China and the Credit Crisis: The Emergence of a New World Order

CHAPTER 3

The Economic Effects of the Crisis on China

The first part of the 2008 crisis happened in the financial world. Protected by a controlled currency, a highly regulated financial sector, and a recently restructured and extremely well-capitalized banking system, China was not much affected by the financial shockwave which flowed from the United States across the Pacific. But the impact of the US banking collapse on corporate activity and consumer confidence created another shockwave, which followed hard behind the first, pushing the developed world into economic recession. As one of the world’s largest international trading economies, this shockwave was bound to affect China. Although the government was quick to take preemptive action, China’s exports were hit hard by the sharp reduction in consumer demand in the US and Europe which followed the Western banking crisis. This negative economic impact has had two important consequences for China. The first is a realization that a dependence for a large part of Chinese growth on household demand in foreign developed countries is unsustainable. That economic strategy has served China well, but now it has to change. Already the signs of a change of focus in China’s economic management are evident. The second consequence is that China knows now that it cannot hide any longer behind the old global power structure which was led by the United States. China’s growing economic weight and its more assured posture are having an impact ...