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Global Financial Crisis and the Chinese Response

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Global Financial Crisis and the Chinese Response Task Force 2010 Professory Gary Hamilton Writers: Evaluator David Tang Callista Bevans Arielle Kloss Nathan Gardner Dimitar Anguelov Elizabeth Lyons Stefan Myers Nathan Snyder Kendall Smith Youn Gee Lee Tim Quijano Chris Schulz Aaron Larsen Andrew Calkins Zhi Wei Wan Editors: James Connelly Michael Grubb Student Coordinator: Justin Henning University of Washington Jackson School of International Studies Contents Acronyms . 4 Executive Summery . 5 China and a Changing Global Landscape . 11 Chapter One: Background Chapter Introduction . 19 Section 1.1 China’s Emergance as a Market Economy . 22 Section 1.2 From a Japanese to a Chinese centered Asian Production Network . 33 Section 1.3 Global Integration . 43 Chapter Two: The Financial Crisis and the Chinese Response Chapter Introduction . 58 Section 2.1 Immediate Effects in China . 68 Section 2.2 China’s Fiscal Stimulus and Implications for the Future . 76 Section 2.3 China’s Monetary Response to the Great Recession . 86 Section 2.4 China Today . 101 Chapter Three: Challenges to Continued Chinese Economic Growth Chapter Introduction . 131 Section 3.1 Structural Changes in the Chinese Economy . 133 Section 3.2 Perilous Growth . 145 Section 3.3 Political and Social Challenges . 159 Chapter Four: Lessons and Policy Considerations Chapter Introduction . 170 Section 4.1 US Economic Policy Towards China . 173 Section 4.2 US Policy towards Chinese Dimlomatic and Economic Engagement . 187 Section 4.3 Renewing America’s Economy . 196 Towards a New American Strategie . 205 List of Figures . 217 Bibliography . 219 China and the Great Recession of 2007-2009 4 Acronyms AGOA: African Growth and Opportunity Act ASEAN: Association of South East Asian Nations BP: British Petroleum CCP: Chinese Communist Party CDS: Coastal Development Strategy CNPC: China National Petroleum Corporation EP: Export Processing EPB: Economic Planning Board EPZ: Export Processing Zone FDI: Foreign Direct Investment FIE: Foreign Invested Enterprise FTA: Free trade area FTC: Foreign Trade Regime G-3: Japan, the European Union and the United States GDP: Gross Domestic Product HRS: Household Responsibility System IEA: International Energy Agency IT: Information Technology NBS: National Bureau of Statistics NDRC: National Development and Reform Commission NIC: Newly Industrialized Country NPL: Non-Performing Loan OECD: Organisation for Economic Co-operation and Development OT: Ordinary Trade PBoC: Peoples Bank of China PRC: People’s Republic of China R&D: Research and Development RMB: Renminbi SEPA: State Environmental Protection Agency SEZ: Special Economic Zone SME: Small to Medium Size Enterprise SNWDP: South-North Water Diversion Project SOE: State Owned Enterprise TVE: Township and Village Enterprise UNCLOS: United Nations Convention on the Law of the Sea UN: United Nations UNDP: United Nations Development Programme UNEP: United Nations Environment Programme US: United States WRI: World Resources Institute WTO: World Trade Organization Task Force 2010 China and the Great Recession of 2007 - 2009 Executive Summary Michael Grubb Introduction Increased Productivity and International Integration The following report goes about filling the mandate given by Beginning in 1978 China began making the transition from a the US-China Economic and Security Review Commission to command economy to a more market based economic system. create a report which evaluates (1) how the Chinese economy Throughout the 1980s a series of reforms liberalized portions continued to grow despite the global recession and a sharp of the economy, specifically in the agricultural sector and in drop-off in external demand for Chinese exports, (2) whether regions designated for access to foreign trade. The events at the example of China’s growth offers any lessons or challenges Tiananmen Square in June 1989 mark a turning point in this for American policy makers, and (3) offer policy guidance on transition, and led to further economic liberalization, increased how the United States, in the context of the global community FDI, and a move towards an export oriented growth model. at large, should interact with China and the Chinese economy given the observed and potential future policy direction of the • Section 2: From a Japanese to a Chinese centered Asian Chinese government. Production Network The report presents its analysis and conclusions in 13 sections, compiled into four chapters. The first chapter goes Before and during this time period a system of production had about laying out the historical context of the development of developed in East Asia, the locus of which was the Japanese the Chinese market economy in the second half of the 20th economy. However, in