3．Financial Crisis Reshaped Globalization and China's Economy

The financial crisis that broke out in 2008 was a major setback for globalization and a watershed for the world economic order. After the crisis, the relative strength of China's economy increased significantly, with its influence continuously improved in the world economy. However, it should also be noted that the crisis has fundamentally changed the external environment of China's development. Confronted with the new normal and new situation of the world economy in the post crisis era, China's traditional mode and path of economic growth are facing major challenges.

Corresponding to the “big crisis” of 1929, the financial crisis that began in 2008 was known as the great recession in its birthplace in the United States. Although the market was recovered, the median wealth of Americans in 2013 was still about 40% lower than in 2007 before the crisis. The crisis was resulted from the domestic financial system of the United States, but through the transmission of financial markets and the impact of Finance on substantial economy, it quickly turned into a world financial, economic and debt crisis. The crisis knocked the world economy down, and also marked the end of the “mighty globalization”. The “shock wave” of the crisis went through the three stages of spreading in the United States, Europe and the emerging market, for which the international capital became a major problem. It could be said that the large-scale return of international capital from emerging markets to developed economies was also a manifestation of the “de-globalization”. For China and the world economy, the impact of the global financial crisis in 2008 remained and the negative impact of its “two shocks” gradually emerged.

Watershed of World Economic Order

The outbreak of the financial crisis meant the end of the “mighty globalization” era. In terms of finance, the scale of international capital flow plummeted, and the financial globalization went backwards with the process of deleveraging. As for substantial economy, the lack of effective demand of the world economy made trade growth sluggish. In addition, international direct investment was obviously insufficient, and international flow of industrial capital and international transfer of productivity got significantly weakened. Concerning the reasons, there were both short-term factors caused by economic recession, and some structural factors with institutional and long-term nature. Moreover, the trend of “de-globalization” also appeared. At enterprise level, it was represented as that part of multinational production activities changed from “offshore” to “back to shore”; at the policy level, as that some developed countries took efforts in reindustrialization. In the struggle between openness and closure, the latter once became increasingly strong, which was common in developed countries. The reflection on all aspects of global capitalism provided support for the momentum of economic nationalism and protectionist in policy sector. The United States, as a leader in the era of “mighty globalization”, was also rethinking, which led to the weakening of the power of globalization and the rise of its domestic anti-globalization forces at multilateral level.

The problems exposed from the global financial crisis made the academic and economic decision-makers recognize the troubles caused by the excessive development of finance and the hollowing-out of substantial economy, and began to re-examine the relation between them. Accordingly, the developed countries paid more attention to the manufacturing industry, and put forward the policy of “reindustrialization”. Related initiatives included the “reindustrialization” implemented by the United States through the programs of “reviving the U. S. manufacturing sector framework” and “strategic plans of countries with advanced manufacturing industry”, Japan's “industry revival plans”, Germany's “industrial 4.0”, France's “new industrial France” and Britain's “high value manufacturing”. With the efforts of “reindustrialization” and the rise of relative cost of offshore production, some countries and industries turned their productivity “back to shore” from the emerging market to the home country. In the United States, the employment in manufacturing continued to decline since the 1990s, with the number of posts of duty starting to go on positive growth since 2013. After Trump came to power, he formulated policies for tax reform, which might expedite “reindustrialization”. In general, the “back to shore” phenomenon implied the reversal transfer of international capital and productivity from developed countries to emerging economies, reflecting a certain degree of “de-globalization”. The scale of reflux of manufacturing capacity of multinational corporations was still limited at stock level, while the trend of decrease of foreign direct investment (especially equity investment) was significant at incremental level.

The impact of the financial crisis on the economy was worldwide, and almost all countries was negatively affected. As for short-term shocks, the impact of the crisis on developed countries was immediate, while the impact on emerging economies was indirect. In addition, the important role of emerging economies in the world economy was recognized by industrialized countries. The group of twenty countries (G20) replaced the group of seven countries (G7) as the main platform for coordination of global macro economic policies. However, with the evolution of the form and scope of the crisis, the financial turmoil occurred with the changes in wave from America to Europe, from developed countries to emerging markets, with significant internal polarization both in developed and emerging economies. In the overall slowing development, whether adjustment and transition could be timely and effectively implemented in such polarization was the key to become the winner.

Under the dual impacts of the short-term shock and long-term influence of the financial crisis, the world economic structure is experiencing a significant turning point, which is highlighted as the rapid strengthening of China's economic status. Based on the current US dollar and the GDP with actual exchange rates, the proportion of China's economy in the world economy went on a rise from 4.2% in 2008 to 7.2% in 2002, up 3 percentage points in 6 years (see Figure 2.3). Six years after the outbreak of the financial crisis, the proportion increased by 6 percentage points to 13% in 2014, transferring the global economic center to the Asia Pacific areas. In 2015, the exchange rate fluctuated sharply, resulting in a decline in global GDP value denominated by US dollars, while China's economy accounted for up to 15% of the world economy under the premise that the exchange rate remained basically stable. Calculated by purchasing power parity, China's GDP reached USD 19.4 trillion in 2015, accounting for 17.1% of the world; the United States, the Euro Zone, India and Japan followed, respectively accounting for 15.8%, 11.9%, 7% and 4.3%. Meanwhile, China's economy greatly promoted global growth. Since the outbreak of the financial crisis, China's contribution to world economic growth reached as high as 1/3, becoming the most important drive of global economy.

