MAKE IT FASTER: A worker inside the Weifang High and New Technology Zone of Shandong Province assembles automatic transmissions for new vehicles. The financial crisis forces China to revamp its industrial structure (SUN SHUBAO)

The results are expected: China's economic growth slowed from 10.7 percent in the third quarter of 2010 to 7.6 percent in the second quarter this year. In other words, the Chinese economy is suffering from the pains of restructuring. But it is in a healthier state than before the global financial crisis.

The crisis also impacted China's economy in two important ways. First, it eliminated high inflation, which stood at 8.5 percent in April 2008, more than twice the government's target of 4 percent. To lower inflation, China's central bank raised its benchmark interest rate six times in 2007, an unprecedented move in the country's history. However, the inflation rate remained high. The global financial crisis soon hacked away at inflation, with the rate even falling below zero from February to September 2009. Second, China's economy significantly grew. In 2007, GDP of the United States was four times that of China's, but in 2012 the gap was narrowed to 1.9 times.

Crisis coming to China?

The global financial crisis that began in the United States has made Chinese economists nervous: Will the Chinese financial sector, which is increasingly becoming integrated with the global financial market, witness a similar financial crisis as the one in the United States? The concerns are real. China is looking a lot like the United States before the global financial crisis. Soaring credit growth and real estate prices—two factors that led to the crash in 2008—are alive and flourishing in China.

What is more disturbing is the risk brought by China's action to cope with the financial crisis. Zhang Ping, Deputy Director of the Institute of Economics of the Chinese Academy of Social Sciences (CASS), said that after China launched its anti-crisis measures, the friction between financial uncertainties and industrial restructuring has been on the rise. China's anti-crisis policy in 2008 encouraged financial institutions and all investors to engage in long-term investment, spending huge amounts of money on high-speed railways, infrastructure and real estate projects. Once the funds outstanding for foreign exchange decline and the central bank does not offer a timely remedy, the financial crisis would occur.

Zhang Ming, a researcher from the Institute of World Economics and Politics of the CASS, believes China's general leverage ratio is now under control. Its ratio of total debt against GDP is 200 percent, which puts it in the middle of the pack among world countries. But Chinese companies have too much debt, accounting for 100-150 percent of GDP. Corresponding to the high corporate debt is surplus capacity, which may cause a financial crisis when external demand weakens.

Some others think financial crisis won't happen in China, at least within next few years. Xiang Songzuo, chief economist at the Agricultural Bank of China, thinks a financial crisis is unlikely. First, the Chinese Government has strict control of the financial and economic sector, while a financial crisis only happens when the government has no control. Second, the Chinese Government owns a huge amount of state-owned assets, including powerful state-owned enterprises and valuable state-owned land, hence it should be able to check any crisis factor in the bud. More importantly, China's financial industry, including its shadow banking system, is still oriented toward the real economy. Therefore, China is unlikely to see the kinds of financial bubbles that were present in Europe and the United States, where the financial industry was divorced from the real economy.

Economists failed to forecast the financial crisis in 2008, and their predictions of China failing into the same rut are uncertain. Still, China's financial sector needs plenty of reform or it could face a terrible fate.

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