CHINA S RESPONSES TO GLOBAL FINANCIAL CRISIS

Transcription

1 CHINA S RESPONSES TO GLOBAL FINANCIAL CRISIS Yiping Huang Seminar at the Crawford School of Economics and Government, ANU, March 1, 29

2 GLOBAL FINANCIAL CRISIS Three unique factors contributed to the current crisis: (1) stable macroeconomic fundamentals leading to compression of risk premium; (2) innovation of financial products not only spreading but also magnifying risks; (3) pro-cyclical mechanisms exaggerating fluctuations in financial markets. The vicious cycle among: (1) decline in asset prices; (2) loss of financial institutions; (3) deleveraging.

3 HOW WILL THE GLOBAL ECONOMY BE DIFFERENT AFTER THE CRISIS? Higher saving of the US households implies lower consumption and current account deficits Cost of capital is likely to be higher as risk premium will probably not be as low Growth of the global economy may not be as strong as before US dollar may be begin its journey of long-term decline as a global currency Globalization may face significant challenge in the near term, not only in goods but also financial sectors The crisis will likely accelerate China s ascendancy in the world economy

4 HAS CHINA DECOUPLED FROM THE U.S.? CN GDP Growth= *US GDP Growth+.12*Time CN Export Growth= *US Retail Sales Growth(6 Months Lag)

5 ARE CHINESE AND AMERICAN SHARE PRICES BECOMING SYNCHRONIZED? Correlation coefficient=-.25 (2-3),.42 (4-5),.68 (6-7)

6 HAS FLOW OF HOT MONEY REVERSED?

7 GDP EXPENDITURE COMPONENTS LOOK RELATIVELY MORE STABLE Real Growth of Fixed Asset Investment Growth of Retail Sales Value and Volume 35 % Y/Y 25 % Y/Y Fixed Asset Investment Residential Investment 5 5 Non-Residential Investment Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-1Jan-2Jan-3Jan-4Jan-5Jan-6Jan-7Jan-8 Retail Sales Value Sources: CEIC Data Company and Citi.

8 TRADE SURPLUS REBOUNDED RECENTLY Real Growth of Exports and Imports and Trade Balance (% YoY, US$bn) 5 % Y/Y US$bn Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Exports (Left) Imports (Left) Trade Balance (Right) Sources: Citi. 8

9 PRODUCTION DATA MIGHT OVERSTATE SLOWDOWN OF UNDERLYING DEMAND Rapid Slowdown of Industrial Production & Power Generation Light vs. Heavy Industry: Reasons for Slowing Electricity Consumption? 3 % Y/Y 3 % YoY Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 All Industries Electricity Production Light Industry Heavy Industry Sources: CEIC Data Company and Citi.

10 INTEREST RATES CAN FALL FURTHER Base Lending and Deposit Rates Short- and Long-Term Market Interest Rates 1 % 15 % Jan-89 Jan-92 Jan-95 Jan-98 Jan-1 Jan-4 Jan-7 Lending Rate Deposit Rate 1/1/23 1/1/24 1/1/25 1/1/26 1/1/27 1/1/28 1/1/29 CHIBOR PBOC CP Yield Treasury Bond Yield Sources: CEIC Data Company and Citi.

11 CAN CHINA REPEAT THE 1998 EXPERIENCE? Positives and Negatives on the Government s Ability to Supporting Growth Exports % GDP Private Sector % GDP Budget revenue % GDP Fiscal Balance % GDP Contingent Liabilities % GDP External Debt % GDP Foreign Reserves US$bn 14. 1,528.2 Loan/Deposit Ratio % Average NPL Ratio % Currency Perception Over-valued Under-valued Sources: CEIC Data Company and Citi. 11

12 FISCAL LIFELINE FOR THE CHINESE ECONOMY Stimulus Package I: Rmb4trn before end-21, equivalent to 16% of 27 GDP Rmb28bn: low-rental housing Rmb37bn: rural infrastructure and social security systems Rmb1.8trn: railways, highways, ports, airports and power grids Rmb4bn: ecology/environment Rmb16bn: innovation and structural adjustment Rmb1trn: earthquake reconstruction Incomplete count of provincial plans already totals Rmb18trn Stimulus Package II: Measures to stimulate domestic consumption improving pension and minimum income support raising farmers income through agricultural prices and farm subsidy creating more jobs improving healthcare and other social welfare systems developing rural markets Key purposes: Package I to support growth and Package II to boost consumption and maintain social stability 12

13 3 2 DEFLATION RISKS HAVE RISEN SIGNIFICANTLY Both CPI and PPI Took Downturns in Recent Months % YoY 6 4 Export Collapse Could Lead to Deflation Risks CPI Inflation % (LHS) Export Growth(RHS) Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 CPI CPI Food PPI Sources: CEIC Data Company and Citi.

14 CORPORATE EARNINGS LOOK CHALLENGING Growth of GDP and Growth of Industrial Profits (% YoY) Corporate Earnings Might Collapse Despite Strong GDP Growth % Y/Y Jan-99 Jan-1 Jan-3 Jan-5 Jan Jan-Feb 7 Mar-May Jun-Aug Sep-Nov Jan-Feb 8 Mar-May Jun-Aug Sep-Nov Profit Growth (Left) GDP (Right) State Industry Non-State Industry Sources: CEIC Data Company and Citi.

15 8% MINIMUM GROWTH HAS ALMOST BECOME A RELIGION, BUT WHY? 4 Construction Can t Make-Up Manufacturing Job Losses % of Total Non-Agricultural 1.5 Number of New Job Market Entrants Is Falling Rapidly % Million Annual New Job Market Entrants: : 7.3mn, 21-21: 4.9mn; : -4.5mn Mar-94 Mar-96 Mar-98 Mar- Mar-2 Mar-4 Mar-6 Mar F 21F 215F 22F Mining Manufacturing Construction Growth of Labor Force (%, LHS) Total Labor Force (Million, RHS) Sources: CEIC Data Company, Institute of Population and Labor Economics, Chinese Academy of Social Sciences and Citi.

16 WHAT SHOULD BE THE BEST POLICY RESPONSES? Fiscal stimulus can support near-term growth but cannot support near-term employment. The 8% minimum growth has become a religion for policymakers and investors. Infrastructure spending also exacerbate the structural problems of the economy and is therefore not favorable for sustainable growth. Policy responses should be able to not only minimize negative impacts of financial crisis but also support longterm growth. A key element should be balancing between spending on infrastructure and development of the social welfare system