The Transmission Mechanism of Financial Shocks
Edited by Satoshi Inomata
Chapter 6: To What Extent Will the Shock Be Alleviated? The Evaluation of China’s Counter-crisis Fiscal Expansion
Nobuhiro Okamoto and Satoshi Inomata 1. INTRODUCTION The year 2008 marked the 30th anniversary of the launch of the Reform and Open-door policy in the People’s Republic of China. As is generally known, China has achieved a high level of economic growth since these internal changes occurred in 1978. Although there were occasional economic recessions caused by accidental factors such as the Tiananmen Square incident in 1989 or the Asian Currency Crisis in 1997, it is fair to say that China has realized rapid economic development in the last 30 years. China’s development model is based on an export-oriented strategy. China achieved its industrialization upon a high degree of export orientation, while shifting its focus from the export of primary products to that of labour-intensive processing industries, which enjoyed the comparative advantage of a massive labour force. However, this strategy was bound to encounter obstacles when the international market started to shrink. For China, the impact of the financial crisis emerged as a result of a fall in exports due to the collapse of the global commodity market, despite the crisis itself originating in US financial markets. Since the Chinese economy is export-driven, the export reduction triggered an immediate economic slowdown; the growth rate fell as low as 6.1 per cent in the first quarter of 2009. An economic growth rate of under 8 per cent implied a significant loss of employment opportunities, thus causing social unrest and instability. Recently, the Chinese government decided to launch a fiscal expenditure package...
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