Nervous Giant: China and the Financial Crisis

Abstract

While the current financial crisis is widely acknowledged to be global, surprisingly little attention has been paid to its effect on one of the largest players in the global economy. China has weathered the crisis extremely well, though its growth has slowed slightly. I will analyze this by looking at China’s purchases of debt, the Chinese holdings of debt in the United States and its growing holdings in Europe, and the policy decisions directing this. This shows an intriguing change in the policy decisions that led to China becoming such a large holder of American debt. China amassed its large holdings of debt from the United States by merit of the strong trade relationship between the two countries, as well as the stability of the U.S. dollar. However, China’s interest in buying up Italian debt and forming stronger bonds with other Eurozone and European countries seems to speak to a different motive. Rather than allowing its reserves of foreign capital to grow over time, as it did with its U.S. debt, China is making a more aggressive move in this case. Thanks to its relative stability during the crisis, I believe this shows us that China is seeking to both ensure the continued security of its economic growth and increase its economic influence, thus using the instability of the global financial crisis to kill two birds with one stone.