China has risen to prominence since the global financial crisis. The country initially powered through the crisis through an accelerated fiscal and monetary stimulus which accounted for approximately 3.1% of its GDP in 2009. Furthermore, the rapid growth of the Chinese economy has been supported by its unconventional monetary policies. The expectation was that the country’s economy would grow by over 10%. China led the Asian bounce back, helping to lead other East-Asian countries out of the crisis. The country’s national savings rate, even from 2008 onward up until 2013, shows a consistent level of approximately 50% of GDP.
The US, on the other hand, experienced weak economic growth due to it being the originating point of the financial crisis. When looking at monetary policy responses to the global financial crisis, it is important to consider the role of the US as the engine of the world. Comparing the US and China is a telling case study: on the one hand, you have the US, the leading global economy, and on the other you have China, a rising economic superpower and the first economy to recover from the crisis.
When looking at the monetary policy responses of the United States and China, it is important to consider their goals and how they coincide and evolve under abnormal market conditions.
China’s monetary policy has changed over time as economic conditions have changed. As a result, China has deployed several unconventional instruments to respond to the global financial crisis. The US Federal Reserve, however, implemented both conventional and unconventional tools to promote economic recovery and maintain price stability by reducing the costs of borrowing and increasing the amount of credit available in the economy. As outlined in the Federal Reserve Act, the goal was to promote maximum employment, stable prices and moderate long-term interest rates. In Q1 2009, China adopted a moderately loose monetary policy to ensure and sustain economic growth and financial stability. Its two primary objectives are to establish a robust framework for liquidity provision in times of market stress and to broaden the Central Bank’s options for providing stimulus given the slowdown in the economy. All these had to work without compromising the government’s public commitment to the central reforms as it strives for more sustainable growth.
Unlike the Fed, the People’s Bank of China does not have the framework for emergency liquidity facilities such as the Federal Reserve Act. Where China’s monetary policy has focused on growth, the US has concentrated on economic recovery. As the financial conditions started to normalise post-2008, the Fed increased its monetary stimulus through expansionary fiscal policies. The main monetary policy instruments the Fed had used to respond to the crisis was Quantitative Easing and Forward Guidance. China implemented unconventional monetary policies to react quickly to the crisis and to promote economic growth mostly in the short term, whereas the US focused on economic recovery through addressing credit demands and providing an adequate level of liquidity, particularly in the money markets.