Title: The Chinese Financial system and its responsiveness to the Asian Crisis
1The Chinese Financial system and its
responsiveness to the Asian Crisis
Team members Meas Pilipin Delattre Francis Wu
Yizhi Mendy Emmanuel Krabuanrat Netita
2 China Economic Background
3 Introduction
- With the most populated country of the world, and
largest territory, China has benefited since the
implement of Deng Xianping initial reforms from
an overwhelming high growth. - Market socialist economy.
4Overview of China
- In the late 1970s the Chinese leadership has
been trying to move the economy from the sluggish
Soviet-style centrally planned economy to a more
productive and flexible economy more market
driven - The economy took off in the 1980s, growing at 8
per year or more, and improving greatly live
standards. Agricultural production was the first
sector to show improvement, closely backed-up by
the manufacturing of consumer goods. Private
savings rates rose importantly as incomes rose
leading to substantial increase of exports. - Industry also has posted major gains, especially
in coastal areas near Hong Kong and opposite
Taiwan, where FDI (e.iTransfer of Technology)
and modern production methods have helped spur
production of both domestic and export goods.
Aggregate output for instance has more than
doubled since 1978.
5China Today
Source OECD
6Source FDI database
7This level of average Income per Resident
enable China to be classed among middle Income
Countries
8The economic growth of China
- Chinese government stepped back from reform
- The initial reforms focused on creating a stable
and uniform international trading system with the
clarification of a convincing framework to get
access to the world market. - Outcomes
- Acceleration of growth. China had become the
world's 10th largest trading nation.
9Source IMF database
10Key Figures for China
Source World Bank
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12Private Firms in China
13Globalisation and the WTO entry
- Globalisation China on the Threshold
- Important benefits of integrating the global
economy outweighing existing costs. Yet, China is
continuing to prepare its domestic policy and
financial system for international
competitiveness. Establishment a governmental
social security system, strengthening the banking
system, and further liberalizing interest rates.
Effects of increased competition will lead to
focusing on efficiency and productivity gains . - WTO expectations
- This year, China finally came to agreement with
the United States to join the World Trade
Organization. China made major concessions to
allow U.S. firms access to the Chinese market.
China's economy would face to privatisation to
become more competitive.
14Asia Economic Environment
- East Asia has remarkable record of high and
sustained economic growth. (e.g from 1965 to
1996 the miraculous growth in 8 countries Japan
the four Tigers Hong Kong, the republic of
Korea, Singapore, Taiwan and China and the three
newly industrializing economies (NIES) of
South-east Asia Indonesia, Malaysia, and
Thailand). - It is almost important to notice that this part
of the world has inspired also the other
developing countries. - Most of these countries in this respect got
rapidly access to the international market.
15The reasons for such a miracle
- More rapid output and productivity growth in
agriculture - Higher rate of growth of manufactured exports
- Creation of a Business-friendly environment
legal and regulatory structure that was generally
hospitable to private investment - The Building and the growing human Capital the
government has been focusing on Education
spending - Increasing of Savings and Investment
- Higher growth rate in physical capital, supported
by higher rates of domestic savings - Generally higher rates of productivity growth
- Program of reduction of poverty and Declining
Income Inequality - The openness to Foreign Technology
- Promoting Specific Industries
16Asian Crisis
17Causes of Crisis
- The macroeconomic imbalances
- Overvalued exchange rates.
- Widening current account deficits and a build up
of short term external debt. - Long-term links between the corporations and the
main banks led to poor investment decisions. - The financial markets did not have sufficient
information about the true financial position of
the corporations and banks. - The close relationship between government and
business in the formulation and implementation of
industrial strategy.
18Gross Domestic Investment as a of GDP
19Industry Value Added as a of GDP
20Exports as a of GDP
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23Total External Debt as a of GDP
24Short Term Debt as a of total debt
25Asian Crisis effected to China
- Reasons
- China had intra-regional trade and investment
linkages with the rest of Asia - The Chinese economy suffered from debilitating
structural problems. - A fragile bank-dominated financial systems.
- Poor prudential surveillance.
- Weak central bank regulation and supervision of
commercial banks. - A large buildup of non-performing loans.
- Over-leveraged state enterprises.
- A largely state-owned financial sector that may
be almost insolvent.
26China The Problems
- BANKS The government channeled 75 of bank
credit into state enterprises. - EXPORT SLOWDOWN Accounts for half of exports has
collapsed, and foreign investment has slowed. - SPECULATION Billions have poured into office
buildings and shopping malls. Overcapacity and
new debt problems for the banks are the result. - JOBS As state-owned enterprises pile up losses,
more are shutting factories, producing new
jobless masses.
27Banking System Structure
28In halfway between socialist planning and
liberalized market
29China and the Asian Crisis
- China as a stabilizer
- China and the debt crisis
- Implications
- Opportunities and Threats
- China as a stabilizer
30China as a stabilizer in the Financial crisis
- Growth 7.4
- Maintained stability of RMB
- Inflation around 1 according to EIU report
- Only 30 state sector of Chinas economy
- Foreign debt is not foreign currency denominated
- Development of home market to re-build assets
- FDI accounted for 70 of capital flow to China
- 90 of external debt was long-term
- Healthy current account
31China and the Asian crisisInitial situation
- Economic slowdown decrease of FDI shift to
cheaper factories and equipment plants (e.g
Thailand) - Accumulation of so-called bad loans in
state-owned banks - Unemployment rise (Still high today)
- Spill-over effect risks due to intra-regional
trade and investment linkages with rest of Asia - Consumer Demand dropping
32China and Debt crisisResponse
- Role of PBOC in BOP
- Trade Surplus differs from neighbouring countries
- Capital controlsNo short-term capital outflows
- Whereas other Asian countries Free capital
flows, fixed exchange rate, target monetary policy
33Opportunities and Threats
- Other countries devaluating increasing
competitiveness - Structural problems
- Favoritism/Cronyism (financial crime)
- Corruption
- Enormous Market (Increase Demand Labour supply)
- Towards a more market driven economy
- Chinese current account not affected thanks to
quota and entry barriers - Chinese foreign debt is strictly managed by the
state
34Opportunities and Threats
- Reform financial system/ Transparency (e.g Non
performing loans) Harvard Business Review. - SOE s reform from 80 to 30 of industrial
output (more flexibility) - SOEs have accumulated unmanageable debt to equity
ratios of between 400 to 700 (Justifying
reforms), leading to liquidity problems (highly
leverage nature of SOEs) MAIN THREAT A domestic
banking crisis would force China to devaluate
their currency generating drastic costs. - Expansion of both fiscal and monetary policies
35China Todaysource Economist Intelligence Unit
Report November 2001
- Current account surplus USD 9.2bn
- Fiscal policyacc pub debt 13 of GDP/lower taxes
- Monetary policylowinterestrates but may rise
- GDP expected to reach 7.8 in 2003
- Exchange rates RMb 8.28 USD 1 in 2002-03
- Inflation 1