The decreased during the beginning of financial crisis

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crisis spread by a number of channels. For the initial stages, financial
channels were the important ones. Financial institutions of a number of
countries, especially in Europe, had invested heavily in securities linked to
the US real estate market. These investors had suffered huge losses. The
investors generated a general flight to safety which led to large capital
outflows from most emerging market economies that had few direct linkages with
the US real estate market. China remained to be largely immune to these wealth
and capital flow effects. FDI in China decreased during the beginning of
financial crisis and rebounded to almost the pre-crisis level later on. As
shown in Table 2, China’s net FDI decreased to $121.68 billion and $70.32
billion in 2008 and 2009, dropping 15% and 42% year by year, respectively, and
increased to $124.93 billion in 2010.

there was also a global financial impact that did not operate directly through
capital flows. This crisis affected the economic outlook and risk attitudes
across the globe and China was not immune. Before the crisis, extreme optimism
had affected many a markets across globe and China’s stock market was no
exception. Like in many other countries, China had enjoyed a stock market boom,
increasing fivefold between 2005 and 2007. Such rapid growth made markets
highly likely to suffer major reversals, and this is just what occurred when
bad news hit.

onset of October 2007, the stock market in China crashed, wiping out more than
two-thirds of its market value. A similar story applied to the real estate
market. A bubble had started to grow with China’s booming economy, since most
of the people believe that investing in property, such as real estate, is safer
than putting money in the banks. These impacts of developments on the Chinese
economy were relatively small compared with the trade channel, however.

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its early stages, the magnitude of the crisis was substantially underestimated
by most governments and private sector analysts. The adverse effects on the
real economies were expected to be quite limited. Hence, it was believed that
most emerging market economies would be little affected. This gave bit boost to
arguments that the behavior of emerging economy financial markets was
decoupling from those of the advanced economies. But, as the crisis began to
push the US and Europe into recession, the trade channel came to the front. This
falling demand in advanced economies had a huge impact on their demand for
imports from each other and from emerging markets. With its past rapid growth
in exports, China was especially exposed to the falls in global demand for its

Categories: Trade


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