FOREIGN BANKS IN SHANGHAI: People pass by foreign bank headquarters on a street in Shanghai on August 29. Out of 23 foreign banks in China, 17 have their headquarters in Shanghai

With U.S. and European financial institutions losing liquidity, the subprime mortgage crisis has become the biggest financial crisis since the Great Depression. It has spread to the real economy, infecting the Chinese market through foreign enterprises in China. Although the financial crisis threatens the stability of China's domestic market, at the same time it creates a good opportunity for China to counterpurchase foreign enterprises or assets in the country.

Foreign investment in China

Foreign investment, mainly foreign direct investment (FDI), has been a driving force behind China's economic development. China is now the second biggest FDI destination in the world, and the top destination among developing countries. According to the Chinese Ministry of Commerce, there were 632,348 foreign-invested enterprises on China's mainland as of 2007, representing $790.747 billion in investment. During the first eight months of this year, 20,801 new foreign-invested enterprises were approved to be set up in China. Their investments reached $74.374 billion.

China's total industrial output in 2007 was 40.45 trillion yuan ($5.77 trillion). Almost 31 percent came from foreign enterprises, 12.6 times more than in 1990. As early as 2006, Chinese employees working at foreign enterprises numbered more than 21 million. By the end of 2007, that number had surpassed 42 million, about 10 percent of China's total employment that year. Foreign enterprises now play a substantial role in the Chinese economy. The global financial crisis will impact foreign enterprises with their parent companies based in the United States or Europe, or in newly industrializing countries.

The crisis in the U.S. and European financial systems has caused a serious credit contraction in the short and middle term. The volume of commercial paper exchange in the United States on October 1 was only $1.6 trillion, shrinking 11 percent in three weeks. The Federal Reserve now finds itself acting as a commercial bank, having invoked emergency powers to lend money to failing companies by purchasing commercial paper as short-term debt. Such a severe credit contraction will inevitably reduce liquidity in the real economy, which in turn will lower market demand. This could have a devastating impact on foreign enterprises in China, which mainly engages in export.

Facing this pressure, many parent companies of foreign enterprises in China might lose profitability or even fold completely. If these parent companies sell off overseas branches or declare bankruptcy, it could create debt problems for Chinese suppliers and banks in addition to increasing unemployment among Chinese workers.