Global Credit Crunch Research Articles

Repression and growth in the periphery of Europe: The politics of changing growth regime in Turkey

This study shows that in peripheral economies that are linked into circuits of global capital on unequal terms, attempts to change the core features of an existing growth regime without broader political support intensify externally induced conflict among the ruling coalition. Under these circumstances, a transition to a new demand regime within a short time frame is more likely to take place via authoritarian intervention when the political cost of repression is lower than the cost of redistribution. In developing these points, the analysis builds on evidence from Turkey: following the 2008 global credit crunch, the Justice and Development Party’s (Adalet ve Kalkinma Partisi, AKP) domestic demand-led and credit-fueled growth under dependent financialization has experienced a major crisis. However, the subsequent push to replace this regime with a profit-led model with an emphasis on exports worsened the conflict among the political coalition supporting the party as their preferences over monetary policy began to diverge. A temporary resolution of this deepening rift has been possible by way of an authoritarian intervention under R. T. Erdogan’s presidential bid in 2017–18. By situating the debate on the relationship between growth regimes and political institutions, the study further unpacks the nexus between democratic backsliding, dominant social blocs, and economic growth in the periphery of Europe.

Banks beyond borders: internationalization, financialization, and the behavior of foreign-owned banks during the Global Financial Crisis

An internationalizing wave swept through many developing and emerging countries’ banking systems in the years before the onset of the Global Financial Crisis (GFC) in 2008. Early critics of the influx of foreign banks worried that local affiliates of international behemoths could serve key nodes for transmitting turbulent conditions in the global financial hubs to the peripheries of the world economy. The eruption of the GFC and its aftermath, it would appear, decisively settled the dispute over the merits of foreign control of national banking systems in the critics’ favor. Yet the simple foreign/domestic ownership distinction cannot answer the questions that animate this article: why did foreign-owned banks play an amplifying role during the crisis in one region (post-communist Central and Eastern Europe) but not in another (Central and South America)? What accounts for the difference in how foreign-owned banks responded to a common financial shock across the two regions? I argue that financialization of banking systems in the post-communist European group of countries is a key mediating factor that explains why the heavy foreign bank presence in the region amplified the regional effects of the global credit crunch in 2008 and the years that followed.

The US Term Structure and Return Volatility in Global REIT Markets

This paper examines the information content of the U.S. term structure of interest rates on the market for real estate investment trusts (REITs) by decomposing the term structure of U.S. Treasury yields into two components that reflect the expectations factor and the maturity premium. We show that the expectations factor component of the U.S yield curve has significant explanatory power over return volatility in REIT stocks, both in the U.S. and globally, even after controlling for stock market trading activity. The expectations factor is generally found to have a positive effect on REIT market volatility, more significantly for the U.S. and Japanese REITs, highlighting the role of global funding conditions (via expected short rates) on return fluctuations in real estate markets. Comparing the findings for the pre- and post-global crisis periods, however, we find that the U.S. term structure has largely lost its explanatory power over global REIT markets, implied by largely insignificant effects during the post-global crisis period. The findings highlight the changing dynamics in REIT investments in the aftermath of the 2018 global credit crunch, possibly due to the slowdown of investments in the real estate sector globally, and suggest that investors will have to focus more on the idiosyncratic risk factors that drive these markets.

Critical Election in the Wake of an Economic and Political Crisis: Realignment of Icelandic Party Voters?

A critical election is generally defined as one in which the decisive results of voting reveal a sharp alternation of pre‐existing cleavage(s) and voting patterns, and the dealignment or realignment made between parties is lasting. A critical election can be caused by various factors and in this article the authors analyse whether the global credit crunch in 2008 set things in motion in Iceland, resulting in the 2009 election as a critical election. In that election, the electoral relevance of voters’ psychological attachment to parties and of ideological distances to them weakened, whereas party competence perceptions increased in importance for vote choices. Attachment to parties and ideological distances are factors that are generally stable and change slowly over time, while party competence is influenced by which issues are of importance at the time of the election. This indicates that, in 2009, a restructuring of the determinants of the vote occurred; a pattern of changes that is typical for a critical election. Evidence is found that the importance of party sympathy increases again in the 2013 election, indicating a realignment, rather than a dealignment, occurring in the wake of the 2009 election.

