The Chinese Financial system and its responsiveness to the Asian Crisis

1
The 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.

4
Overview 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.

5
China Today
Source OECD
6
Source FDI database
7
This level of  average Income per Resident
enable  China to be classed among middle Income
Countries
8
The 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.

9
Source IMF database
10
Key Figures for China
Source World Bank
11
(No Transcript)
12
Private Firms in China
13
Globalisation 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.

14
Asia 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.

15
The 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

16
Asian Crisis
17
Causes 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.

18
Gross Domestic Investment as a of GDP
19
Industry Value Added as a of GDP
20
Exports as a of GDP
21
(No Transcript)
22
(No Transcript)
23
Total External Debt as a of GDP
24
Short Term Debt as a of total debt
25
Asian 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.

26
China 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.

27
Banking System Structure
28
In halfway between socialist planning and
liberalized market
29
China and the Asian Crisis

• China as a stabilizer
• China and the debt crisis
• Implications
• Opportunities and Threats
• China as a stabilizer

30
China 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

31
China 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

32
China 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

33
Opportunities 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

34
Opportunities 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

35
China  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