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Posted 10 February 2009

Can China save the world from the current global financial crisis?

As an engine of global economic growth – accounting for about 34% of total growth in 2007 - can China provide enough momentum to pull the world out of the current economic recession?

In a recent public lecture at University College Dublin, Dr Liming Wang, Director of the UCD Institute for Chinese Studies, analysed the extent to which China, the world’s most dynamic emerging economy, has been affected by the global financial crisis.

“With a $2 trillion arsenal of reserves, little connection to foreign banks and a budget surplus, China may have the capability to perform as well as it did in the Asian financial crisis in the late 90s,” says Dr Wang.

According to Dr Wang, the Chinese government has announced a huge $600 billion fiscal-stimulus package and various measures to stimulate domestic demand in response to the global financial crisis.

Based on Purchase Power Parity (PPP), China is the second largest economy in the world; in terms of Market Exchange Rates, China is ranked the third largest, according to figures from the World Bank and the International Monetary Fund.

“However, China is the first “poor superpower” in contemporary history because China’s per capita income lags behind one hundred other nations. It is a rich country full of poor people,” explains Dr Wang.

“Chinese Premier, Wen Jiabo once said that any issue, no matter how big in China divided by a population of 1.3 billion people becomes small and insignificant, while alternatively, any problem, no matter how small and apparently insignificant, when it is multiplied by 1.3 billion, will be huge.”

China will be the only major economy in the world with a significant growth rate in 2009. Forecasts by economists range from 5.5 to 9%. “Maybe this is one of reasons why people are asking will China save the world from its present crisis,” says Dr Wang.

With close to $2 trillion in foreign reserves, a $29 billion trade surplus, and potentially undervalued currency yuan, it may seem that China is immune from the crisis – at least from a fiscal perspective. Unlike the rest of the world, China is not in debt.

“There is no credit crunch in the Chinese banking system, the government has been partly privatising its big 4 commercial banks in order to increase efficiency,” says Dr Wang.

“To this end, hundreds of billions of dollars of bad debts have been funded by the government. Furthermore, in the beginning of 2008, the government injected $20 billion into China Development Bank and $47 billion into the Agricultural Bank of China.”

However, according to Dr Wang, China has not been immune from the effects of the global financial crisis. Over the last three decades, the Chinese economy has been closely integrated into the world economic system, especially since its WTO entry in 2001. As the global economic crisis intensified, China’s exports have been hit mostly as a result of weakened demand from the US and Europe. In the last two months of 2008, there was actually a decline in exports (of 2.8%) from China for the first time in a generation.

Recent figures of a 9% of GDP growth rate in 2008 down from 13% in 2007, while still impressive, is fresh evidence of a serious slowdown caused by the global financial crisis. According to Dr Wang, apart from the current shrinking stock market and sluggish housing market in China, there are signs of a loss of momentum in the real economy, in sectors like export-oriented manufacturing, tourism, construction, steel and automobile industries.

“The future of the Chinese economy will surely hinge on not only the effectiveness of China’s fiscal stimulus package at home but its relationships with the US and European Union abroad,” says Dr Wang. The new round of economic growth and prosperity of the world will depend to a large extent on the health of the Chinese economy and other emerging markets like India. “China can not save the world, but the world can not now be saved without China,” concludes Dr Wang.


Dr Liming Wang - Biosketch

Dr Liming Wang completed an International MBA course in Sheffield Business School in 1989, and subsequently his PhD in Economics at Queen's University Belfast. From 2000, he worked as a Senior Research Fellow and Head of the China Unit at Queens, which is primarily involved in managing the expansion and development of Queen's links with China in teaching, research and joint programmes. In 2006, he was appointed to establish and manage the Irish Institute for Chinese Studies at UCD, and in 2007 he was also appointed as Director of UCD Confucius Institute for Ireland.

Dr Wang is currently the Chairman of the Association for Chinese Studies in Ireland, the Secretary General of Chinese Economic Association in the Europe and a Board Director of the Chinese Economic Association in the UK. His primary research interests include: Transitional Economics, Chinese Economy, China's Financial Market, China's Rural Development and Chinese Grain Economy.

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Can China save the world from the current global financial crisis?