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Financial Crisis

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Why did China fare much better than the United States and the United Kingdom during the 2007-2009 financial crisis ?

1. Global financial crisis 2007 to 2009

1.1 Background

The 2007-2009 financial crisis started as a sub-prime crisis in the United States (US). The Wall Street, driven for higher profits and low federal fund rate in home ownership began lending to sub-primes (Whalley et al, 2009). The mortgage loans were then re-packaged into financial instruments and sold to investors globally. When the housing prices declined in 2006, sub-primes defaulted on their mortgage loans as the values of their houses depreciated. These non-performing loans grew in sizes and led to the collapse of the mortgage loan market and collateralised debt obligations, leaving banks and financial institutions with lower net worth (Bianco, 2008). Due to the interconnected economies, the impact of the crisis spread beyond the US and resulted in a global financial crisis.

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GDP growth (%):

Considering that China’s GDP was only a third of the USA’s, its fiscal stimulus package size was significant in comparison to USA and UK, where the stimulus package were only 6% and 1.4% of their respective GDP (Fleet, 2010).. Hu Jintao committed at the G20 summit meeting held in London in November 2008 to provide international financial stability through steady and relatively fast growth of its own economy (MFA-PRC, 2008).

The commitment and decisiveness demonstrated by China’s government was absent in the US and the UK. Singales (2008) argues that the US government did not have enough insight in the complex network between Lehman Brothers and other financial institutes worldwide. The lack of understanding made it difficult to provide a good legal framework. This was supported by Thomas and Robert (2009) who assert that within the US government, there was disunity in regard to the proposed solutions to the crisis. As a result, much time was lost to solve the crisis. The bailout plan proposed in September 2008 by President George W Bush was debated furiously and eventually approved by the Congress and signed into law by President Barack Obama only in February 2009.

In the UK, the Prime Minister, Gordon Brown failed to garner support from the governor of the British’s central bank and EU president whe he tried to increase the fiscal stimulus size of UK and European Union (EU) economies,. Public reception of QE (what is QE….spell full)was also poor given that the central bank itself was pessimistic of the benefits from QE (Hopkins, 2009).



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Stimulus package to counter Global economic crisis

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