Effect of Financial Crisis 2008 on China
2008 Financial Crisis
The 2008 financial crisis was regarded as the worst financial disaster in the history of economy. The situation was commonly known as the Great Depression of 1929. Federal Reserve and the Treasury Department of the US tried hard to overcome the situation. However, all the efforts were not sufficient for minimizing the impact of the crisis (Kowalewski, 2016). There was a Great Recession at the global level when the prices of the houses dropped below the price plunge. This was followed by a sharp rise in the rate of unemployment, almost above 15%. The crisis led to the European debt crisis, which started with a financial deficit in Greece and Iceland during the years 2008-2009.
The causes can be attributed to the overwhelming load of mortgage-backed securities, which contained a substantial amount of high-risk loans. The lending procedures surged up recklessly, leading to an unprecedented number of defaulters (Mehdian et al. 2019). All these factors bundled together led to the failure of the institutions in covering up their debt conditions and a government bailout of these institutions. As the crisis started with housing finance, the housing market was the worst affected one witnessing evictions and foreclosures. As a response to this, the stock market began to fail, losing millions of dollars.
Effect on China
The global financial crisis posed a maximum negative impact on the trading activities of China. The foreign demand for Chinese products reduced significantly, which affected the revenue earned by China through its exports. However, China could keep a relatively high growth rate during the period of this crisis. Within a year, the Chinese economy rebounded, and the GDP touched a promising growth rate of 10%, superseding other economies (Fligstein et al. 2017). While the economy of Chine slightly softened in the year 2011, it was reported to have great potential for regaining its strong position. It was quite surprising that the Chinese exports make up more than 40% of the country’s GDP, and despite this strong export dependence, the country could maintain an impressive growth rate during the crisis. Researchers and policymakers, therefore, have tried to investigate the Chinese economy for coming up with appropriate reasons for surviving future damages.
Through detailed studies, the researchers could come up with three essential strategies that helped China maintain a considerably high growth rate at the time of this financial crisis.
- Strong Fiscal position – China’s financial position is quite strong as compared to other economies. China could quickly adapt to a robust stimulus package when it comes to financing its economy. China has a stable position in the marketplace, and it could generate substantial fiscal and credit expansions. The country even had a budget surplus as a result of which its “Deficit to GDP ratio” was merely 0.4 to 2.2 percent at the onset of the financial crisis.
- A healthy level of foreign exchange reserves – Though China has high expansionary monetary and fiscal policies, there was no balance of payment deficit (Kanjilal and Ghosh, 2017). This can be attributed to the intense level of foreign exchange reserves that were capable of increasing the feasibility of the stimulus packages.
- The limited flow of capital from international markets – After the emergence of the World Trade Organisation (2001), China lost its control over foreign banks and global capital flows. Due to this reason, it did not suffer from the reduced capital flow of international capital, unlike other economies.
Role of Chinese Company Law
The Company Law of the Republic of China has been formulated for standardizing the processes and activities of the organizations such that their lawful rights, as well as interests, can be protected. The law safeguards the social and economic order of the country (Wei et al. 2019). According to the company, all the legal limited liability enterprises are required to abide by the laws and administrative regulations and maintain the code of conduct in business ethics.
During the financial crisis, China’s unprecedented growth was driven by the sale of exports to various other economies and a rise in the influx of foreign capital by different foreign investors. Many foreign investors and multinational companies used China as a platform for manufacturing goods for selling in local and foreign countries. During Financial crisis, Chinese firms performed well by adhering to the regulations of the Company Law. Ethics has been maintained throughout the operations of the firms and owing to the strong financial condition, the interests and rights of the shareholders and creditors could also be protected.
According to the Company Law, an enterprise would be liable to for all its debts with respect to its property (Womack, 2017). The shareholders can enjoy rights such as return on assets, participation in the process of decision-making and selecting managers for the board of the companies. During financial crisis, China considered all these factors and incorporated ideas provided by different local firms for the revival of the economy during the financial crisis of 2008.
References
Fligstein, N., Stuart Brundage, J. and Schultz, M., 2017. Seeing like the Fed: Culture, cognition, and framing in the failure to anticipate the financial crisis of 2008. American Sociological Review, 82(5), pp.879-909.
Kanjilal, K. and Ghosh, S., 2017. Dynamics of crude oil and gold price post 2008 global financial crisis–New evidence from threshold vector error-correction model. Resources Policy, 52, pp.358-365.
Kowalewski, O., 2016. Corporate governance and corporate performance: financial crisis (2008). Management Research Review.
Mehdian, S., Rezvanian, R. and Stoica, O., 2019. The Effect of the 2008 Global Financial Crisis on the Efficiency of Large US Commercial Banks. Review of Economic and Business Studies, 12(2), pp.11-27.
Wei, Y., Qin, S., Li, X., Zhu, S. and Wei, G., 2019. Oil price fluctuation, stock market and macroeconomic fundamentals: Evidence from China before and after the financial crisis. Finance Research Letters, 30, pp.23-29.
Womack, B., 2017. International Crises and China’s Rise: Comparing the 2008 Global Financial Crisis and the 2017 Global Political Crisis. The Chinese Journal of International Politics, 10(4), pp.383-401.