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World Financial Crisis and World Financial Crisis and China China
Professor Shujie Yao
SCCS amd GEPUniversity of Nottingham
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World Financial Crisis and China
Introduction: overviewEvolution of crisisPolicy methodsChina in the crisisImplications on world geo-political
economyKey conclusions
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Introduction: overview
• Deepest crisis since 1930’s
• Starting from richest nations: US, EU and Japan
• Affecting all countries
• Spectacular failures of banks, insurance companies
• Unprecedented rescue efforts in human history
• Significant rebalancing of world power
• China benefits
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Causes of crisis
Long period of world growth 1992-2007
Structural failure in the West
Greed, complexity and opaqueness in
banking/finance
Mismanagement of inflation-interest rates by
central banks
Energy and materials crisis
State vs market: invisible hand no panacea
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Trade balances of UK, US and China ($ billion)
Sources: Official statistics of three countries
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Evolution of crisisEvolution of crisis
2004-7 Rising interests in US & Europe
2006 on Falling US house prices
Aug 07 Sub-prime losses hit banks
2007-8 Banking system meltdown
Jan-Jul 08 Surging oil & commodity prices
2008 Contagion to all countries
Sep 08 Stock market collapses
May 08 Rescue actions from US, EU, Japan, China
April 09G20 London
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New York -34%
London -31%
Paris -43%
Frankfurt -40%
Mumbai -52%
Singapore -49%
Sydney -41%
Hong Kong -48%
Shanghai -65%
Tokyo -42%
Table 1: World stock markets 2008
Sources: Danny Quah (2009) 'Will Asia save the world?' The World Economy Asia Lecture presented in January 2009, Kuala Lumpur, Leverhulme Centre GEP, Nottingham.
Falling share prices in the world
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Colossal losses of giant banks & other MNCs
• US: Lehman Brothers, Citigroup, AIG, GM, etc.• UK: RBS, HBOS (Lloyds)
Example 1: AIGLosses: Q4, 08 = $61.7 bil; total loss from 07 = $100 bil.• Market value: from over $150 bil to $1.2 bil.• Covering: $2 tril products, of w, $1 tril insuring 12 large banks 94% of Fortune 500 properties • Government rescue: $150 bil, could go $250 bil.• Bonus $165 mil a peanut in good days, but huge anger today
Example 2: RBS• Losses: 2008 = £24 bil (cost of ABN AMRO, £11 bil)• £324 bil toxic assets out of £1 trillion (80% overseas)• Share price: High £7 (Jan 07), low £0.1 (Jan 09)
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GDP growth by quarter 2007Q1 – 2009Q1 (%)
Sources: Official statistics of three countries
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Sharp contraction in prices, productionAnd services
• Industrial production (e.g. UK -6% in Feb 2009)
• FDI (world FDI -24% in 2008)
• House construction/sales (-50% in UK and US)
• Car production/sales (-40% in UK and US)
• House prices (-18% in US 2008, -16% in UK 2008)
• Unemployment rate: US 8.1%, UK 2m and still rising
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Volumes of trade 2007Q1 – 2009Q1 ($ billion)
Sources: Official statistics of three countries
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Response to crisis
• Sharp drop in interest rates
• Bailouts of failing giant banks & other MNCs
(e.g., Citigroup, AIG, RBS, Lloyds-HBOS)
• Stimulus packages to boost outputs
(e.g. China RBM 4 trillion, US, $787 billion, UK up to £20 billion)
• Quantitative easing (UK, £125 billion, US $1.2 trillion, March 2009)
• Global efforts (G20, end of 2008, 2 April 2009: $1.1 trillion)
Notes: (1) US $1.2 billion on 18/3/09: $0.3 tril on Treasuries,
$0.75 tril mortgage-back securities, $0.1 tril Freddie Mac.
(2) This package follows the $787 bil package in Feb. 09 which
Included tax cuts, infrastructure and aids to states.
