“The financial crisis is not yet over..., but our work so far indicates that our measures are effective. People across the country should be proud of it," Wen Jiabao, Chinese Premier, Interview with Xinhua News Agency, December 27, 2009.Many Chinese scholars believe that the current global financial crisis, triggered by the U.S. subprime crisis, is even worse than the Great Depression of the 1930s. Indeed, this crisis has dealt a heavier blow to China’s economy than the Asian crisis in 1997. The Chinese government took immediate anti-crisis measures, which have been quite effective and successful. 

 

This paper will first look at the impact of the crisis on China and then discuss what has been achieved by the anti-crisis measures over the past two years. Finally, it will review what the Chinese scholars have said about the nature and origins of the crisis.

 

I. What Is the Impact of the Crisis on China?

 

Three decades of reform and opening to the outside world has made China’s economy increasingly integrated with the world. Consequently, the global financial crisis created very serious negative repercussions upon the Chinese economy. In his speech to the Annual Meeting of the New Champions (or Summer Davos), hosted by the World Economic Forum in Tianjing, China, on September 27, 2008, Premier Wen Jiabao said that one of the difficulties for the Chinese economy was the world economic environment, which “is getting tougher and more complex, with exacerbated financial volatility and notable economic slowdown. ”[1]

 

The most immediate impact was on China’s real economy. Exports to the United States, Japan and Europe account for around 40 percent of China’s total exports. As a result, weak demand from the developed countries, along with protectionist policies in many parts of the world, made it hard for China to sustain the momentum of expanding exports. In November 2008, China’s foreign trade stopped to grow for the first time in seven years. By August 2009, it had declined for ten consecutive months.[2] In the first six months of 2009, monthly exports fell to less than US$100 billion, and in February, it was only US$64.9 billion.[3]

 

When exports fell, factories in the coastal areas and other parts of China had to lay off workers or even shut down. According to Li Yizhong, Minister of Industry and Information Technology, a sample survey indicated that, by the end of 2008, 7.5% of China’s medium- and small-sized enterprises were forced to stop production.[4] It was reported that, due to reduced exports, more than 2 million migrant workers had to leave the workshops and returned to their rural homes.[5]

 

Entering 2009, although some economic indicators improved, the whole situation did not get better. In his government report to the annual session of the Chinese legislature in March 2009, Premier Wen Jiabao said that the global financial crisis continued to spread and got worse because demand kept on shrinking on international markets and trade protectionism was resurging. “The external economic environment has become more serious, and uncertainties have increased significantly…Continuous drop in economic growth rate due to the impact of the global financial crisis has become a major problem affecting the overall situation. This has resulted in excess production capacity in some industries, caused some enterprises to experience operating difficulties and exerted severe pressure on employment,” said Premier Wen Jiabao. [6]

 

In an interview with the Xinhua News Agency on December 27, 2009, the Premier gave a vivid account of China’s economic situation after the global financial crisis happened.  He said that the year 2008 was really “frightening”. He recalled that at the end of 2008, he saw mountains of mineral ores piling up on the docks, simply because production was bleak. “These mineral ores were bought at high prices and were expected to be sufficient for production till June 2009.  The Baltic Dry Index had dropped from ten thousand points to several hundred. In November 2008 I went to Shengzhen and then to Dongguan for inspection. I was told that the largest container manufacturing plant in China could not get one single order.  Many workers were laid off and the migrant workers had to return to their villages. We were so saddened. We did not know how serious the damages caused by disaster would be, nor did we know how long it would last.”[7]

 

Due to weak external and domestic demand, China’s gross domestic product (GDP) growth rate fell from 13.0% in 2007 to 9.6% in 2008 and the 2009 figure would be lower.

 

In addition to exports and slowed GDP growth, there are some other damages. For instance, China’s foreign exchange reserves, totaling US$2.27 trillion by September 2009,[8] has witnessed erosion of its international purchasing power. Furthermore, China’s overseas assets also suffer from the U.S. subprime crisis and the subsequent global crisis.  By the end of June 2008, the total amount of U.S. bonds, mainly of Freddie Mac and Fannie Mae, held by the Chinese government and commercial banks, stood at more than US$470 billon.[9] The value of these bonds has been greatly reduced by the crisis and the devaluation of the U.S. dollar.

