Is China an island of stability in the midst of the gathering global financial storm, or will it, too, soon be sucked into the vortex?
Chinese officials have said that the crisis that began in the US will not slow down long-planned reforms in the financial markets.
They insist that China will go ahead with plans to introduce margin trading, short selling and futures contracts on share prices.
But China slowed capital-account liberalization after the Asian financial crisis 10 years ago, so it is possible that the US’ troubles could make China more cautious.
China has played an important role in financing the US budget deficit in recent years, thanks to its effort to manage the yuan’s exchange rate against the dollar.
China does not want its large current-account surplus to cause the currency to overshoot on the upside, and it may now want to slow the yuan’s appreciation because of concern about the global economic slowdown.
If so, China would have to expand its foreign exchange reserves by another US$300 billion to US$400 billion, which would allow it to finance the large expansion in the US fiscal deficit.
Recent slight declines in the value of the yuan suggest that China’s exchange rate policy may be changing with the 20 percent appreciation of the currency since July 2005.
German Finance Minister Peer Steinbruck has said that the crisis will reduce US financial hegemony and create a more multipolar world.
The Sept. 26 edition of the China Daily carried an article by Steinbruck asking, “Is the Sun Setting on US Economic Supremacy?” It reviewed examples of how foreign investors have lost money in the US market and concluded: “The outbreak of the latest crisis shows that the neo-conservative revolution launched in the [1980s] has already come to an end.”
The article attributed the crisis to policies that “called on market forces to be given full play with the scrapping of government controls, especially on the financial market.”
Chinese officials have not yet echoed Steinbruck’s comments, but the US experience will naturally make them more suspicious of Western investment bankers and US-style regulation.
China has so far lost money on two of its major investments in Western financial firms (Morgan Stanley and Blackstone). It could have helped to contain the current crisis if it had accepted invitations to invest in Lehman Brothers, but given its previous losses on Wall Street, it declined.
As a result of concern about the global economy, the People’s Bank reduced interest rates two weeks ago and joined the coordinated global interest rate cut on Oct. 8 — the first time that China ever participated in a global monetary policy move.
The government also announced plans earlier this month to increase infrastructure spending by US$586 billion next year and in 2010.
The projected spending increases are equal to 15 percent of GDP, and are the largest that any country has undertaken so far in response to the financial crisis.
They demonstrate clearly that China is prepared to compensate for export weakness by stimulating domestic demand.
China must now take further action to bolster consumer spending, which slumped to only 36 percent of GDP last year from more than 50 percent during the 1980s, owing to the economy’s heavy dependence on exports and capital spending since the late 1990s.