China's comprehensive financial strategy enables it to face crises

China invests in Asia, Africa, and Latin America to secure sources of raw materials and food. As a result, China now has financial incursions in practically the entire world.

China's comprehensive financial strategy enables it to face crises
Chinese city on a foggy day with some bright billboards. Photo by Ralf Leineweber / Unsplash

In China, state-owned companies, which are the main recipients of credit, are not very efficient on average, since they generate 22 percent of the gross domestic product (GDP) and absorb 55 percent of the total corporate debt, said economist and internationalist Eugenio Anguiano Roch, the former Mexican ambassador to that country and academic at the Center for Economic Research and Teaching (CIDE).

"The Chinese state mobilizes sufficient resources to counteract the current (and past) crises and sustain economic growth. Five state fund managers regularly bail out banks," he said in the inaugural conference of the XXII Seminar "Public and Private Credit: National and Global Experiences in the Current Crisis".

In his presentation, Anguiano Roch explained that the financial opening of the Asian nation began in 1980 with the entry of the People's Republic to the International Monetary Fund (IMF) and the World Bank. Along with the establishment of five economic zones and 12 ports for economic and technological development, a modern financial intermediation system was being set up.

In the 1980s and 1990s, commercial banking institutions were created and the People's Bank of China was formally established as a central bank. The primary objective was to capture the liquidity necessary for rapid and sustained economic growth and to have modern intervention mechanisms to fund state-owned, mixed, and private enterprises.

China's GDP in U.S. dollars, at 2010 prices, grew at an average annual rate of 10.8 percent from 1982 to 2020. In those 38 years, it grew more than 29 times, making the country the second-largest economy in the world (behind the US) at current prices.

The also called Asian giant faced the external shock of the financial crisis that emerged in 2007 and affected other advanced economies, although in its case it was with less intensity for other countries. The impact was felt at the end of the Lunar New Year holidays in 2009 when around 20 million people were unable to return to work.

The government then implemented an economic restructuring package equivalent to US$526 billion, akin to 87 percent of 2007 tax revenues, or 13 percent of that year's GDP. Not all were central government spending; there were credit measures and provincial government stimulus operations.

Support was given to transportation, public housing, infrastructure, health, and education. GDP fell 4.8 percentage points between 2007 and 2009; in 2010 it recovered, but 3.6 percentage points below 2007. This level of increase has not been recorded again. Starting in 2011, a slow but steady slowdown in growth began in the eastern nation.

In 2019 growth was 6.1 percent and in 2020 GDP did only 2.3 percent (3.8 percentage points less than a year earlier).

Starting in the mid-80s of the last century, Chinese public and private capital were invested in assets and companies in advanced countries; then in developing nations and emerging markets. In the former to secure intermediate manufactured goods (Europe); co-investments in high-tech companies (United States), and mining extraction industries (Australia and Canada).

In Asia, Africa, and Latin America they have invested to secure sources of raw materials and food; while in Central Asia, Siberia, part of Southeast Asia, and South Asia they are investing in infrastructure and logistics, roads, railways, hydrocarbon pipelines, electricity lines, and port facilities. As a result, China now has financial incursions in practically the entire world.