lecture 3: country in focus: china and east asian crisis

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Yale School of Management

Lecture 3: Country in Focus:

China and East Asian Crisis

Topics today

Why China, India and Russia have had different

experience?

Brief history of China’s reforms and capital market

Is China going to follow the “Tigers” experience next?

What caused the East Asian Financial Crisis?

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From a historical perspective

Source : A. Maddison "the World Economy -- A Millennial Perspective"

3.49.49.68.67.65.4Former USSR

3.13.33.62.73.64.5Africa

5.03.14.27.612.216.0India

11.54.64.58.917.232.9China

7.77.73.02.62.33.0Japan

29.516.415.521.936.056.2Total Asia (excl. Japan)

1.91.71.31.00.60.7Mexico

21.922.027.319.18.91.8US

8.78.77.94.52.52.0Total Latin America

2.03.43.54.54.13.3Eastern Europe

3.34.26.58.39.15.2United Kingdom

3.03.63.13.53.83.2Italy

4.35.95.08.86.53.8Germany

3.44.34.15.36.55.5France

20.625.726.333.533.623.6Total Western Europe

199819731950191318701820

% of World Total GDP

Share of World GDP 1820-1998

Source : A. Maddison "the World Economy -- A Millennial Perspective"

3.49.49.68.67.65.4Former USSR

3.13.33.62.73.64.5Africa

5.03.14.27.612.216.0India

11.54.64.58.917.232.9China

7.77.73.02.62.33.0Japan

29.516.415.521.936.056.2Total Asia (excl. Japan)

1.91.71.31.00.60.7Mexico

21.922.027.319.18.91.8US

8.78.77.94.52.52.0Total Latin America

2.03.43.54.54.13.3Eastern Europe

3.34.26.58.39.15.2United Kingdom

3.03.63.13.53.83.2Italy

4.35.95.08.86.53.8Germany

3.44.34.15.36.55.5France

20.625.726.333.533.623.6Total Western Europe

199819731950191318701820

% of World Total GDP

Share of World GDP 1820-1998

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China, India and Russia(PPP-adjusted per-capita GDP)

0100020003000400050006000700080009000

1000011000 China

India

Russia

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China, India and Russia: (growth in PPP-adjusted GDP)

-15

-10

-5

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

China

India

Russia

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China vs India: Why?

In “China is outperforming India” (IHT, Jan. 7), Ramesh Thakur states:

A decade ago, China's per capita GDP was about the same as India's. Today it is double.

China is outperforming India in almost every facet of national competitiveness, attracting more than 10 times as much foreign capital, increasing its share of world markets and being courted as a responsible manager of global order.

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Ramesh Thakur continues:

While keeping costs as low as India's and offering the allure of an even bigger domestic market, China has built much better highways, telecommunications, power supply, seaports, airfields and other infrastructure than India.

Meanwhile, some of India's long-standing advantages over China are eroding or becoming less relevant, including English language competency, democracy and the rule of law.

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Yale School of Management EDITORIAL DESK | August 29, 2003, Friday, New York Times

Freedom's In 2nd Place?

By NICHOLAS D. KRISTOF (NYT)

ABSTRACT - Nicholas D Kristof Op-Ed column contrasts economic conditions in Ukraine and China, which took diametrically opposite political paths in late 1980's and early 1990's; says Ukraine held presidential election and pronounced itself a democracy, while China massacred protesters demanding more freedom and democracy; says that since then, China's economy has tripled in size and Ukraine's has shrunk by half; says authoritarian orderliness is sometimes more conducive to economic growth than democratic chaos; says perhaps best explanation for different paths of Ukraine and China is not policy but culture (M)

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A Gradual Privatization Process: Trial-and-Error

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The Private Sector’s Share Today

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How has China grown so much?

Besides a focus on manufacturing and other “hard” industries,

capitalization and financialization has played a crucial role in energizing the economy for growth

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Government debt issuance has generated supply of “capital”

(1000)0

1000200030004000500060007000 New government debt issues

Fiscal deficit

RMB 100 millions

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China’s Fiscal Deficit as Percentage of GDP:issuing debt against future government income

-2%

0%

2%

4%

6%

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

Data source: China Data Center at University of Michigan

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Government Expenditure as Percentage of GDP

0%

10%

20%

30%

40%

50%

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

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China’s main highway network: Every year constructing around 4,000 km of expressways, towards its target of connecting every city to an 85,000 km network.

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Capitalization of corporate assets & future cashflows has generated much capital supply

Sources: Federal Reserve Flow-of-Funds

Total bond mkt value = RMB 6 trillion

0

2

4

6

8

10

12

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

A-Share mkt capitalization in RMB trillions

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Figure 1: The Shanghai Stock Exchange Composite Index

0

1000

2000

3000

4000

5000

6000

Dec-90

Oct-91

Aug-92

Jun-93

Apr-94

Feb-95

Dec-95

Oct-96

Aug-97

Jun-98

Apr-99

Feb-00

Dec-00

Oct-01

Aug-02

Jun-03

Apr-04

Feb-05

Dec-05

Oct-06

Aug-07

Data source: The CCER Database provided by SinoFin Financial Information Service, www.ccerdatabase.com.

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Typical Ownership Pie for Listed Companies

State37%

RIS28%

A-shares30%

B-shares5%

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China’s Stock Market Today

1,400+ publicly traded stocks

Total market cap: RMB 20 trillion

120+ securities firms, with 100,000+

professionals

110+ million investor accounts

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Chinese companies listed overseas

First overseas listing in 1993

Now, overseas listed companies have a market cap of RMB ~15 trillion

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China’s Capitalization of Land & future labor income

Sources: State Statistical Bureau

0

500

1,000

1,500

2,000

2,500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total home mortgage loans in RMB billions

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Consumer credit started in 1995: auto loans

Credit cards emerged in 1999. Now, 30 million card holders

Student loans, other loans

Emerging consumer credit market in China

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China today vs the U.S. of 1945

As % of GDP

Stk Mkt Cap

MortgagesConsumer

Credit

China today 48% 11% 1.10%

U.S. in 1945 53% 9% 3%

U.S. in 2006 156% 77% 18%

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What is going to happen next in China?

Political risk & corruption

Institutional reform (e.g., legal reform, free press)

Non-performing loans (NPL) and assets: too much growth is financed by government borrowing & spending

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Too much wealth invested in real estate

Real Estate as % of Household Net Worth

22.30%

35%

46.8% 48%

68.50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

USA Britain Germany China Italy

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Some of the problems caused by financial under-development

% of Household Net Worth in Financial Assets

13%

35%38%

43% 45%

61%

0%

10%

20%

30%

40%

50%

60%

70%

Italy China Japan Germany Britain USA

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Too much money in bank savings: is there any problem?

% of Cash & Savings in Banks

21.5% 23.6%

35.7% 37.0%

52.1%

84.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Britain USA Italy Germany Japan China

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Financial Market Development and Income Inequality: any effect?

% in Cash & Bank Savings % in Stocks % in Bonds

China 84.5% 7.7% 5.8%

Italy 35.7% 11.3% 37.8%

Japan 52.1% 15.5% 5.2%

Germany 37.0% 16.9% 17.0%

Britain 21.5% 19.9% 9.2%

USA 23.6% 34.6% 5.2%

All as % of Financial Assets: household portfolios

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Risk Factor:

Income Inequality

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In comparison with other countries

lecture 3: country in focus: china and east asian crisis

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