Faltering demand and performance of the logistics service sector in two cities of South-East Finland

Emerging markets experienced strong growth since the years 2002–2003, and this was especially the case for import markets in Russia. Many border-sharing countries, as well as nearby sea ports, terminal areas and logistics service companies, benefited from it and revenue growth was the norm for years. This was also the case in Finland, more specifically for South-East cities such as Kotka and Kouvola. However, the situation changed in 2009, mostly due to the global credit crunch. The demand decline experienced then continued after a short recovery in 2010–2011. In this study, small and medium sized enterprises (SMEs) of the logistics service branch in the two Finnish cities will be analyzed. The findings reveal that the sea port city (Kotka) suffered more from depressive demand, while a hinterland region (Kouvola) was able to switch from transit import and Russian import to more versatile logistics services. However, the situation is not straightforward, as transit export and railway volumes have maintained their levels rather well during the depression period.

Comparison of individual, ensemble and integrated ensemble machine learning methods to predict China’s SME credit risk in supply chain finance

Supply chain finance (SCF) becomes more important for small- and medium-sized enterprises (SMEs) due to global credit crunch, supply chain financing woes and tightening credit criteria for corporate lending. Currently, predicting SME credit risk is significant for guaranteeing SCF in smooth operation. In this paper, we apply six methods, i.e., one individual machine learning (IML, i.e., decision tree) method, three ensemble machine learning methods [EML, i.e., bagging, boosting, and random subspace (RS)], and two integrated ensemble machine learning methods (IEML, i.e., RS–boosting and multi-boosting), to predict SMEs credit risk in SCF and compare the effectiveness and feasibility of six methods. In the experiment, we choose the quarterly financial and non-financial data of 48 listed SMEs from Small and Medium Enterprise Board of Shenzhen Stock Exchange, six listed core enterprises (CEs) from Shanghai Stock Exchange and three listed CEs from Shenzhen Stock Exchange during the period of 2012–2013 as the empirical samples. Experimental results reveal that the IEML methods acquire better performance than IML and EML method. In particular, RS–boosting is the best method to predict SMEs credit risk among six methods.

Assessing the financial performance of European banks under stress testing scenarios: a multicriteria approach

The European banking system has been under considerable pressure since the beginning of the financial crisis in 2007–2008. Except for the global credit crunch, the European sovereign debt crisis has created additional difficulties. In response to the need for increasing the transparency and stability in the European financial/banking system and identifying weaknesses in banks’ capital structures, EU-wide stress tests have been performed by the European Banking Authority (EBA) on a regular basis since 2010. In this context, the aim of this study is to examine the financial performance of the European banks that have participated in the stress tests of EBA. The analysis takes into account the actual financial data of the banks, on the basis of the Capital, Assets, Management, Earnings, Liquidity framework, as well the results of the stress tests. The evaluation of the banks’ financial strength is performed through a robust multicriteria decision aid classification methodology. The latter is used to distinguish between the banks, which failed to meet the minimum capital requirement conditions imposed by EBA, and the well-capitalized ones.

Financialisation, oil and the Great Recession

This article addresses the role of world oil price hike of 2007–08 in serving to transform the financial and banking crisis into what is commonly referred to the Great Recession. Existing literature on the global crisis of 2007–09 tends to view it as a financial or banking phenomenon, with analyses focusing mainly on state policies, governance mechanisms and market dynamics in transforming the banking crisis of 2007–08 into the economic recession of 2008-12/13 Although often attributing the global meltdown to wider phenomenon of financialisation, rarely do existing perspectives delve into the role of the commodity sector in the global credit crunch. In this paper, we aim to fill this gap, by inquiring into the role played by oil as a financial asset class in the political economy of the global crisis.

Stress testing German banks against a global credit crunch

This paper investigates the impact of a global credit crunch on the corporate credit portfolios of large German banks using a two-stage approach. First, a macroeconometric simulation model (NiGEM) is used to forecast the impact of a substantial increase in the cost of business capital for firms worldwide in three particularly export-oriented industry sectors in Germany. Second, the impact of this economic multi-sector stress on bank credit portfolios is captured by a state-of-the-art Credit Metrics-type portfolio model with sector-dependent unobservable risk factors as drivers of the systematic risk. In our assessment of capital ratios, we confirm that both the increase of the capital charge for the unexpected loss and the increase in banks’ expected losses need to be considered. We also find that the availability of granular information at the level of borrower-specific probabilities of default has a significant impact on the stress test results.

