China's economy is heavily dependent on global trade and investment flows. In 2007, China overtook the United States to become the world's second-largest merchandise exporter after the European Union (EU). China's net exports (exports minus imports) contributed to one-third of its GDP growth in 2007. China's exports of goods and services as a share of GDP rose from 9.1% in 1985 to 37.8% in 2008 (see Figure 1 ). The Chinese government estimates that the foreign trade sector employs more than 80 million people, of which 28 million work in foreign-invested enterprises. Foreign direct investment (FDI) flows to China have been a major factor behind its productivity gains and rapid economic growth. FDI flows to China in 2007 totaled $75 billion, making it the largest FDI recipient among developing countries and the third largest overall, after the EU and the United States; FDI flows to China in 2008 were $92 billion. The current global economic slowdown (especially among its major export markets—the United States, the EU, and Japan) is having a significant negative impact on China's export sector and industries that depend on FDI flows. The Chinese economy slowed sharply in 2008 and early 2009. China's fourth-quarter 2008 real GDP growth (year-on-year basis) was 6.8%, and its 1 st quarter 2009 growth (year-on-year basis) was 6.1% (reportedly, the slowest quarterly growth in 10 years). Some analysts contend annual economic growth of less than 8% could lead to social unrest in China, given that an estimated 20 million people seek jobs every year (including migrant workers who move to urban centers and high school and college graduates). According to the International Monetary Fund (IMF), China was the single most important contributor to world economic growth in 2007. Thus, a Chinese economic slowdown (or recovery) could also have significant global implications. The extent of China's exposure to the current global financial crisis, in particular from the fallout of the U.S. sub-prime mortgage problem, is unclear. On the one hand, China places numerous restrictions on capital flows, particularly outflows, in part so that it can maintain its managed float currency policy. These restrictions limit the ability of Chinese citizens and many firms to invest their savings overseas, compelling them to invest those savings domestically, (such as in banks, the stock markets, real estate, and business ventures), although some Chinese attempt to shift funds overseas illegally. Thus, the exposure of Chinese private sector firms and individual Chinese investors to sub-prime U.S. mortgages is likely to be small. Moreover, Chinese government entities, such as the State Administration of Foreign Exchange, the China Investment Corporation (a $200 billion sovereign wealth fund created in 2007), state banks, and state-owned enterprises, may have been more exposed to troubled U.S. mortgage securities. Chinese government entities account for the lion's share of China's (legal) capital outflows, much of which derives from China's large and growing foreign exchange reserves. These reserves rose from $403 billion in 2003 (year end) to $2.1 trillion as of June 2009. In order to earn interest on these holdings, the Chinese government invests in overseas assets. A large portion of China's reserves are believed to be invested in U.S. securities, such as long-term (LT) Treasury debt (used to finance the federal deficit), LT U.S. agency debt (such as Freddie Mac and Fannie Mae mortgage-backed securities), LT U.S. corporate debt, LT U.S. equities, and short-term (ST) debt. The Treasury Department estimates that, as of June 2008, China's holdings of U.S. securities totaled $1,205 billion (up from $922 billion in June 2007), making it the second-largest foreign holder of such securities (after Japan). Of this total, $527 billion were in LT U.S. agency securities, $522 billion were in LT Treasury securities, $100 billion in LT equities, $26 billion in LT corporate securities, and $30 billion in ST debt. If China held troubled sub-prime mortgage backed securities, they would likely be included in the corporate securities category and certain U.S. equities (which include investment company share funds, such as open-end funds, closed-end funds, money market mutual funds, and hedge funds) which may have been invested in real estate. However, these were a relatively small share of China's total U.S. securities holdings. China's holdings of Fannie Mae and Freddie Mac securities (though not their stock) were likely to have been more substantial, but less risky (compared to other mortgage-backed securities), especially after these two institutions were placed in conservatorship by the Federal Government in September 2008 and thus have government backing. The Chinese government generally does not