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How will China cope with US debt crisis?

By Yi Xianrong (Chongqing Times)

17:02, August 18, 2011

Edited and translated by People's Daily Online

The U.S. debt crisis over the last two weeks seems to have brought the global economy back to 2008.

At the time, the sudden bankruptcy of Lehman Brothers resulted in the collapse of the U.S. financial system, which dragged the global economy down into a seemingly bottomless abyss.

Afterward, all economies introduced various strong policies to recover from the global financial crisis. China launched a 4-trillion-yuan stimulus package and reversed its monetary policy in a timely fashion, which contributed much to its V-shaped economic recovery in 2009.

The U.S. debt crisis may have shown the same symptoms as the 2008 financial crisis, including a stock market nose dive and financial market turmoil, but the Chinese government will not adopt the same countermeasures.

First, the U.S. debt crisis is significantly different from the 2008 financial crisis, so the Chinese government will not roll out an oversized stimulus package as it did in 2008. In the short term, China will take a wait-and-see approach to the debt crisis, and new policies will not be introduced unless necessary.

Second, China's current economic situation is different from what is was in 2008. Despite the global financial crisis, China has maintained rapid economic growth in the past three years due to ample lending and strong government financial support. As the U.S. debt crisis has only a limited impact on China's economy, the country should focus more on maintaining an annual economic growth rate of around 8 percent instead of unnecessarily worrying about the showdown in GDP growth. Overall, China will not specifically introduce many new policies for dealing with the debt crisis.

Furthermore, the current issues faced by China's economy are how to maintain relatively rapid economic growth, ease the overly high inflation and reduce the risk in the financial system instead of avoiding a sharp economic slowdown. Although the fall in the prices of all commodities, particularly oil, due to the impact of the U.S. debt crisis on U.S. and European real economy will help ease China's imported inflation, it is difficult for domestic CPI to fall in the near future. Given the continued high CPI, the domestic monetary policy will unlikely be adjusted as the market expects.

The current risk in China's financial system is mainly associated with the domestic housing bubble. It could be said that housing prices have generally made no corrections over the past year since the microeconomic housing regulatory policies were adopted and have even been on the rise in second and third-tier cities.

The outstanding loans in the real estate sector exceeded 10 trillion yuan at the end of June 2011, including more than 6 trillion yuan to individual housing buyers. The two figures are more than twice as much as they were when the financial crisis erupted in the United States in 2008. If related mortgage loans and the housing loans relating to the local government financing platforms are included, the figures will even be far higher. This means that whenever the domestic housing bubble bursts, the domestic financial system will be exposed to great risks.

People are all discussing the severity of the sovereign debt crisis in the United States and Europe, but the domestic debt issue is more serious than that of the United States and Europe if the risks associated with local government financing platforms are analyzed. Nevertheless, the domestic housing bubble will not be exposed until it bursts.

Of course, the government of China hopes to maintain proper economic growth to alleviate the inflation pressure and reduce risk in China’s domestic financial system. After the U.S. debt crisis occurred, the government of China did not hastily launch new rescue policies like it did in 2008 but observed the situation peacefully instead because it needed to pursue a balance among maintaining a proper economic growth, stabilizing commodity prices and reducing the risk of its financial system, and any new stimulus policy would break that balance.

And if the balance was broken, the results would be much more severe. That is the key reason why China did not launch new stimulus policies after the U.S. debt and credit crisis occurred. Of course, it is not that government of China did not do anything for this U.S. debt and credit crisis, and it is expected that it focus on further accelerating the exchange rate reform, foreign reserve policies and the RMB internationalization policies.

The current U.S. debt and credit crisis indeed has taught China an important lesson.

(The Author is a research fellow at the Institute of Finance and Banking under the Chinese Academy of Social Sciences.)


Leave your comment2 comments

  1. Name

Bobby K at 2011-08-24168.215.131.*
The Chinese are like a drug dealer dealing with a very sick addict when it comes to U.S. Policy. They know the U.S. will borrow and borrow beyond it's ability to ever pay, yet it keeps on lending. Sure the Americans are sick, but the Chinese just feed the addiction for their own benefit.
iRnDzVAi at 2011-08-2324.123.110.*
And I thought I was the sensible one. Thanks for setting me srtaihgt.

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