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.