release detailed information on the holdings of its financial entities, although some of its banks have reported on their level of exposure to sub-prime U.S. mortgages. Such entities have generally reported that their exposure to troubled sub-prime U.S. mortgages has been minor relative to their total investments, that they have liquidated such assets and/or have written off losses, and that they (the banks) continue to earn high profit margins. For example, the Bank of China (one of China's largest state-owned commercial banks) reported in March 2008 that its investment in asset-backed securities supported by U.S. sub-prime mortgages totaled $10.6 billion in 2006 (accounting for 3.5% of its investment securities portfolio). In October 2008, it reported that it had reduced holdings of such securities to $3.3 billion (1.4% of its total securities investments) by the end of September 2008, while its holdings of debt securities issued or backed by Freddie Mac and Fannie Mae were at $10 billion. Fitch Ratings service reported that the Bank of China's exposure to U.S. sub-prime-related investments was the largest among Asian financial institutions, and that further losses from these investments were likely, but went on to state that the Bank of China would be able to absorb any related losses "without undue strain." However, China's economy has not been immune to effects of the global financial crisis, given its heavy reliance on trade and foreign direct investment (FDI) for its economic growth. Numerous sectors were hard hit. To illustrate: The real estate market in several Chinese cities experienced a sharp slowdown in construction, falling prices and growing levels of unoccupied buildings. This increased pressure on the banks to lower interest rates further to stabilize the market. The value of China's main stock market index, the Shanghai Stock Exchange Composite Index, lost nearly two-thirds of its value from December 31, 2007, to December 31, 2008. China's trade and FDI plummeted sharply, as indicated in Figure 2 . Exports and imports from January-July 2009 were down 22.0% and 23.6%, respectively on a year-on-year basis; they declined 10 straight months beginning in November 2008. FDI flows to China from January-July 2009 were down 20.4%; they declined for 10 consecutive months beginning in October 2008 (year-on-year basis). The Chinese government in January 2009 estimated that 20 million migrant workers alone had lost their jobs in 2008 because of the global economic slowdown. During the first four months of 2009, industrial output rose by 5.5% year-on-year, well below the 12.9% growth rate in 2008. China has taken a number of steps to respond to the global financial crisis. On September 27, 2008, Chinese Premier Wen Jiabao reportedly stated that "what we can do now is to maintain the steady and fast growth of the national economy, and ensure that no major fluctuations will happen. That will be our greatest contribution to the world economy under the current circumstances." In addition to cutting interest rates and boosting bank lending, China has implemented a number of policies to stimulate and rebalance the economy, increase consumer spending, restructure and subsidize certain industries, and boost incomes for farmers and rural poor. On November 9, 2008, the Chinese government announced it would implement a two-year, 4 trillion yuan ($586 billion) stimulus package (equivalent to 13.3% of China's 2008 GDP), largely dedicated to infrastructure projects. The package would finance public transport infrastructure (including railways, highways, airports, and ports) affordable housing, rural infrastructure (including irrigation, drinking water, electricity, and transport), environmental projects, technological innovation, health and education, and rebuilding areas hit by disasters (such as areas that were hit by the May 12, 2008 earthquake, primarily in Sichuan province). China's stimulus, if fully implemented, would likely constitute one of the largest economic stimulus packages (both in spending levels and as a percent of GDP) that have been announced by the world's major economies to date, although it is unclear to what extent the stimulus package represents new spending versus projects that were already in the works before the economic downturn hit China. Table 1 provides a breakdown of the stimulus program spending priorities. The Chinese stimulus program includes steps the government intends to take to assist 10 pillar industries (i.e., industries deemed by the government to be vital to China's economic growth) to promote their long-term competitiveness. These industries include autos, steel, shipbuilding, textiles, machinery, electronics and information, light industry (such as consumer products), petrochemicals, non-ferrous metals, and logistics.