As of 2009, China's economy had recovered from the global recession that began in 2008. How did...

As of 2009, China's economy had recovered from the global recession that began in 2008. How did China manage that? As a follow-up question, how can they manage to avoid an inflationary episode as global growth picks up?

Expert Solution

The government moved fast to mitigate diminishing GDP growth post the GFC thru a stimulus package & expansionary monetary strategy .

In November 2008 the Chinese government launched a ¥ 4 trillion stimulus package (14 % of 2008 GDP) for the years 2009 & 2010.

The success of this stimulus package was expected. Previous to the package, China’s budgetary deficit was so low that post the stimulus China’s debt was only around 20% of GDP. There was plenty of room for the government to utilize an expansionary fiscal strategy to supplement the dearth of export demand.

The central government funded one-quarter of the ¥ 4 trillion package, by way of direct grants & ROI subsidies. Bank credit was the 2^nd most essential source of funding for the stimulus package.

Local governments also introduced their own stimulus packages . The central government issued ¥ 200 billion in governmental bonds in aid of the local governments, however the commercial bank credit was the most essential source of funding for the local-governmental projects.

Monetary expansion has also been essential to China’s recovery. The PBOC adopted an expansionary monetary strategy to support the expansionary fiscal strategy.

Inflationary pressure can be restricted by increasing the interest rates in the economy.

Rahul Sunny answered 2 years ago

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As of 2009, China's economy had recovered from the global recession that began in 2008. How did...

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