The revelation for China after the financial crisis

The subprime Mortgage Crisis performs as financial crisis in the western countries, while it is more reflected in the real economy in China. The economy in China has developed fast over the past years , accompanied by many problems. We provide over-produced goods through low cost and serious pollution ,then dump them to international market at low prices. The people do not have money to make purchases and have to face the environmental pollution. There are several changes we have to make to our economy after the global financial crisis.

(1)  To increase domestic demand. The insufficient domestic demand leads to excess supply of commodities , and it  converts to surplus capacity which is very common in China. The consumption in developed countries helps to absorb part of surplus capacity. However, if these countries implement trade protectionism or restrict the export of Chinese products, serious surplus capacity may happen and leads to crisis. So the key is to support the economy by increasing domestic demand. The government should increase people's income and make sure they have effective consumption power. The incomplete social security system and unreasonable distribution  wealth leads to the weak power of consumption. We have to pay more attention to developing the rural market as the rural population is the largest in China. The domestic demand will increase dramatically if we can activate this market.

(2)  To change the mode of foreign trade and exports. Currently, the main exports mode in our country is to dump  low-end and  low added value products to foreign markets. This mode is not environmental friendly and consume a lot of resources. So we should carry out economic transition, which means improve the growth mode of foreign trade by producing more high added value products.

(3)  To use our foreign exchange reserves more effectively. China is the largest buyer of US treasury bonds. Until November 2010, China holds 8960 billion dollar US treasury bonds, which accounts for about 32% of China's foreign exchange reserves. In addition, China holds long-term U.S. agency debt ,long-term corporate bonds and stocks for over 6000 billion dollar. With the expansion of U.S. debt, we are facing the risk of debt depreciation. So the government should diversify the large amount of foreign exchange reserves to disperse risks, for example, to purchase more physical products including staple commodity instead of virtual bonds.

A Financial Rescue in America

Most countries have three choices when they face financial crisis: self-protection, crisis export or look for a new growth engines. We can analyze American financial rescue after the 2008 global financial crisis in the three respects:

(1)  Self-protection. After the Subprime Mortgage Crisis, America put it in the first place, to expand the relief range and extend the relief time. The core of self-protection is to strengthen the social security. In 2009, the cost of  retirement pension ,social welfare and medical care account for about 56% in the total costs in the US federal and state and local governments. Another important measure of self-protection is to cut tax. For enterprises, it can help them to survive and invest  to provide more jobs to the society. For individuals ,it can help to stimulate consumption and improve their anti-crisis ability. The scale of tax cuts is huge and generous. In October in 2008, January and September in 2009 ,December in 2012,the government t passed about 1520 ,3000 ,2000 and 8580 billion dollars tax cuts plans for enterprises and individuals which all benefits the middle class in America.

(2)  Crisis export. The keystone of American economic stimulus plan is the huge tax-cut plan. This is mainly achieved by issuing us dollar, bond and start the trade war. In March 18 in 2009, the Federal Reserve announced to purchase 3000 billion US national debt and 7500 billion mortgage securities. Until June in 2011, the Federal Reserve has purchased 6000 billion US bonds to stimulate the recovery of economy. More ,the government established polices to encourage the consumption of products made in USA and strengthen the trade barriers against China. In addition, American contracts loans all over the world, then to dilute these loans debts by weak dollar policy. Until  January 2011,the total amount of U.S. Treasury bonds has reached 14056 trillion dollar, which is close to upper limit of the official national debt for 14.3 trillion dollar.

(3)  Looking for a new growth engines. The key approach to motivate the economy is to look for a new growth engines. The policy made by government in this aspect is explicit which is to develop new energy and increase investment in research. The government allocated a lot of money in this area to become leader.

A Financial Rescue in China

To research the economic trend in China, we must analyse it according to Chinese logic . The Chinese economists are used to use three carriages(investment, exports and consumption)  when proofing the economic. Unlike USA, consumption made a small contribution to GDP in China. Before 2007, investments and exports accounted for 80% of GDP while consumption only occupied 20%.After the Subprime Mortgage Crisis in 2008 ,the export fell dramatically  which made a great impact on economy. Consumption cannot be changed in a short time because of the  weak consumption power of the generally public and incomplete social security system.

So the main idea to rescue the financial market relied on investment by the government. However, the total local government’s debts are about 40000 billion CNY at the end of 2007 .There are 2  direct ways to raise money :one is to sell lands, another is to increase the tax revenue and expenses of enterprises. If local governments want to sell lands in high price, they should force up the housing prices. This can be achieved by putting in the staggering amount of credit. Large amount of credit into the market may cause the public panic about the currency depreciation, so money flows into the market and activate the real estate. The real estate is the breakthrough of the financial rescue in China. At the same time, government has released many preferential polices in a housing loan and tax rate. People queued up to buy houses which resulted the increasing housing price. Local governments raised large amount of money to investment  fund  rapidly as housing has become a financial products .

So the way of saving market in China is to raise enough money through real estate and tax revenue to support the investment plan, then activating the domestic demand through investment and consume-encouraged policies.

2008 Global Financial Crisis

Financial crisis generally refers to all or most financial indicators in a one or several countries deteriorate rapidly in a short duration such as short rate, monetary assets, stock price index, inflation rate and so on. Financial crisis usually come along with large amount of business failures, the increased unemployment and economic depression, sometimes even results in social turbulence.

The global financial crisis erupted in 2008 is the latest and most serious one after the Great Depression in 1930, which brings great damage to the global economy. It is caused by the Subprime Mortgage Crisis in America and gradually evolves into an international financial crisis. It has a close relationship with the derivatives market .The Subprime Mortgage Crisis began to show its effects in the middle of 2007.The American second-largest subprime mortgage company “New Century Financial Company” went bankruptcy, then more than 20 suppliers of subprime mortgage declare bankruptcy ,suffer from great losses or seek to be acquired. Large amount of subprime mortgage formed bad debt and depreciated the related securities by a large margin. Then subprime mortgage crisis broke out. In July 2008, the giants in home mortgage market “Fannie Mae and Freddie Mac” were in trouble and taken over by  American government. Then in September,  the fourth-largest investment bank “Lehman Brothers” went bankrupt . Also, “Goldman ”and “ Morgan Stanley” converted into bank holding companies. The largest savings bank “Washington Mutual Bank” and the third-largest investment bank “Merrill Lynch” have been acquired by U.S. regulators and bank. This crisis spread rapidly to other major financial markets in Europe and Asia and finally became a global financial crisis.

The stock markets have fallen around the world, and many large financial institutions have collapsed or been acquired. Governments in no matter the richest or undeveloped countries came up with a series of polices to save the market and bail out their financial systems. In the following articles, the different financial rescue ways in China and USA will be compared and discussed.