HRD challenges when faced by disengaged UK workers

Purpose– This paper seeks to consider employees' perceptions of engagement from their lived experiences of UK employees following the global credit crisis, post 2008. It draws from the prior studies of Hassardet al.(2009), which researched work practices in the period preceding the study.Design/methodology/approach– The research utilised focus group discussion, which was analysed by template analysis from an interpretive perspective and adopts narratives to facilitate a critical interpretive paradigm.Findings– There is clear evidence of theories surrounding the positive value of employee engagement, however the findings do not demonstrate that it is necessarily valued by UK management by their responses towards the work environment given post 2008 trading conditions.Research limitations/implications– The limitation of the study lies with the size of the sample participating. While this reflects the need for further future research to be undertaken, the study also recognises that the findings are determined by the perceptions of employees which may not reflect the intentions of the management within the organisations which they work.Originality/value– There is a dearth of empirical study into the post 2008 period. This research attempts to ground theories of engagement within the post global credit crunch timeframe.

Feminist Finance: Recessionistas, Debt and the Credit Crunch

This article offers an opposing argument to the «man-cession» narrative that has dominated the press in recent years and explores what makes this particular economic context crucial for contemporary women’s fiction, offering a view into the recession’s impact on women’s lives, reading, consumption patterns, and self-identity in today’s post-credit-crunch world. The credit crunch has reignited debates about gender and the workplace in twenty-first century society. This article proposes that tensions between gender and debt have been played out in popular culture post-2007, most notably in publishing, through the emergence of a new genre of literature – Recessionista fiction. In Recessionista fictions, cocktails and heels are eschewed in favour of financial practicality, as shopaholic heroines confront a harsh new reality, forced into a position where they must take stock of their lives and start again from the midst of financial ruin, divorce or a major career change. As part of this process, Recessionista fiction foregrounds the impact of the credit crunch on female identity. This article examines a range of Recessionista fictions to explore how, why and with what effects the heroines of these novels intern and reify the attitudes of society during and after the global credit crunch. Examining an evolution in contemporary fiction that brought a taste of reality to an outdated chick lit genre in danger of extinction, the article analyses representations of gender and debt and the possibilities for personal transformation brought about by the global economic downturn.

Demise of the Dutch social housing tradition: impact of budget cuts and political changes

At the beginning of the financial crisis in 2008, the Dutch housing associations were in the position to perform a kind of anti-cyclical housing production that could save, at least partially, the total housing production in the Netherlands. In this contribution, we give insight into the way the housing associations managed to fulfil this specific task and more in general if the associations managed to strengthen their position since the economic crisis. After presenting the development and the main characteristics of the Dutch social rented sector, we give an overview of the general economy of the Netherlands since 2008, which suffers from the global credit crunch, followed by the debt crisis and the Euro crisis. Because of the strong international relations and the big size of the Dutch banking sector, the Netherlands appears to be very vulnerable for international financial problems. In the aftermath of the credit crunch, the Dutch government decided to give priority to a sound public budget and announced in 2010 and 2012 huge budget cuts. The rented sector was already faced with drastic reforms and huge budget cuts by the start of the Rutte I Cabinet in 2010. These policies are described and analysed. The increased impopularity of housing associations explains that these social housing providers were extremely hit by additional budget cuts. For the housing associations, the situation is threatening. The Rutte I and Rutte II Cabinets seem not to be aware of the rich tradition of the Dutch social housing sector and want to reduce the size of the social rented sector (now: 31 %) substantially. This contribution argues that there is the danger now that the austerity measures of the current government (Rutte II) will lead to the demise of the Dutch social housing tradition, although the housing associations could be a part of the solution for alleviating the current problems on the housing and construction market.

