-old-cold-war-rivals-into-close-proximity-in-syria/article26604468/
Russia in Syria: Air strikes, Isis and Vladimir Putin's goals explained in 60 seconds. (2015,
October 1). International Business Times. Retrieved from: http://www.ibtimes.co.uk/russia-syriaair-strikes-isis-vladimir-putins-goals-explained-60-seconds-1522038
Syria crisis: Where key countries stand. (2015, October 2). BBC News. Retrieved from:
http://www.bbc.com/news/world-middle-east-23849587
Putin's Syria intervention isn't grand, brilliant strategy. It's an act of fear. (2015, September 30).
Vox. Retrieved from: http://www.vox.com/2015/9/30/9419729/putin-syria-fear
Assumption of Russia's Economic Interest in Syrian Mission 'Propaganda'. (2015, October 3).
Sputnik International. Retrieved from:
http://sputniknews.com/russia/20151003/1027962542/syria-russia-interest-propaganda.html
An Alliance Built Around Trade (2015, March 16). NVC Review. Retrieved from:
http://www.nvcreview.com/an-alliance-built-around-trade-what-drives-the-relationship-betweensyria-and-the-russian-federation/

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By Jin Zhiyan
Historical Background
China opened its economy to the world in 1978, and has since enjoyed three decades of yearon-year GDP growth averaging 10%. What has been worrying these few years is the rapid fall
of this indicator: 7.7% in 2013, 7.3% in 2014, and a projected 6.7- 6.8% by 2016, according to
the OECD and IMF respectively. This article seeks to present some reasons for the predicted
decline and will also proffer some insights into the potential impact of this slowdown on the
global economy.

The Cause
The most commonly cited reason for the projected decline of the Chinese economy is that the
current pattern of investment-driven growth is unsustainable. Since 2011, additional capital
pumped into the economy has been the primary source of any increase in output. This is
concurrent with the near-zero change in total factor productivity, which measures the change
of output per unit of input. Indeed, the incremental capital output ratio, which measures the
contribution of investments to growth, has risen and China has reaped high returns on
investments (ROI) (Figure 1). However, it is clear that investment levels even then were
already excessive and that over-investing in a large number of projects could lead to economic
inefficiency. This is clearly evinced in Chinas notorious ghost towns where unsold
residential properties are left barren and offer no ROI. As of October 2015, investment as a
share of GDP is at 46%. To maintain the current level of GDP growth, investment as a
contribution to GDP will have to increase to 60-70%. The cost of such measures could severely
undermine overall economic stability because vast overcapacity results in investment
inefficiency which would drag down the countrys long-term growth rate.

Figure 1: Investment versus Real GDP growth in OECD and BRIC Countries

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Another reason for the projected decline of the Chinese economy is the massive debt overhang.
Excessive investment has come hand-in-hand with a huge expansion of debt of questionable
quality. While 97% of yuan-denominated bonds hold top-ratings of double- or triple-A
domestically, many of them are rated as junk-grade bonds internationally. Total debt has
climbed to over 250% of GDP, and although this allowed China to survive the global financial
crisis, it also saddles the nation with a huge repayment burden which could hamper growth in
the coming years. While much of this credit flowed to property developers, current unsold
home inventory has climbed to a record high. This issue worsens as the property projects for
which credit was loaned are unable to be sold off. Together, the repayment of debt and the
repercussions of unsold home inventory will lead to a massive drag on the Chinese economy.
Chinas previous growth has been powered by a large arsenal of able working-age citizens who
have provided the requisite manpower for the nations manufacturing and service industries.
Due to increased life-expectancy as well as the effects of the one-child policy, it has recently
joined the ranks of ageing economies. While only 5% of the population was over 65 in 1983,
this figure increased to 9% in 2013 and is likely to swell to around 25% by 2050. The
corresponding fall in size of its total labour force erodes Chinas traditional competitiveness in
labor-intensive industries especially when compared with other relatively young and rapidly
developing countries in the region such as India. Simultaneously, the ageing workforce also
means that China will not be able to take full advantage of the economic shift from primary to
tertiary industries due to the relatively poorer acceptance and uptake of technology by workers
of a more advanced age. This combination of factors implies that even as China is grappling
with the problem of shrinking competitiveness in its traditional niches, it requires a transition
to a younger workforce in order to stay competitive in the global economy.

80

Percentage of labour force among those aged 15 and

over

79
78
77
76
75
74
73
72
71

Figure 2: Percentage of labour force among those aged 15 and over

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Potential Impact on the World

In the past decade, China has contributed to a third of the global economys expansion, a far
larger proportion than that of any other individual nation. Hence, it is fair to conclude that the
key to global growth rests definitively in Chinas hands. Should Chinese growth fall to negative
or even near-zero rates, the world economy will certainly be severely affected. As the worlds
second-largest economy, any change in Chinas growth rate will lead to a domino effect on
countries all over the world. This is especially crucial as a number of other emerging economies
such as Brazil and Russia are already locked in domestic recession. In addition, a fall in
domestic GDP growth, will lead to both a fall in imports as well as a fall in exports, events
which will lead to drastic consequences for the rest of the world.
Another worrying issue which might develop would be the potentially massive decline of the
commodities industry. China is the worlds largest consumer of many of the worlds most
widely produced commodities, notably aluminum, iron ore, and copper. Even at current prices,
commodity exporters such as Kazakhstan or Venezuela are already suffering. A drop in Chinas
demand for commodities is likely to put further downward pressure on resource prices, many
of which are already at multi-year lows. The role of China in shaping commodity prices can be
seen in the consequences of the recent yuan devaluation, which caused aluminum and crude
futures to dip by 1.8% and 1.6% respectively. A decline in the Chinese economy would lead
to a far more severe and potentially catastrophic impact on the commodities industry.