Figure 2.3 Proportion of Major Economies in World Economy Based on Current USD: 2002-2015

Data source: UN.

In the recovery period after the financial crisis, developed economies were inclined to be “divided”. American economy performed impressively. As the birthplace of the crisis, it not only avoided economic collapse, but became the leader in economic recovery of developed countries as well. Comparatively speaking, at the beginning of the outbreak of the financial crisis, the safe and sound European Union was under the burden of the debt crisis. From the middle-and-long-term perspective, owing to the imbalance of national competitiveness among the countries of the EU, defects in all aspects of economic structure, the issues of immigration, refugees and domestic political differences, and the hindrance of economic integration, Europe will face a continuing decline; the Brexit might be one of “the beginning of an end”. Meanwhile, Japan's economy experienced two “lost decades” after the financial crisis and was difficult to be significantly improved.

Another “differentiation” took place inside emerging economies. After the outbreak of the global financial crisis, the macro economic performance of India, Brazil, Russia and other countries were poor, with more sluggish growth in contrast with China. In 2014, under the background of the turmoil of finance and currency, as well as the slump of commodity prices, the countries with macroeconomic instability and weak international competitiveness suffered from a strong impact, and the developing entities with single economic structure and excess reliance on resource export undertook a tremendous external pressure on their trade, balance of payments and fiscal revenue. It was worth noting that, since 2014, under the government of the new prime minister Modi, India's economy began to show relatively strong growth momentum. As of the end of March of the fiscal year of 2016, India's GDP growth reached 7.6%, hit its highest level in 5 years and overtook China. As the only two entities with one-billion populations, in the contest between the “dragon” and “elephant” in the emerging markets in terms of economic growth, the latter began to gain the upper hand.

Impact on China's Economy

Because of the relative closure of the financial system, China fortunately escaped the direct impact of the global financial crisis. However, owing to the high openness of China's real economy, especially the high dependence on exports of its economic growth, the crisis brought huge indirect shock to China. As for the “three carriages” effect stimulating economic growth, net goods exports and services contributed 1.6 percentage points on average during the period from 2005 to 2007, 0.3 percentage points in 2008, and -3.9 percentage points in 2009. In other words, if consumption and investment continued the contribution rate of 2008, the negative effects of the trade decline would reduce China's GDP growth to 5.4%. As global trade picked up, the severe short-term shocks brought by the slump in exports came to an end, while the impact of global economic downturn and weak international demand remained.

The Chinese government powerfully responded to the impact of the financial crisis. As a whole, the Chinese government formulated proper stimulus packages at the right time but with inappropriate strength. With the launch of the “four trillion” strong stimulus measures in 2009, the pulling effect of investment on economic growth soared to 8 percentage points, thus pushing the GDP growth rate to 9.1%. At the critical moment that the “natural growth rate” (or “potential growth rate”) fell from above 10% to below 5%, what goal for growth rate should be set up required discussion. In addition, in order to achieve the set goal for growth rate, what kind of stimulus policies and methods should be taken demanded in-depth analysis. The scale of “four trillion” was beyond reproach, but the problem lied in the huge financial leverage and multiplier effect in the context of bank credit easing and local debt lift. From the perspective of long-term effect of the stimulus policy, the enlarged edition of “four trillion” stimulus increased macro economic risks and difficulty of implementing the follow-up policies. On the other hand, in the wake of the external shock, Chinese government's excessive pursuit of high growth caused China's economy to miss the best opportunity for structural adjustment and also the opportunity to clear the market.

Chinese and foreign academia made a useful comparative study about the great crisis of 1929 and the financial crisis of 2008. From a global perspective, the main reason for the different consequences of the two crisis lied in the effective policy response, the core of which was the United States'QE and China's “four trillion”. Both policies exerted unprecedented powerful intervention against domestic economy, respectively from the angles of monetary and fiscal policies. By resorting the huge impact of both countries on financial monetary and investment trade, the spillover effect and global influence occurred to both countries. China's strong stimulus for economy growth, in the context that development countries were exhausted for economic growth drive, provided “ultimate power” for world economic growth;while the U. S. quantitative easing policies, under the background that developed countries had nearly zero interest rates, provided the world economy with continuous liquidity. Both made concerted efforts in pulling back the world economy from the brink of collapse and averted the catastrophic consequences of the great crisis. From a global perspective of political economy, an important difference between both was that China undertook the policy costs by themselves and shared the benefits with other countries; while the U. S. solely took benefits from unconventional monetary policies and jointly shouldered its costs with the whole world.

The impact of the global financial crisis on China's economic growth was short-term and cyclical, and also long-term and structural. With the outbreak of the financial crisis as the watershed, the driving force of the external impetus to China's economic growth underwent a fundamental change from strong to weak. In fact, the triangle crises of global financial market, international economic (trade and investment) and sovereign debt exerted great influence on the Chinese, which showed how the crisis sourced from foreign countries influenced domestic economy, and highlighted the importance of open economy condition to ensure national economic security. Confronted with the dual transformation of globalization changing from strong to weak and the world economy developing from high speed to low speed, the “China mode” must be adjusted in the short run and reconstructed for a long time.