[Beijing Diary] The SVB Crisis and China's Face Management

What was the turning point for China to establish its belief in socialism as the ideology of the Chinese Dream? Many domestic and international scholars and the pro-China faction (知中派) point to the 2008 global financial crisis. While China was swelling with pride after successfully hosting the Beijing Olympics, the subprime mortgage crisis that erupted in the United States triggered a global economic downturn. Watching the global hegemon, the United States, collapse due to its failure to manage and regulate the free market economy, China likely smiled quietly.

At a time when employment and the real economy were collapsing due to domino defaults, China unleashed a massive fiscal stimulus of 4 trillion yuan (approximately 757 trillion won) to boost consumption and decisively implemented interest rate cuts and eased loan requirements. In contrast, capitalism and democracy, which most of the international community including South Korea followed, failed to exert power. Even when the U.S. stimulus package was delayed due to partisan conflicts between the ruling and opposition parties, exposing the limits of cyclical power, China maximized the advantages of socialism through the Communist Party’s swift decisions and immediate implementation. While the world economy was plummeting in 2009, China proudly recorded a growth rate of 8.9%.

Since then, the view that democracy is an absolute good and socialism is a regressive totalitarianism temporarily subsided. Even Western countries voiced opinions seeing China as a savior. It was also around this time that the term “G2” began to be actively used, placing China right next to the United States.

There is a sense of d?j? vu in China’s attitude toward the recent Silicon Valley Bank (SVB) collapse that has shaken the financial markets. The SVB incident has raised concerns about a chain collapse of small and regional banks in the U.S., spreading to a crisis among European investment banks already showing red flags in financial soundness. Although U.S. Treasury Secretary Janet Yellen declared to quell the crisis by assuring, “You can be confident that you can withdraw your deposits whenever you need them,” the market’s reaction remains unchanged. The power of the United States is beginning to be doubted again.

[Image source=Yonhap News]

Just in time, Chinese President Xi Jinping, after successfully launching the third term of the top leadership centered on his close aides through the largest annual political event, the Two Sessions (National People's Congress and Chinese People's Political Consultative Conference), tightened control over the financial market through party and state institution restructuring. On the 16th, the Communist Party Central Committee and the State Council announced the establishment and launch of the Central Financial Commission, a party organization. Chinese local media unanimously say this will enable effective management of financial risks in an increasingly uncertain financial market. Wang Feng, a researcher at the Beijing Academy of Social Sciences, told China’s state-run Global Times (GT), “(The establishment of the Central Financial Commission) is a restructuring of the financial and technological systems at a higher level,” adding, “In light of the U.S. SVB collapse, this restructuring announcement is very timely.” GT also criticized the Federal Reserve’s interest rate hikes, chosen to tackle domestic inflation, saying they “affect other countries including China and also pose fiscal risks.”

In a situation where the U.S. and China are raising tensions across economic, political, and diplomatic fronts, the SVB incident could be a boon for China. Due to the deterioration of relations between the two countries, the dependence of Chinese mainland startups on dollar investments has significantly decreased over the past two years. China seems to be reflecting on 2008 while managing its expression.