Global Financial Crisis and China's Transition: Balancing Market Power with Active Role of the Government

Abstract

China's transition is uncompleted in terms of privatization and of government intervention into economic activities. However, China performed relatively well in handling the 1997 Asia Financial Crisis and the 2008 American Financial Storm, as it keeps a strong government on both macro-economic management and corporate activities. This paper provides some evidence from China to support the theories of developmentalists on the active role of governments in economic development and market failures. We argue that the success of transition requires a balance of market power and government regulations.

Keywords:

• Financial crisis
• government intervention
• government ownership
• China

JEL CLASSIFICATIONS :

• G01
• P20
• O10

Acknowledgement

This paper benefits from the Fundamental Research Funds for the Central Universities and from the Social Sciences Planning Fund of the PRC Ministry of Education (12YJA790124).

Notes

¹China generally implements reforms in a gradualist fashion.

²Exports in May 2009 were down 26.4% on a year-on-year basis, the biggest monthly decline ever recorded. FDI flows to China dropped by nearly a third in January 2009 (year-on-year basis).

³On September 27, 2008, Chinese Premier Wen Jiabao reportedly stated in a speech that ‘What we can do now is to maintain the steady and fast growth of the national economy and ensure that no major fluctuations will happen. That will be our greatest contribution to the world economy under the current circumstances.’

⁴Purchasing Management Index (PMI) measures new orders made by the manufacturing sector.