 

On the whole, however, the Chinese banks were not badly affected. According to Liu Mingkang, Chairman of the China Banking Regulatory Commission, the country's banking regulator, the global economic crisis had not taken a big toll on China's banking industry as the after-tax profits reached RMB583 billion (US$85.23 billion) in 2008, a growth rate of 30.6 percent over the previous year. The return on equity (ROE) in the banking sector was 17.1 percent in 2008, 0.4 percentage points higher than in 2007 and 2 percentage points higher than in 2006. This figure was significantly higher than the average ROE of the global banking industry.  “For 2009, I believe Chinese banks will grow faster than the country's economy,” said Liu Mingkang.[10]

 

The reason why the Chinese banks can weather the storm is two-fold. On the one hand, China’s financial opening is quite limited and the banks have had modest exposure to the outside world. On the other, the Chinese government had already taken up many measures well before the crisis.  As a result, the banks seem to have become stronger.

 

It is interesting to note that, many Chinese, including scholars and netizens, believe that the global financial crisis is also a rare opportunity for China to make significant adjustment of its development model. It is suggested that the focus of the adjustment should be placed on 1) reducing dependence upon exports of low value-added goods; 2) paying more attention to environmental protection and efficient use of energy and resources; 3) preventing over-investment to avoid surplus production; and 4) stimulating domestic demand by raising the income of the rural residents and improving income distribution.

 

II. What Are the Anti-crisis Measures?

 

The most impressive anti-crisis measure in China emerged on November 5, 2008, at the executive meeting of the State Council chaired by Premier Wen Jiabao. A stimulus package, totaling RMB4 trillion (about 570 billion U.S. dollars), was approved at the meeting. This huge amount of money would be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructures, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the Wenchuan earthquake on May 12, 2008.

 

At this meeting the State Council also decided to adopt “active” fiscal and “moderately active” monetary policies and implement more forceful measures to expand domestic demand, speed up the construction of public facilities and improve living standards of the poor. [11]

 

The 2008 central economic work conference on December 8-10, 2008, reaffirmed the government’s anti-crisis policies and pledged to strive for continued economic growth in 2009 through domestic demand expansion and economic restructuring.[12] It was agreed that proactive fiscal policy and moderately easy monetary policies would be pursued in 2009. It was also accepted that the anti-crisis measures should be implemented towards 1) maintaining growth; 2) expanding domestic demand; 3) adjusting economic structures; and 4) improving the living standards of the people.

 

Soon after the 2008 economic work conference, the National Development and Reform Commission, the most important governmental body in China to design and implement economic policies, announced that eight specific and concrete lines of policy would be carried out in 2009: 1) to stimulate domestic demand and expand investment scale; 2) to promote agricultural development by supporting grain production and raising farmers’ income; 3) to upgrade economic structures; 4) to eliminate barriers in the economic system; 5) to export more high-tech intensive and labor intensive products and at the same time import advanced technology and raw materials; 6) to reduce carbon emission and protect the environment; 7) to improve social welfare; and 8) to strengthen institutional building.[13]

 

In his government work report to the annual session of the People’s Congress in early March 2009, Premier Wen Jiabao set out the economic growth target of 8 percent in 2009. “As long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve this target,” Wen Jiabao said at the Second Session of the 11th National People's Congress.

 

The international press spoke very highly of China’s 8 percent growth target.[14] It is interesting to point out that anticipation for China was so high that, as the joke goes, China was expected to save the world.[15]

 

The purpose of maintaining the target of 8 percent growth is to control the unemployment rate. For most Chinese, employment is the only way to make a living. If unemployment rises, social tensions will worsen, thus jeopardizing the efforts to build a harmonious society. It is calculated that one percentage point of GDP growth rate can generate one million employment opportunities. Only 8 percent of GDP can absorb the increase of migrant workers and university graduates entering the job market.[16]

 

According to the 2010 blue book of China’s economy, a yearly publication which has gained prestigious reputation for its authoritative prediction and analysis, China’s GDP growth rate for 2009 can reach 8.3 percent, meaning that the target set out by the government early in the year will be realized. And, the blue book predicted, if the world economy will not get worse and there will not be large-scale natural disasters, China’s GDP growth rate might able to reach 9 percent in 2010.[17]

 

During his third official visit to China as World Bank Group president in early September 2009, Zoellick spoke highly of China’s decisive action to help stabilize the world economy.  He also praised China for its efforts to re-balance its economy towards greater domestic demand, “Through its massive stimulus and strong lending program, China has contributed to the early signs of a global recovery by keeping its growth rate up. With growth in China now projected at close to 8 percent for 2009 as a whole, and signs of stabilization in many other economies in Asia and around the world, the chances of a truly global recovery have increased measurably,” said Zoellick.[18]

 

However, China’s economic situation is not without problems. First, deficient demand, manly in the form of production surplus, still exists.[19] Second, increase of credit has created a rapid rise of prices in the stock and housing markets. Third, fixed capital formation is growing too rapidly.  Fourth, inflation pressure is also on the rise.