response to the currency revaluation century. The second chapter analyses the global financial crisis, achieved through the Plaza Accords in 1985, firms from the Chinese response to the crisis, and the implications of that Taiwan, Korea and Hong Kong began to invest more heavily response for the prospects of continued growth of the Chinese in China as a production platform, on account of China’s economy. The third chapter identifies specific areas which we relatively low labor costs. After the Asian Financial Crisis have identified as having the potential to impede the continued in 1997 investment was further redirected towards China, growth of the Chinese economy, looking specifically at solidifying China’s integration into the established East Asian economic, socio-political and environmental issues. The fourth production networks. and final chapter presents the specific policy recommendations of the report in regards to US macroeconomic, foreign and • Section 3: Global Integration domestic policy in light of the reports findings. The Policy recommendations put forth in various China became a member of the WTO on December 11, 2001. sections of the report are also included in this executive This was followed by a significant influx of FDI form the US, summary. Japan, Korea, Hong Kona, and Taiwan. China’s rate of economic growth increased greatly thereafter, as WTO membership Chapter 1: Background allowed for increasing linkages with regional and global trading networks. The US-China trade relationship has also grown in • Section 1: China’s Emergence as a Market Economy: the last decade, though the direction of trade between the China and the Great Recession of 2007-2009 6 two has been decidedly one-sided. China has amassed huge foreign currency reserves, enabling it to suppress the value of The Chinese renminbi (RMB) is artificially pegged to the its currency, as well as finance the growing US national debt. US dollar, and while this provides a certain advantage to China’s export sector, it imposes exceedingly high costs on the central government and inhibits their ability to use traditional monetary policy to steer the economy. In the face Chapter 2: The Financial Crisis and the Chinese of excess liquidity and rising real estate prices (on account Response of the fiscal stimulus) Beijing has implemented measures to curb bank lending and stave off inflation. The continued • Section 1: Immediate Effects in China: Contagion through use of non-market determined interest rates to regulate the Trade Channels, Not the Banking Sector economy has led to an inefficient allocation of credit with a preference towards SOEs, despite the increasing contribution The Chinese banking system remained quite strong during the of SMEs to China’s economic growth. The Chinese response financial crisis, as Chinese banks were not heavily invested in to the crisis entails unclear future costs, and marks a clear mortgage backed securities. As the recession deepened in the movement towards an increased level of state intervention in US there was an overall drop in external demand, and many the economy. foreign firms began to de-invest in China. It is estimated that 20million migrant workers in China lost their jobs on account • Section 4: China Today: the Effects of the Stimulus and of this drop in external demand, and the GDP growth rate Chinese Ambitions for Global Growth dropped to 6.1percent. China’s Asian trading partners were also negatively effected, as Chinese import demand also There has been steady growth in Asian exports since the decreased sharply. summer of 2009. The Chinese response during and after the recession has been integral to stabilizing not only • Section 2: China’s Fiscal Stimulus and Implications for Chinese economic growth, but also the continued growth of the Future interregional trade. An analysis of recent trends in Outward Foreign Direct Investment (OFDI) and reforms in the On November 5, 2008 Premier Wen Jaibao announced a banking sector reveal that Beijing has been rather reserved in RMB 4trillion ($586billion) fiscal stimulus package, the its approach to expanding government investment in these expressed goal of which is to mitigate the effects of the sectors. Despite continuing issues of transparency and “round- global downturn on China’s economy by providing aid to tripping”, which still surround Chinese OFDI, our analysis key industries, by creating jobs to offset unemployment and has shown that most of this investment is concentrated in reduced FDI and achieve 8 percent growth in 2009. Short ICT, clean technology and other business related IT and term demand has been successfully propped up through the financial services sectors. There are no clear signs that China stimulus, and the goal of 8 percent growth in 2009 has been is attempting to secure itself a more central role
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