Strategic Asia 2009-10: Economic Meltdown and Geopolitical Stability

China and the International Financial Crisis

executive summary This chapter examines how the global financial crisis has affected China’s economy and geopolitical status. main argument: The global economic crisis came to China as large scale lay-offs in construction preceded the collapse of exports, which triggered massive additional unemployment. China’s strong fiscal situation, low leverage, and relatively strong banks left ample room, however, for aggressive fiscal and monetary stimulus to beat the recession. China is emerging from the crisis sooner than any other large economy, and the crisis will probably accelerate China’s rise and expand China’s global leadership role in the economic and financial arena. policy implications: • The U.S. must continue to accommodate China as a rising power, in part by intensifying and expanding the bilateral dialogue with China, as agreed upon between Presidents Obama and Hu at the April G-20 summit. • An informal G-2 relationship to provide leadership on global governance issues such as climate and energy should be promoted, but not at the expense of other international forums for consultation and decisionmaking. • The U.S. must understand that the crisis has damaged its credibility in the financial arena and that emerging economies such as China will intensify their search for alternative models of finance while promoting SouthSouth economic relations. • The U.S. has to both rebalance its own economy by keeping consumption growth below GDP growth for an extended period and strengthen its international competiveness by improving infrastructure, public education, health care, energy efficiency, social security, fiscal responsibility at all levels of government, and financial regulation. China Pieter Bottelier is Senior Adjunct Professor of China Studies at the School of Advanced International Studies (SAIS) at the Johns Hopkins University. He can be reached at . China and the International Financial Crisis Pieter Bottelier How has the economic crisis affected China’s economy? This chapter argues that while the crisis has been painful, particularly in terms of declining exports and unemployment, China has been weathering the economic storm fairly well, in part due to the country’s strong financial and fiscal position at the onset of the crisis. Despite the crisis, China will continue market reform and financial system development in the same direction as before, though with more caution and a renewed emphasis on the role of the state as owner of strategic facilities, provider of social services, market regulator, and promoter of regional equality. As a result, China is already emerging from the crisis, sooner than the United States. or any other large economy. In light of the government’s strong awareness of the need to rebalance its economy—that is, to reduce dependence for growth on manufacturing investment and exports—it seems likely that China will intensify efforts in that direction when the crisis is over. What effect then will this global financial crisis likely have on China’s foreign policy and global status? A relatively enhanced economic position will probably accelerate China’s rise and will lead Beijing to take on an expanded global leadership role in the economic and financial arena. China will, for instance, promote the international use of the renminbi as a settlement currency while at the same time pushing for international monetary reform. China will also promote South-South trade so as to reduce dependence on consumer markets in the advanced economies and improve access to raw materials. 72 • Strategic Asia 2009–10 This chapter is organized as follows. The first section provides an overview of the state of China’s economy in late 2008 and early 2009. The next section tackles the question of whether China—given the trade and larger economic imbalances that have been building up for years—was a contributing factor behind the global financial meltdown, and finds that China’s exploding current account surplus had less to do with the country’s exchange rate policy than with exceptionally high productivity growth in manufacturing, a topic that is the subject of section three. The fourth section identifies the impact that the crisis has had on China, arguing that China’s economy was relatively well positioned to respond to the crisis and emerge even stronger. This is followed by a section that overviews how China has responded to the crisis. The sixth section shifts focus to the crossstrait relationship, given the importance of the relationship between the two sides, and finds that the crisis will likely result in China continuing efforts to strengthen economic, financial, and...