The unloved dollar standard: from Bretton Woods to the rise of China

The world dollar standard is an accident of history that greatly facilitates international trade and exchange-even trade not directly involving the United States. Since 1945, the dollar has been the key currency for clearing international payments among banks including interventions by governments to set exchange rates, the dominant currency for invoicing trade in primary commodities, and the principal currency in official exchange reserves. Although the strong network effects of the dollar standard greatly increases the financial efficiency of multilateral trade, nobody loves it. Erratic U.S. monetary and exchange rate policies have continually made foreigners unhappy. A weak and falling dollar led to the worldwide price inflations of the 1970s and contributed to the disastrous asset bubbles and global credit crisis of the noughties -- including the global credit crunch of 2008-09. Dollar weakness aggravated the postwar world's three great oil shocks in 1973, 1979, and 2007-08. After 2008, the U.S. Federal Reserve Bank's policy of keeping short-term interest rates near zero and out of alignment with emerging markets on the dollar standard's periphery, makes the international monetary system vulnerable to 'carry' trades: hot money inflows into the periphery that cause a loss of monetary control, commodity bubbles, and worldwide inflation . When these carry-trade bubbles suddenly unwind, they can result in huge swings in exchange rates and credit crunches. The asymmetrical nature of the dollar standard also makes many Americans unhappy because they cannot control their own exchange rate. Under the rules of the dollar standard game as explained in chapters 2 and 3 of this book, foreign governments may opt to set their exchange rates against the dollar while, to prevent conflict, the U.S. government typically does not intervene. Nevertheless, Americans often complain about how foreigners set their dollar exchange rates unfairly. Japan bashing in the late 1970s to the mid-1990s over the alleged under valuation of the yen, and China bashing in the new millennium over the alleged undervaluation of the renminbi, are two cases in point. Thus, while nobody loves the dollar standard, the revealed preference of both governments and private participants in the foreign exchange markets since 1945 is to continue to use it. As the principal monetary mechanism ensuring that international trade remains robustly multilateral rather than narrowly bilateral, it is a remarkable survivor that is too valuable to lose and too difficult to replace. This book provides historical and analytical perspectives on the different phases of the postwar dollar standard in order to better understand its resilience in spite of the great volatility in today's global monetary system. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/economicsfinance/9780199937004/toc.html

Global Deleveraging and Foreign Banks’ Lending to Latin American Countries

(ProQuest: ... denotes formulae omitted.)Lending by foreign banks to emerging markets is a defining feature of finan- cial globalization. In the years preceding the recent global crisis, foreign bank lending to emerging economies expanded rapidly-whether directly from parent banks' headquarters in advanced economies (cross-border flows) or through their affiliates operating in host countries. In the case of Latin America, lending by foreign banks became a significant source of funding for households and firms over the last decade. Although there is no consensus on the benefits of foreign banks' activity, on balance the presence of foreign- owned banks is generally believed to have enhanced competition and aided overall financial stability.1After the onset of the global credit crunch in 2008-09, however, foreign banks became a potential conduit through which financial stress in advanced economies could spread to emerging markets. Funding shortages in interbank markets and the need to deleverage bank balance sheets raised concerns that for- eign banks would pull back from international lending activities, potentially dis- rupting macroeconomic and financial stability in emerging market economies.2In Latin America, the growth rate of total foreign banks' credit slowed sig- nificantly after the collapse of Lehman Brothers in the third quarter of 2008. Yet crucially, the lending behavior of parent banks vis-a-vis their local affili- ates in Latin American economies was starkly different. Cross-border lend- ing, which is mostly denominated in foreign currencies, followed a boom-bust pattern, reversing sharply after the fourth quarter of 2008. In contrast, lending by their affiliates operating locally (a large share of which is denominated in host countries' domestic currencies) proved much more resilient and contin- ued to expand, even amid the financial turmoil.This paper explores how the global financial shocks were transmitted to Latin American countries through the foreign bank lending channel. For this purpose, we undertake an econometric analysis of the determinants of foreign banks' lending to Latin American and Caribbean countries using data from the Bank for International Settlements (BIS). The sample covers twelve Latin American countries and spans 1999 (the first year for which data are available on a quarterly basis) to the first quarter of 2009, at the height of the global credit crunch. We assess the effects of three factors that characterized the recent global financial turmoil: the freezing of international money markets, the deterioration of the financial health of parent banks in advanced economies, and more restrictive lending standards in developed countries' banking sys- tems. The sample period used in the paper thus provides an event study of the transmission of the global crisis to foreign banks' lending, rather than a systematic description of foreign banks' reaction to crises.To identify the channels of transmission and the possible mitigating fac- tors, we exploit differences in the geographic structure (cross-border versus local affiliates) and currency mix (foreign versus domestic) of foreign banks' lending to Latin American countries at the bilateral level (that is, between each Latin American recipient country and a BIS-reporting creditor country in a given quarter). For this purpose, we rely on publicly available data from the BIS on the currency structure of foreign banks' claims, together with confidential BIS data on the share of foreign banks' total lending extended through local affiliates (in both domestic and foreign currencies).Our results indicate that international money market conditions had a sig- nificant impact on foreign banks' lending to Latin American and Caribbean countries. In particular, an increase in the TED spread caused by liquidity shortages in the global interbank market adversely affects foreign banks' lending growth to Latin American countries. …