 

Indeed, over the last three decades, China’s economic growth rate has been remarkably high, but this growth is investment-driven. Furthermore, the environment has been degrading rapidly. Now the global crisis has made it more imperative to transform the Chinese economic structures. It is hoped that the Chinese economy will reduce its dependence on foreign trade and investment, increase domestic demand and consumption, and utilize resources more efficiently. Some of the anti-crisis measures, however, have made it hard for China to achieve these objectives.  For instance, in order to maintain the momentum of increasing exports and curb unemployment rate, many of the medium- and small-sized enterprises producing low value-added products or polluting the environment are not to be shut down. It is an irony that new steel mills have to be constructed so that overcapacity of iron and steel can be absorbed.

 

Not a few Chinese scholars are concerned that the global crisis might have a negative impact on the nation’s structural adjustment. According to Zhang Min, sub-chief of the Division for International Finance at the Institute of World Economy and Politics, CASS, in order to mitigate the impact of the global crisis, “the Chinese government might postpone or even cancel some of its structural adjustment policies.” One example Zhang Min noted is the possibility of reviving real estate investment. Therefore, he warned, “The longer the adjustment is postponed, the greater the final impact of the collapse will be. The Chinese government should take note from the Japanese experience in the late 1980s.”[20]

 

It is encouraging to see that the 2009 central economic work conference, held in early December 2009, vowed to continue efforts in 2010 to boost domestic demand and control investment growth.[21]

 

III. What do the Chinese Scholars Say?

 

Predicting a crisis in the making is not an easy job. During a visit to the London School of Economics, the British Queen asked why no one had predicted that the “credit crunch” was about to happen. Then, a group of eminent British economists wrote to her explaining why no one foresaw the timing, extent and severity of the recession.[22]

 

But a few Chinese scholars succeeded in foreseeing that the U.S. was going to fall into a crisis. For instance, Li Shengmin, Vice President of the Chinese Academy of Social Sciences (CASS), and concurrently Director of the Research Center of World Socialism (RCWS) at CASS, predicted as early as in 1999 that “there is a hidden crisis in the U.S. economy and the crisis would be very serious.”  He also cautioned that “we must conduct more research work on the bubble economy in the United States and try to find ways of dealing with it. If the U.S. bubble economy should collapse during the period from 2020s or 2030s to the mid-21^st century, the world will suffer greatly.”[23]

 

Li Shengmin expressed similar views in his speech to the second international conference on economic globalization and development, held in Havana, in January 2000. He said, “It is very likely that the U.S. economy will fall into great recession.  The problem is that we do not know when it happens.” His prediction was based on the following seven aspects of the U.S. economy: a bubble in the stock market; US$6 trillion internal and external debt; excessive printing of the dollar; rising trade deficit; too much consumer credit; the baby-boomers coming to their retirement age and the social security system was not ready for it. In this speech, Li Shengmin warned, “If the U.S. economy is caught in deep trouble, not only the Third World, but also the global economy, will witness a great catastrophe, and its severity might be larger than the Great Depression in the 1930s.” He suggested that leaders of the Third World countries should take this factor into consideration when they make mid- and long-term development strategy.

 

In this speech, Li Shengmin shortened the prediction of the U.S. economic crisis from 20~ 50 years he made in his 1999 paper to 10~20 years. “If the U.S. economy should have a great disaster in 10~20 years, the world we are living in would certainly be a turbulent one,” said Li at the conference in Cuba. As Wang Liqiang, Secretary-General of RCWS, said in the preface to the book U.S. Dollar Hegemony and the Economic Crisis: Analysis of Today for the Current Economic Crisis, published in July 2009, “There is no doubt that Li Shengmin’s warning about the current U.S. crisis was one of the earliest prediction.”[24]

 

