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The Chinese Financial system and its responsiveness to the Asian Crisis


... 5508.8 7855.0 11829.1 17042.9 20019.2 22914 24941 28406 29855 32610 Total amount of export and import (one hundred million US dollar) ... – PowerPoint PPT presentation

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Title: The Chinese Financial system and its responsiveness to the Asian Crisis

The Chinese Financial system and its
responsiveness to the Asian Crisis
Team members Meas Pilipin Delattre Francis Wu
Yizhi Mendy Emmanuel Krabuanrat Netita
China Economic Background
  • 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.

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
  • 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.

China Today
Source OECD
Source FDI database
This level of  average Income per Resident
enable  China to be classed among middle Income
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.

Source IMF database
Key Figures for China
Source World Bank
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Private Firms in China
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.

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
  • 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.

The reasons for such a miracle
  • More rapid output and productivity growth in
  • 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
  • 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

Asian Crisis
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.

Gross Domestic Investment as a of GDP
Industry Value Added as a of GDP
Exports as a of GDP
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Total External Debt as a of GDP
Short Term Debt as a of total debt
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.

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.

Banking System Structure
In halfway between socialist planning and
liberalized market
China and the Asian Crisis
  • China as a stabilizer
  • China and the debt crisis
  • Implications
  • Opportunities and Threats
  • China as a stabilizer

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

China and the Asian crisis Initial situation
  • Economic slowdown decrease of FDI shift to
    cheaper factories and equipment plants (e.g
  • 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

China and Debt crisis Response
  • 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

Opportunities and Threats
  • Other countries devaluating increasing
  • 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

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

China  Today source 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