Global Deleveraging and Foreign Banks’ Lending to Latin American Countries

Global Deleveraging and Foreign Banks’ Lending to Latin American Countries Herman Kamil (bio) and Kulwant Rai (bio) Lending by foreign banks to emerging markets is a defining feature of financial globalization. In the years preceding the recent global crisis, foreign bank lending to emerging economies expanded rapidly—whether directly from parent banks’ headquarters in advanced economies (cross-border flows) or through their affiliates operating in host countries. In the case of Latin America, lending by foreign banks became a significant source of funding for households and firms over the last decade. Although there is no consensus on the benefits of foreign banks’ activity, on balance the presence of foreign-owned banks is generally believed to have enhanced competition and aided overall financial stability.1 After the onset of the global credit crunch in 2008–09, however, foreign banks became a potential conduit through which financial stress in advanced economies could spread to emerging markets. Funding shortages in interbank markets and the need to deleverage bank balance sheets raised concerns that foreign banks would pull back from international lending activities, potentially disrupting macroeconomic and financial stability in emerging market economies.2 [End Page 1] In Latin America, the growth rate of total foreign banks’ credit slowed significantly after the collapse of Lehman Brothers in the third quarter of 2008. Yet crucially, the lending behavior of parent banks vis-à-vis their local affiliates in Latin American economies was starkly different. Cross-border lending, which is mostly denominated in foreign currencies, followed a boom-bust pattern, reversing sharply after the fourth quarter of 2008. In contrast, lending by their affiliates operating locally (a large share of which is denominated in host countries’ domestic currencies) proved much more resilient and continued to expand, even amid the financial turmoil. This paper explores how the global financial shocks were transmitted to Latin American countries through the foreign bank lending channel. For this purpose, we undertake an econometric analysis of the determinants of foreign banks’ lending to Latin American and Caribbean countries using data from the Bank for International Settlements (BIS). The sample covers twelve Latin American countries and spans 1999 (the first year for which data are available on a quarterly basis) to the first quarter of 2009, at the height of the global credit crunch. We assess the effects of three factors that characterized the recent global financial turmoil: the freezing of international money markets, the deterioration of the financial health of parent banks in advanced economies, and more restrictive lending standards in developed countries’ banking systems. The sample period used in the paper thus provides an event study of the transmission of the global crisis to foreign banks’ lending, rather than a systematic description of foreign banks’ reaction to crises. To identify the channels of transmission and the possible mitigating factors, we exploit differences in the geographic structure (cross-border versus local affiliates) and currency mix (foreign versus domestic) of foreign banks’ lending to Latin American countries at the bilateral level (that is, between each Latin American recipient country and a BIS-reporting creditor country in a given quarter). For this purpose, we rely on publicly available data from the BIS on the currency structure of foreign banks’ claims, together with confidential BIS data on the share of foreign banks’ total lending extended through local affiliates (in both domestic and foreign currencies). Our results indicate that international money market conditions had a significant impact on foreign banks’ lending to Latin American and Caribbean countries. In particular, an increase in the TED spread caused by liquidity shortages in the global interbank market adversely affects foreign banks’ lending growth to Latin American countries. Also, a deterioration of parent banks’ own financial soundness in advanced economies is associated with reductions in foreign banks’ financing to Latin American countries. Changes [End Page 2] in banks’ lending standards in advanced economies also seem to have a statistically significant effect on the growth of foreign banks’ credit to Latin American countries. However, we also find that the propagation of these global financial shocks was significantly more muted for countries where foreign banks conduct a higher share of their lending through their local affiliates in domestic currency than through cross-border...

