strategic asia 2009 10 economic meltdown and Geopolitical Stability Edited by Ashley. ellis, Andrew Marble, and ravis anner 2009 he National ureau of Asian Research Country Studies China and the International inancial Crisis Pieter ottelier restrictions on use: his PD is provided for the use of authorized recipients only. or specific terms of use, please contact <publications@nbr.org>. o purchase the print volume Strategic Asia 2009 10: Economic Meltdown and Geopolitical Stability in which this chapter appears please visit <http://www.nbr.org> or contact <orders@nbr.org>. 1215 ourth Avenue, Suite 1600 Seattle, Washington 98161 USA 206-632-7370
executive summary his chapter examines how the global financial crisis has affected China s economy and geopolitical status. 2009 he National ureau of Asian Research main argument: he 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: he 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 u 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. he 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 South- South economic relations. he 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 China and the International inancial Crisis Pieter ottelier 2009 he National ureau of Asian Research ow has the economic crisis affected China s economy? his 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 eijing 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. Pieter ottelier is Senior Adjunct Professor of China Studies at the School of Advanced International Studies (SAIS) at the ohns opkins University. e can be reached at <pbottel1@jhu.edu>.
72 Strategic Asia 2009 10 his chapter is organized as follows. he first section provides an overview of the state of China s economy in late 2008 and early 2009. he 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. he 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. his is followed by a section that overviews how China has responded to the crisis. he 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 personal ties with aiwan so as to reduce tensions. A final section summarizes how a post-crisis China will approach U.S.-China relations and issues of global governance. 2009 he National ureau of Asian Research China s Economy on the Eve of the Crisis China was looking forward to the year 2008. It was going to be the year of the eijing Olympics, which given that 8 is a lucky number in China was to be opened on the 8th day of the 8th month at 8 minutes past 8 o clock in the evening (People pay extra for license plates and telephone numbers including 8). he nation had been preparing for the Olympics for years, eager to show the world the enormous economic progress it had made. he economy was booming. he private sector had been leading the state sector in output and employment for at least a decade. Many state-owned enterprises (SOE) had finally become competitive and dynamic. he growth rate for 2007, initially set at 11.9%, was later revised to 13%, the highest since 1994 (igure 1). After ten years of reform, China s banking sector was in good shape, shielded from the global financial crisis by capital controls and the ability to expand lending quickly. China had become the world s second-largest exporter in 2006, poised to overtake apan as the secondlargest economy in 2009 or 2010 (assuming no significant yen appreciation). Yet 2008 turned out to be a troubled year for China. hough the Olympics were highly successful, many other things went wrong:
ottelier China 73 f i g u r e 1 GDP growth rates for China, India, Russia, razil, and the United States, 1980 2008 Annual growth (%) razil China India 20 Russia United States 15 10 5 0 5 10 15 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year 2009 he National ureau of Asian Research s o u r c e : GDP Growth(Annual %) World Development Indicators, World ank, http:// web.worldbank.org. n o t e : 2008 data and 2007 data for China is from International Monetary und, World Economic Outlook, anuary 2009, http://www.imf.org. Severe snow and ice storms in the beginning of the year in southern China, where frost is rare, disrupted traffic and power supplies. his disruption fueled inflation that had started around the middle of 2007 as a result of shortages of pork and steep international price increases for imported wheat, soy beans, oil, and minerals. In March there was serious unrest and anti-chinese violence in ibetan areas. he Chinese government sent in troops to restore order, invoking intense criticism around the world and calls for an international boycott of the eijing Olympics. In April the tour of the Olympic torch, carried by Chinese athletes through major cities around the world, became a lightning rod for anti-chinese sentiment, especially in California, rance, and the Czech Republic. In December rench President Nicolas Sarkozy met with the Dalai Lama in Poland, causing China to cancel a Sino-EU summit meeting later that month. 1 1 he summit was ultimately held in Prague on May 18, 2009.