The severity of the recent financial crisis is self-evident: it may have started out as a housing market crisis in the US, but today its reach has extended all across the globe. Across the Pacific Ocean, for example, the rising economic giant China has seen its GDP drop from the usual double-digit figures to 6.1% in the first quarter of 2009. The cause of the crisis has been attributed to various parties, one of which is China itself. Paradoxically, or perhaps accordingly, China has also been suggested as an important part of the solution.
As such, seeing that China seems to play such an important role in the crisis, the natural question to ask is: How responsible is China for the financial crisis, and to what extent is it the solution? Following the dichotomy of the question itself, I will explore China's causative role in the financial crisis in Part I of my essay; and subsequently, its hand in solving the crisis in Part II
[...] The new interest rates, being pushed down very low, drove up public borrowing, which amounted effectively into public debt. A housing bubble ensued, which spiralled into a housing, then financial, crisis—and this is basically how China played its role in creating the dire situation today. B. Why China cannot be considered the main cause There is certainly a possibility that the allegations made against China are true. However, as adamant as these accusations may sound, sources like The Economist have expressed that there is actually no irrefutable proof that China has “manipulated” its currency1. [...]
[...] China as the cause of the financial crisis China has been variously blamed for the world economic downturn. The US Treasury Secretary under the Bush administration, Henry Paulson, was the first one to propose that it was the main culprit. He was followed by his successor Timothy Geithner, who accused China of “manipulating” its currency. In Part I will demonstrate how China played a part in causing the crisis, and in Part I will show why it cannot be considered the primary cause. [...]
[...] On the contrary, it has demurred, saying that the financial crisis is the responsibility of everyone. Firstly, and perhaps most importantly, it simply is not in China's interest to appreciate its currency just to solve the financial crisis. As explained earlier, its economic growth model is export-based, and is not any different from other developing and industrialising countries. Thus, it makes no sense for it to let its currency rise against the dollar, at least not to the extent that the current crisis would be addressed appreciably, because this would mean compromising its own exports and thus growth rate. [...]
[...] However, even this will be difficult, seeing that the inability of real wages to keep up with prices will remain significant. Conclusion Thus, in conclusion, it seems that China has not so much “manipulated” its currency in ill will as it has simply and logically done what is best for itself. Indeed, what it has done can be said to be predictable, since its economic growth model has not diverged too much from the conventional one. The difference in its case, rather, might be attributed to its sheer size. [...]
[...] This lowers the Chinese people's propensity to save, and thus would increase consumption in China, ceteris paribus. This way, China's trade surplus may re-equilibrate, and stimulate other economies in the world like the US'. China also has some 1-2 trillion US dollars in its foreign reserves, depending on which sources one chooses to believe.3 In any case, it is certain that it has a large reserve of dollars, which is evidenced by the fact that it even overtook Japan in September 2008 to become the US' largest creditor. [...]
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