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Rescue efforts in the UK
• VAT from 17.5% to 15% for one year
• Interest rate drops from 5% Oct 08 to 0.5% March 09
• Stamp duty exempt threshold £60,000 to £175,000
• Nationalisation of Banks
Northern Rock (100%), RBS (70%), Lloyds (63%)
• Toxic assets insurance (RBS, £325 billion, Lloyds £260 billion)
• Quantitative Easing (£125 billion in H1 2009, may up if necessary)
Notes: How bad is the UK economy? (1) unemployment 2m March 09,
Expected to 3m end of 2009, or 10%. (2) House and stock market
Values drops £1.9 trillion, or £40,000 per adult. (3) Mortgage lending
Drops 50% from Jan 08 to Jan 09. (4) GDP to decline by 3.5%-4.3% in 2009.
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G20 Concerted Rescue Efforts
• Concerted domestic stimulus efforts
• Preventing trade protectionism
• G20 in London 2 April 2009: $1.1 trillion ($500 billion
to IMF, SDR 250 billion issued by IMF for trade credits,
$1 billion for poor nations)
• China, Japan and Korea: Asian Fund $86 billion
($38.4 by China and Japan each, and $19.2 by Korea)
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The latest development in May 2009
• EU, Japan, US will contract sharply in 2009 and recover in 2010
• UK and other DCs: U-shape
• China & India, V-shape
• Stock markets have seen their worst over in March 2009
Lowest May 09 Change (%) Dow Jones 6400 (Mar 09) 8500 + 33 FTSE100 3400 (Mar 09) 4500 + 32 Shanghai 1600 (Nov 08) 2600 + 63
• Banking sector stability Stress test for 19 US banks and Barclay Share prices of most banks and resource companies rose 4 times from their lowest points seen in January-March 2009
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China in the crisis environment
• China hit hard but much less than its competitors
Bank reforms 1998-2006 pays dividends
China’s economic fundamentals strong
High growth/savings
Low deficit and strong state revenue
High foreign exchange reserves
Swift government action
• Nonetheless, GDP-Trade-FDI-Employment-Production hit hard
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Long term implications on China and the world economy
• Re-balancing of geo-eco-political power: West to East
• China and India are big winners, esp, China
• New global financial regulatory system
• Preventing and coping with future crisis
• Technology and environment
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China becomes the biggest winner
• Catching up with Japan and the US more quickly
• More influential on world economy and politics
• Benefiting from low prices of oil and raw materials
• Moving up the technological ladder
• Reducing regional inequalities
• Becoming aware of potential future crisis
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US Major Foreign Holders of Treasury Securities ($bil)
Country March 2009 March 2008 Change % 09/08
China 768 491 36.1
Japan 687 597 13.1
Russia 138 42 69.6
UK 128 200 -56.3
Brazil 127 149 -17.3
Luxenburg 106 90 15.1
HK 79 61 22.8
Taiwan 75 41 45.3
Grand total 3265 2506 23.2 http://www.treas.gov/tic/mfh.txt
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China's Economy in April 2009: sign of recoveryChange from same period last year
GDP 2009 Q1 +6.10%
Exports Jan-April -20.50%
Investments 2009 expected 10 tril RMBTrade surplus Jan-April +32.40%Exports April vs March +6.90%Imports April vs March +15.10%Industrial output Jan-March +4%Industrial output April +7.30%Retail sales April +14.80%Investments 2009 Q1 5 tril RMBInvestments 2009 total 10 tril RMB
People's Daily: 14/5/09, p1; People's Daily, 13/5/2009, p5
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Key conclusions
• Crisis triggered by credit crunch in US from 2007
• Real crisis starting from 3rd Q 2008
• It may last for 2 years, 4 years to recover to 2007 level
• Unprecedented from 1930s
• Affecting all countries: DCs and LDCs
• DCs hit harder than LDCs
• Rebalancing world power: China biggest winner
• Future crisis possible due to globalisation
• Imperative to learn lessons, esp, China and India