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Causes of china crisis

While its financial system is relatively closed, China is the most


dependent on external trade of all four countries. As a
consequence, the total drop in Chinese export earnings between
2007 and the end of 2009 is predicted to be around 18%15 an
amount equivalent to nearly 7% of Chinas 2007 (ie pre-crisis)
GDP
The immediate threat in China is real. A large part of Chinas
economic success over the last 10 years has been based on a
strategy of export-led growth. In 2007, earnings from exports
accounted for 37% of Chinas GDP. The financial crisis shows that
this was a risky strategy but it is one that has been key to
providing jobs for millions of migrants moving to the cities from
urban areas, and has brought China many billions of dollars of
export revenue over the years.
But the prediction of hundreds of millions of dollars of lost export
revenue is not a death sentence. Export-led growth in China was
accompanied by highly controlled engagement with international
finance. Chinas exposure to international financial markets is the
lowest in this group of four, and it has been holding steady over
the last 10 years. While international inflows are small, the
domestic financial sector is moderately large, and most financing
for development in China (including for its very high rates of
investment) comes from domestic sources. Losses to Chinas
financial system between 2007 and 2009 are predicted to be just
over 2% of the countrys pre-crisis GDP.
So its likely that Chinas financial system will be resilient enough
to provide the capital to allow Chinese companies to switch their
focus to domestic and regional markets and Chinas sheer size
means that there is more of a prospect of developing a domestic
market, providing the huge and growing inequalities in Chinese
society can be tackled.

As mentioned above, recent IMF research indicates that


recessions that follow banking crises tend to last longer and cut
deeper than other recessions. Whether this general conclusion
can predict different countries experiences of this crisis remains
to be seen, but its a possibility that since the crisis in China is
predominantly a trade rather than a banking or financial crisis.

The influence of the Chinese stock market on the global economy


is widely overestimated. Its impact is essentially psychological,
and it is the violence of its falls (in 2007 and 2015) after long
periods of exuberance that has drawn the attention of foreign
punters. Only two years ago, the same markets were going
through a bearish trend that was completely uncoupled from
global markets.
Two common misconceptions about Chinas links to the
global economy should be dispelled. The first is that Chinas stock
markets drive global equity trends. Their large capitalisation is
tempered by the fact that only 30 percent of the shares issued by
state firms which constitute 80 percent of this capitalisation
are tradable and liquid, the rest being crossholdings mostly held
by other state institutions. In addition, the stock markets have
historically been largely closed to foreigners. Although
backchannels have been established that allow ingenious
foreigners to invest in A shares (previously reserved for Chinese
citizens), these channels are illegal. The government has built up
various qualified investor schemes that serve as a filter,
requiring time and previous investment, for foreigners to hold
shares. The recently established ShanghaiHong Kong Stock
Connect programme is the only significant channel that links the
Chinese stock market to outside markets chiefly, Hong Kong.

The second misconception that China is the locomotive for


global growth explains the psychological fallout from its stock
market fluctuations. In reality, though China is the largest
component of global growth, its ability to pull others is limited and
localised. An economy whose trade and current-account balance
is consistently positive does not promote growth outside its own
borders. Chinas capacity as an external lender matters much
more, especially vis--vis the United States and some energy- and
raw material-producing economies, but this can be seen as a
mere balancing process. While Chinas outward investment has
grown in size, and now balances inward direct investment, it does
not yet create an overall surplus.

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