China’s Macro-policy and Regulatory Framework of the Financial Sector to be Tested by the Global Economic Slowdown

Abstract

Aside from GDP growth figures, by any measure, China is acquiring all the hallmarks of a developed nation in terms of internet-usage, auto sales figures, and Starbucks- and KFC-density. China increasingly influences global economic activities and amidst the global recession 2008/09, China’s stability has become crucial to containing the global financial crisis. In contrast to the Asian financial crisis of 1997/98, the global financial crisis of 2007/09 has adversely affected the growth of GDP, net exports and employment, even though it took a cautious approach to capital liberalization and the degree of integration into global financial markets was low compared to the EU and the USA. However, currently China is more resilient to external shocks than it was a decade ago. After years of prudent economic policy-making, the country has achieved remarkable fiscal consolidation and a strong external position. The soundness of the banking system, and the limited direct exposure of banks to sub-prime and related securitized financial products, have helped China to face the financial turmoil with confidence. In November 2008, the policy-makers responded with a proactive fiscal stimulus package combined with a rise in short-term credit to stimulate growth. These expansionary policy measures can be perfectly transformed into ready-for-use infrastructure projects without the risk that part of the stimulus package will leak away.