According to Wang Liqiang, researchers affiliated with RCWS made two important observations in 2007. 1) Economic globalization and high-tech revolution might be able to make it possible for the U.S. economy to avoid the repercussions from the crisis, but it cannot escape from the law of a long-term crisis. The Kondratiev wave could apply to the U.S. economy, which had been falling in the declining period of the wave starting from 1967. The rapid growth from March 1993 to March 2001 was only a special exception to the wave. Since March 2001 it started to move into a declining period again, and this period would last two or three decades or even longer. 2) If the U.S. economy had inherited the declining wave, what would happen? Was it possible for the United States to use all means to destroy other big countries or powers as it did to the Soviet Union in the 1990s? If its objective could materialize, its economy might be able to grow again and the arrival of the declining period of the Kondratiev wave could be postponed.[25] 

 

In the yearly-published yellow book on the world economy at the end of 2003, Yu Yongding, then the Director of the Institute of World Economics and Politics, CASS, said, “In the past several years, in the United States and Europe, housing prices have been rising steadily, offsetting the negative effect of a sudden drop in the stock market on consumer demand. To a large extent, the real estate boom was the result of the U.S. Federal Reserve’s low interest rate policy.  We cannot exclude this possibility: with the recovery of the global economy, interest rates might climb due to some unexpected reasons, causing a crash in the housing market and exerting great damages to the economy.”[26] At that time Yu Yongding was among the very few Chinese economists who noticed the danger of a bubble bursting in the U.S. real estate market. [27]

 

Regarding the root causes of the U.S. subprime crisis and the subsequent global financial crisis, Chinese scholars have different views, which can be summarized into two categories: one is in an ideological perspective, i.e., criticizing the nature of capitalism and free market, and the other is from a purely technical angle, i.e., focusing on economic policies.

 

Wang Weiguang, Executive Vice President of CASS, proposed that, in the face of the global financial crisis, it is imperative to read Karl Marx’s Das Kapital and Vladimir Lenin’s Imperialism: the Highest Stage of Capitalism once again. He says, “In order to understand the nature and causes of the crisis, we must make use of the Marxist position, viewpoints and methodology.” According to Wang Weiguang, also a well-known professor, the best way to understand the nature and causes of the crisis is to borrow the scientific methodology of Marxism in understanding the dual contradictions of commodity. He said, “Without further understanding of the nature and deep roots of the crisis, China would not be able to design effective measures to protect its national economy; nor could it guard against such crisis in the future…A combination of market economy with socialist system is the best way to avoid such a crisis for China.”[28]

 

Ru Xin, former Vice President of CASS, said that the global financial crisis is both a good thing and a bad thing.  “It’s a bad thing because the crisis has dealt a heavy blow to the world economy and also to China’s economy.  It’s a good thing insofar as the crisis has made us understand the nature of capitalism more clearly and strengthen our determination to walk on the path of socialism with Chinese characteristics. At the same time, it will also make us adjust our steps accordingly,” said Ru Xin.  

 

Ru Xin declared that it is highly necessary to study Marx’s Das Kapital and Lenin’s Imperialism: the Highest Stage of Capitalism once more. He said, “Some years ago we often heard some people argue that Das Kapital was about capitalism in the nineteenth century and Lenin’s Imperialism: the Highest Stage of Capitalism was about capitalism before the World War I. These people argue that the two books have been outdated because contemporary capitalism has corrected all its past mistakes and revived its youthfulness and vigor.  According to these people, capitalism has become a paradise. But the current global financial crisis has crashed their dreams.”

 

Ru Xin warned that “Never take capitalism as panacea.  Never believe in the ‘invisible hand’ in a blind way.  Otherwise, we shall suffer a great deal. Planning and market are only instruments. Never take these instruments as the objective.”[29]

 

Some Chinese scholars blame the root cause of the global financial crisis on greed and selfishness inherent in capitalism. As Zhang Jianyun, Associate Professor from the Academy of Marxism, CASS, said, “The tycoons on the Wall Street have clearly shown how greedy they are! Just look at their salaries.  Henry Paulson, Jr., former Chairman and Chief Executive Officer of Goldman Sachs, earned US$38 million for his bonus in 2005. ” Zhang went on to say that the U.S. government is as greedy as these people on the Wall Street. “Through financial manipulation and innovation and printing the dollars, the U.S. is able to enjoy a luxurious life by spending other nations’ money.  That is the same as asking people around the globe to buy houses, cars and expensive goods for the poor people of the America,” said Zhang.[30]

 