Conclusion
As the second-largest economy in the world, China has a responsibility to not only its own
citizens but the rest of the world to undertake responsible economic policies to ensure its
continued growth. In recent months, the government has put in place changes such as partial
privatization of state-owned enterprises in order to allow for greater market competitiveness.
It has also introduced measures to boost demand in domestic markets, such as cutting the
minimum down payment for first-time home-buyers in many cities and cutting taxes on the
sale of small cars. With the governments aspiration to shift from its current investment-driven
growth model to a consumption-driven one, it remains to be seen whether such a move will
lead to more sustainable growth for the economy in the face of global headwinds.

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References:
China Economic forecast summary (June 2015). OECD. Retrieved from:
http://www.oecd.org/economy/china-economic-forecast-summary.htm
Walker, A. (2015, September 27). Chinas economy is stumbling, but by how much? BBC News.
Retrieved from: http://www.bbc.com/news/business-34340936
Wolf, M. (2015, September 1). Column: China risks an economic discontinuity. Financial Times.
Retrieved from http://www.ft.com/intl/cms/s/0/cfe855be-5092-11e5-8642453585f2cfcd.html#axzz3nOC07tLw
Lee, Liu, Syed. (2012) IMF Working Paper: Is China Over-Investing and Does it Matter? Retrieved
from: https://www.imf.org/external/pubs/ft/wp/2012/wp12277.pdf
Wolf, M. (2015, September 15). Column: A New Chinese export recession risk. Financial Times.
Retrieved from: http://www.ft.com/intl/cms/s/0/486bc716-5af0-11e5-9846-de406ccb37f2.html#ftarticle-comments
The Economist Hong Kong. (2006, November 2). Dim Sums: The Widely Held Belief that China
Over-invests is based on flawed figures. The Economist. Retrieved from:
http://www.economist.com/node/8108538
Law, F. (2015). Can All Chinese Debt Be Rated Top Quality? The Wall Street Journal. Retrieved
from: http://www.wsj.com/articles/can-all-chinese-debt-be-rated-a-1437942674
S.R. (2015, March 11). Why Chinas economy is slowing. The Economist. Retrieved from:
http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-8
Huang, Yanzhong. (2013, November 10). Population Aging in China: A Mixed Blessing. The
Diplomat. Retrieved from: http://thediplomat.com/2013/11/population-aging-in-china-a-mixedblessing/
Sharma, R. (2015, August 16). A Global Recession May Be Brewing in China. The Wall Street
Journal. Retrieved from: http://www.wsj.com/articles/a-global-recession-may-be-brewing-in-china1439764500
Buttonwood. (2015, September 9) Forecasting a global recession. The Economist. Retrieved from:
http://www.economist.com/blogs/buttonwood/2015/09/economics
Spence, P. (2015, September 2015). China leading world towards global economic recession, warns
Citi. The Telegraph UK. Retrieved from: http://www.telegraph.co.uk/finance/chinabusiness/11854084/China-leading-world-towards-global-economic-recession-warns-Citi.html
Ro, S. (2015, August 11). China is the worlds largest consumer of most commodities. The Business
Insider. Retrieved from: http://www.businessinsider.com/chinas-share-of-global-commodityconsumption-2015-8?IR=T&
Mukherji, B. (2015, August 11). With Yuan Devaluation, China Digs A Hole for Commodities. The
Wall Street Journal. Retrieved from: http://www.wsj.com/articles/with-yuan-devaluation-china-digsa-hole-for-commodities-1439292219

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Koh, GQ. (2015, May 27). China President stresses market forces in reforms: media. Reuters.
Retrieved from http://www.reuters.com/article/2014/05/27/us-china-economy-reformsidUSKBN0E71C320140527
Reuters in Beijing. (2015, September 13). China unveils plan for partial privatisations as economy
cools. The Guardian. Retrieved from: http://www.theguardian.com/business/2015/sep/13/chinapartial-privatisations-economy-cools
Shao, XY, Subler, J. (2015, September 30). China cuts downpayment requirement to boost property
sector. Reuters. Retrieved from: http://www.reuters.com/article/2015/09/30/us-china-economyproperty-idUSKCN0RU16420150930
The Wall Street Journal. (2015, September 22). Full Transcript: Interview With Chinese President Xi
Jinping. The Wall Street Journal. Retrieved from: http://www.wsj.com/articles/full-transcriptinterview-with-chinese-president-xi-jinping-1442894700

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Tay Qi Hang (Director, SPEX)

Rachel Tan Yi (Writer)

Undergraduate

Undergraduate

School of Economics

School of Economics

Singapore Management University

Singapore Management University

qihang.tay.2013@economics.smu.edu.sg

rachel.tan.2014@economics.smu.edu.sg

Meghana Hari Prasad Sunku (Creative

Director)

Jin Zhiyan (Writer)

Undergraduate
School of Economics
Singapore Management University

Undergraduate
School of Business
Singapore Management University
zhiyan.jin.2015@business.smu.edu.sg

meghanas.2012@economics.smu.edu.sg
Valerie Hew Kai Shuen (Writer)
Undergraduate
School of Accountancy
Singapore Management University
valerie.hew.2013@accountancy.smu.edu.sg