The current global economic slowdown (especially among its major export markets—the United States, the EU, and Japan) is having a significant negative impact on China's export sector and industries that depend on FDI flows. The Chinese economy slowed sharply in 2008 and early 2009. According to the International Monetary Fund (IMF), China was the single most important contributor to world economic growth in 2007. However, China's economy has not been immune to effects of the global financial crisis, given its heavy reliance on trade and foreign direct investment (FDI) for its economic growth. China's stimulus, if fully implemented, would likely constitute one of the largest economic stimulus packages (both in spending levels and as a percent of GDP) that have been announced by the world's major economies to date, although it is unclear to what extent the stimulus package represents new spending versus projects that were already in the works before the economic downturn hit China. The government has also announced plans to boost agricultural subsidies to farmers. Has China's Economy Bottomed Out? They note a number of positive developments:
GDP in the second quarter of 2009 grew by 7.9%, compared to 6.1% growth in the first quarter 2009, on a year-on-year basis. In addition, many analysts have raised concerns that the large level of borrowing by local governments and state-owned enterprises could lead to a sharp rise in non-performing loans on the balance sheets of China's major banks, and could cause local governments to be become heavily indebted. Some have charged that China has rolled backed some it its economic reforms by boosting industrial subsidies and increasing trade and investment barriers, in order to assist firms deemed by the government to be vital to future development. Many economists contend that China's long-term economic growth prospects will likely depend on the ability of the government to rebalance the economy by promoting greater domestic consumption and to deepen market-oriented economic reforms. Some have speculated that China may, in order to help stabilize its most important trading partner (the United States), boost purchases of U.S. securities (especially Treasury securities) in order to help fund the hundreds of billions of dollars that are expected to be spent by the U.S. government to purchase troubled assets and stimulate the economy. One concern could be whether increased Chinese investments in the U.S. economy would produce long-term economic benefits for China. Many analysts (including some in China) have questioned the wisdom of China's policy of investing a large volume of foreign exchange reserves in U.S. government securities (which offer a relatively low rate of return) when China has such huge development needs at home. For example, various Chinese government officials reportedly suggested on a number of occasions in the past that China could dump (or threaten to dump) a large share of its holdings in order to counter U.S. pressure (such as threats of trade sanctions) on various trade issues (such as China's currency policy).
Over the past several years, China has enjoyed one of the world's fastest-growing economies and has been a major contributor to world economic growth. However, the current global financial crisis has significantly slowed China's economy; real gross domestic product (GDP) fell from 13.0% in 2007 to 8.0% in 2008. Several Chinese industries, particularly the export sector, have been hit hard by crisis, and millions of workers have reportedly been laid off. This situation is of great concern to the Chinese government, which views rapid economic growth as critical to maintaining social stability. China is a major economic power and holds huge amounts of foreign exchange reserves, and thus its policies could have a major impact on the global economy.
The Chinese government has stated that it plans to rebalance the economy by lessening its dependence on exports for economic growth while boosting domestic demand. In November 2008, the Chinese government announced a $586 billion spending package to help stimulate the domestic economy, largely geared towards new infrastructure projects. In addition, the government ordered banks to sharply expand loans to local governments and businesses to expand investment. The government has also offered a number of programs to stimulate domestic consumption of consumer products (such as cars and appliances), especially in the rural areas. As a result, China's economy has shown some improvement. For example, its GDP in the second quarter of 2009 grew by 7.9%, compared to 6.1% growth in the first quarter 2009, on a year-on-year basis. However, from January to July 2009, China's trade was down 23% over the same period in 2008, while foreign direct investment fell 18%.
Some analysts have criticized various aspects of China's economic stimulus policies. Some contend that China, in an effort to assist firms impacted by the global economic slowdown, has imposed numerous new trade-distorting policies, such as extensive industrial subsidies and trade and investment restrictions on foreign firms. In addition, many analysts warn that the easy lending policies of Chinese state-owned banks may later lead to a sharp increase in the level of non-performing loans by these banks if loans go to investments that fail to produce long-term returns.
China's efforts to stabilize its economy are of major concern to U.S. policy makers. If successful, such policies could boost Chinese demand for U.S. products. In addition, China is a major purchaser of U.S. Treasury securities, which help fund the Federal Government's borrowing needs, and thus its decision whether or not to continue to purchase U.S. debt could impact the U.S. economy. U.S. policy makers also want to ensure that, despite the sharp downturn in the Chinese economy from the effects of current global economic downturn, China will continue to reform its economy and liberalizes its trade regime and refrain from imposing policies that restrict or distort trade.