The Effects of the Global Financial Crisis on China's Financial Market and Macroeconomy

1. Introduction

In the last two decades, China’s economy has emerged as a major player in the world economy. China’s high GDP growth has changed the distribution of economic activities across the world. It has passed Japan to become the second largest economy, and it is only a matter of time before it passes the United States. China’s exports have lowered consumer prices across the globe, and its imports have begun to have a major impact on global commodity prices. China has become a major hub of intraindustry trade. From this point of view, China may become the engine of the world economy.

It is more important than ever to know how China responds to the global economy, especially the global financial crisis and ongoing concerns regarding US recession. This paper provides a brief review of China’s economic position in the world economy, discusses the spillover effects of the global financial crisis on China’s financial markets and the real economy, presents and critiques alternative ways of estimating these effects, and analyzes the reasons for the limited impact of the global crisis on China. One interesting result is that while China was not one of the countries hardest hit by the crisis, neither was it as insulated as many have assumed. While its high growth rate during the crisis was the envy of most other countries, China’s growth was substantially lowered by the crisis, suggesting that the decoupling of China’s growth from the advanced countries may not be as great as many popular analyses have suggested. The paper also provides a discussion of the major challenges facing China for a sustainable growth.

2. China’s Position in the World Economy

From 1978 to 2010, the share of China’s GDP in the world economy increased from 1.7% to 9.5%, when valued at market exchange rates [1]. The share of China’s GDP in the world economy is even higher if purchasing power adjusted prices were applied. This is due to both the differences between the prices of...