International Business : A Financial Crisis, World 's Top Financial Watch Dog Warns

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ID: 9970760
BMAN10931 Financial Innovations in International Business
Assessed Essay Question, Semester 1, 2016-2017
Article chosen: ‘China facing full blown financial crisis, world’s top financial watch dog warns’
The author warns of the existence of a bubble in the Chinese economy that will eventually result in a financial crisis. I agree with this position as this warning is based on solid facts that prove China’s credit vulnerability, and show the huge debt that the Chinese economy has accumulated in its effort to maintain its growth that could lead to a devastating banking crisis.
The article suggests that the debt driven growth of the Chinese economy for many decades will cause a banking crisis. The Chinese …show more content…

After the economic reforms of 1978, China gradually became the manufacturing hub of the world and its GDP catapulted from 214 billion USD and 9th in the world to almost 11 trillion and 2nd in the world in 2015 (focus economics, 2016). China’s financial system has managed to sustain this rapid economic growth for many years, mostly through the appropriate allocation of capital (Yan, 2013).
The Chinese financial system has many differences from the ones of other economies as it is closely tied with national and regional governments who can dictate most of its activities (Yan, 2013). It is controlled by the large state owned banks which handle more than 70% of the savings and credits in the Chinese economy (Yan, 2013). The five largest banks that provide almost half of the total loans in the Chinese economy are majority owned by the central government while the government holds stakes at many of the other banks (Yan, 2013). For many years the major banks have been used by the government as pools of unlimited capital for the country’s state owned enterprises (Yan, 2013). With the use of the implicit government guarantees the government prevents the large state owned enterprises from defaulting on their loans (Yan, 2013). This makes it possible for the state enterprises to acquire a large quantity of loans as they are considered a safe debtor by the

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