Asia and the Subprime Crisis: Lifting the Veil on the by Chi Lo (auth.)

By Chi Lo (auth.)

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Indeed, despite its stronger economic fundamentals and financial foundation than the western world this time around, Asia has not learnt from the 1997/98 regional crisis that overreliance on export-led growth is an unsustainable long-term growth model (see Chapter 9). The Asian Relevance to the Subprime Crisis 19 The adjustment The deepening of the US subprime crisis after September 2008, despite the Fed’s repeated massive liquidity injection, shows that the markets had failed to clear on their own and the global financial system had stalled.

This makes the change of China’s growth model all the more urgent. The feeble economic environment in the post-subprime-crisis world has given the Chinese authorities a very good opportunity to boost social spending, both as a counter-cyclical policy and as a structural step towards a more balanced growth mix. A bigger domestic sector with higher consumption power is both a necessary and a sufficient condition for China to reduce its economic vulnerability and enhance long-term growth sustainability.

The bigger-than-expected real impact Indeed, although the financial impact of the subprime crisis on China is limited, its real impact on the economy is larger than expected. This is because conventional analysis has often overlooked the spillover impact of trade on domestic investment and job growth. This impact is big enough to affect over half of investment spending and urban employment, according to my estimate. The conventional wisdom is that China’s push for market diversification in recent years will help reduce the impact of weaker demand from the developed markets.

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