Some Chinese scholars also consider neoliberalism as the cause of the crisis. Xu Haiyan, an assistant researcher from the Institute of Political Sciences, CASS, said, “The U.S. financial crisis is the inevitable end of the neo-liberal policies pursued by the U.S. government over the past three decades.” According to Xu Haiyan, the major western nations saw their market system and capitalist economic institutions as a “hero” defeating socialism in the Soviet Union and Easter Europe. “Consequently, they believed that neoliberalism is a panacea. In reality, however, neoliberalism made the former Soviet republics and Eastern Europe move backward for twenty years. It also caused Latin America to miss a chance of development for a decade,” said Xu Haiyan.[31]

 

Zhao Lei, a professor from the Southwestern University of Finance and Economics, tried to play down some scholars’ attempt to blame the crisis simply on lack of regulation and supervision, policy mistakes, underestimation of the financial risks, etc.  According to Marx’s theory, he argued, the crisis was brought forward by surplus production.  “Marx’s framework of analyzing the contradictions of capitalism is not outdated,” said Zhao Lei.[32]

 

Many Chinese scholars are not for the ideological analysis. They would like to dig out the root cause in the light of policy mistakes on a technical level.  Wang Guogang, a professor from the Institute of Finance and banking, CASS, asked the following questions before offering his explanation about the origin of the crisis: Why could only US$1.3 trillion of subprime debt, or 12 percent of total mortgage debt, cause a crisis of enormous magnitude? Why did nobody pay any attention to the long-term drop of the housing price in the United States? Why were proper measures not taken to deal with the devaluation of the subprime mortagage?  How could the financial institutions that have issued mortgage loans escape from the crisis whereas others sank into deep trouble? Why should the loss of the values of the subprime debts generate such massive cross-border repercussions? “With these questions in mind, we have to acknowledge that the U.S. subprime crisis is not a subprime debt crisis; it is a crisis of securitization of the subprime mortgage credit. As the name suggests, the nature of the crisis is not “subprime”. It has to do with securitization,” said Wang Guogang.

 

According to Wang Guogang, shortcomings in the mechanism of asset securitization were magnified by the securitized derivatives, leading to a financial crisis. “This has nothing to do with market failure.  This is simply the punitive result of going against market mechanism,” Wang Guogang argued.[33]

 

Zhang Min believed that there are three major reasons that can explain why the U.S. subprime crisis happened at last. First, the loose monetary policy pursued by the U.S. Federal Reserve led to an over-expansion of the housing market. Second, rapid development of the financial derivatives was not accompanied by strict and proper regulation and supervision.  Finally, imbalance of international payments created an over-supply of liquidity on the world financial market.[34]

 

Yu Ze, a professor from the People’s University of China, argued that both the U.S. subprime crisis and the subsequent global crisis were the result of 1) discontinuity of U.S. technological innovation after the IT revolution, and 2) the speed of capital deepening surpassing technological progress. He believed that the United States adopted a model of accumulating public and private debts so as to correct these shortcomings.  This model did help raise profitability rate for the business, but could not avoid a debt crisis. “As there are new financial instruments at hand, the debt crisis took the form of subprime mortgage crisis. But its nature is the same as that of crisis in the past,” said Yu Ze.[35]

 

Some Chinese scholars would like to combine the above two categories of examination, i.e., a critique of capitalism from an ideological point of view and an analysis of the policy mistakes in technical dimension, into one. For instance, according to Pang Jinju, a professor from the Nankai University, the U.S. subprime crisis was caused by policy mistakes (low interest rate and fiscal deficit), deficiency of risk management by the financial companies, and a belief in neoliberal theory. However, he said, these factors were not the most important. The deepest root of the crisis was the disparity between excessive expansion of production and a lack of demand with purchasing capacity.  “This is the fundamental contradiction of capitalist system where production is socialized but means of production is privatized,” Pang Jinju said.[36]

 

IV. Concluding Remarks

 

As the Chinese economy has been increasingly integrated with the world, the U.S. subprime crisis and the subsequent global financial crisis have dealt a heavy blow to China. The anti-crisis measures implemented by the Chinese government are effective and successful. The relatively high growth rates in 2008 and 2009 have contributed to the world economic recovery.

 

Chinese scholars have different views towards the causes and origins of the U.S. subprime crisis and the subsequent global financial crisis. In the ideological dimension, contradictions of the capitalism, i.e., socialization of production and privatization of means of production is to blame. In a technical sense, the crisis was caused by policy mistakes, including over-reliance on financial derivatives, lax regulation and supervision, a bubble caused by uncontrolled expansion of the housing market, etc. it seems that the best way to understand the nature and origins of the crisis is to combine the two analyses.