Putting Humpty Dumpty Back Together Again: Financialisation and the Management of the Subprime Mortgage Crisis

The subprime mortgage debacle in the USA and the subsequent global credit crunch provoked a wide range of crisis management responses in different national settings. Such interventions are typically figured as the sovereign state coming to the rescue of the markets and the banks. In contrast, and offering a critical analysis of the character and content of the principal interventions of authorities in the heartland of the crisis in the USA and the UK from Autumn 2007 through to 2009, we argue that these responses served to reproduce financialisation tendencies present across the seemingly separable domains of state and market which contributed to producing the crisis in the first place. Understood as a process co-constituted through pervasive but contradictory developments in capital accumulation, the risk management practices of lenders and the disciplining of borrowers, we show how, far from being seriously curtailed by crisis management, the financialisation of socio-economic life was actually buttressed during the very period in which its fragilities were most sharply exposed. In short, the management of the subprime crisis is a story akin to that of trying to put Humpty Dumpty back together again.

Public mortgage guarantee: instrument to cope with impacts of the financial crisis on the owner-occupied housing market evidence from the Netherlands

The global credit crunch had a deep impact on the mortgage markets in Europe, including the Netherlands. When the credit crunch transformed into a debt crisis, this impact deepened. The impact of the credit crunch and the debt crisis (together: the global financial crisis) on the Dutch housing market is described here. The Dutch government started to react with a stimulating policy but since 2010 austerity measures have become dominant. The National Mortgage Guarantee (NHG) has been applied as an instrument to shelter home-owners against the hardship of the financial crisis. In this paper the role of National Mortgage Guarantee in the Netherlands is analysed. Particular emphasis is placed on the role of this guarantee as an instrument to cope with the impact of the financial crisis on the national owner-occupied housing market. The performance of NHG in 2010 is elaborated. The conclusion is that NHG has made the Dutch owner-occupied housing sector more resilient during the financial crisis.

Contrasting the evolution of corporate governance models: A study of banking in Hong Kong

The sub-prime mortgage crisis, the bankruptcies of important US banks, and many originally family controlled enterprises coming under non-family, CEO-type leadership during the 2008 global credit crunch led many people to rethink the relationship between risk management and family businesses. One of the foci was on the doctrine of separation of ownership. This paper attempts to compare and examine the evolution of corporate governance in the banking business in Hong Kong by using two key financial institutions based there. By contrasting the evolution of corporate governance, management style and pattern of succession, we can see that although they developed under the same business environment and legal framework, the East-West business culture and ideology led them to choose different ownership structures and ways of succession, which ultimately determined their different developmental trajectories.

Is the Eurozone Rescue Strategy Tantamount to the Rearrangement of the Deckchairs on the Titanic?

The eurozone is the crown jewel in the process of European integration. This monetary zone includes the most advanced integration grouping of countries in the European Union. The eurozone has been expanding the number of its participants, a sign of success in any economic or political union. Politicians promised citizens stability and perpetual economic progress at the time of the eurozone inauguration (1999). This monetary integration has been a predominantly political process which neglected certain economic fundamentals for long term durability. These include federal-type intra-group fund transfers and orientation towards economic growth. Certain eurozone flaws appeared, raising powerful doubts about its survival. Some of the internal troubles of the eurozone such as an endemic lack of respect of rules, were amplified by the global credit crunch, bringing into question the initial promises made to citizens. A series of rescue operations commenced in 2010. Too much political and economic capital has been invested in the eurozone, to the extent that its statesmen will do everything they can to rescue it. If its participants believe the deal to be beneficial, the eurozone will continue its existence, but several federal-type amendments are necessary. Otherwise, the eurozone may join the ranks of a series of European monetary zones that have disintegrated over the past two centuries. The bloc’s citizens (and others) are unwitting observers of a slow motion eurozone train crash. Even though the eurozone burdens some of its member countries with high costs, its break-up or countries’ departure from it may prove even worse, but not inconceivable. c

China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence?1

AbstractChina is criticised for keeping its dollar exchange rate fairly stable when it has a large trade (saving) surplus. This criticism is misplaced in two ways. First, no predictable link exists between the exchange rate and the trade balance of an international creditor economy. Second, since 1995, the stable yuan/dollar rate has anchored China’s price level and facilitated counter cyclical fiscal policies that have smoothed its high real GDP growth at a remarkable 9 to 11 per cent per year. With its now greater GDP, China displaces Japan as the largest economy in East Asia – but with a much stronger stabilising influence on East Asian neighbours from its higher economic growth and more stable dollar exchange rate. Now, an ever larger China is an essential stabiliser for the world economy – as exemplified by its prompt and effective fiscal response to the global credit crunch of 2008–09. However, cumulating financial distortions – in China and the United States – threaten to undermine China’s growth and its stabilising influence on the rest of the world.