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Opportunity for Economic Expansion

In: China After the Subprime Crisis

Author

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  • Chi Lo

Abstract

Albert Einstein once said, ‘In the middle of difficulty lies opportunity’. The subprime crisis is a difficulty for the western world, but this difficulty has provided China with an opportunity to expand its economic interest globally. The crisis will likely speed up China’s overseas investment, since the cost of acquisition has been lowered in the process of wealth destruction. For China, increasing overseas investment does not only serve the purpose of seeking markets and resources; it also helps to lower the costs of production and, more crucially, to diffuse the risk of domestic asset bubbles. From a structural point of view, the ultimate solution for China to rebalance its economy is to reduce savings by encouraging domestic consumption. But this is not a process that can be completed within a short period of time. So an interim solution is to build a ‘relief valve’ for the domestic liquidity ‘pressure cooker’ by allowing capital to flow out of the country in search of better investment returns. In any case, given China’s high level of domestic savings, it will need to liberalise its capital account more aggressively to promote overseas investment in the post-subprime era in order to address its domestic over-investment problem.

Suggested Citation

  • Chi Lo, 2010. "Opportunity for Economic Expansion," Palgrave Macmillan Books, in: China After the Subprime Crisis, chapter 7, pages 106-122, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-0-230-29896-5_8
    DOI: 10.1057/9780230298965_8
    as

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