Macroeconomic Trends and Cycles

Junhui Qian2015 October

Content• Overview• Key Macroeconomic Variables

• GDP• Consumption• Investment• Inflation• Employment• Industrial Output• Loans• Interest Rates

• Current Problems

Overview• Major Cycles (Year of overheat)

• 1978-1983 (1980)• 1984-1986 (1985)• 1987-1990 (1988)• 1991-1997 (1994)• 1998-2005 (2004)• 2006-2008 (2008)• 2009- (2011)

• Before 1998, each cycle was accompanied by pushes for reform and ideological backlashes. • After 1998, macroeconomic cycles were driven by the business cycle itself and

policy (fiscal and monetary).

Content• Overview• Key Macroeconomic Variables

• GDP• Consumption• Investment• Inflation• Employment• Industrial Output• Loans• Interest Rates

• Current Problems

Annual GDP Growth

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20140.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Real Annual GDP Growth (%)

Chinese GDP Quarterly Growth

19921992

19931993

19941994

19951995

19961996

19971997

19981998

19991999

20002000

20012001

20022002

20032003

20042004

20052005

20062006

20072007

20082008

20092009

20102010

20112011

20122012

20132013

20142014

20152015

0

5

10

15

20

25

30

35

40

GDP Growth (quarterly, %)

Nominal GDP Growth (%) Real GDP Growth (%)

GDP Components (Expenditure)

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

2014

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

GDP ComponentsConsumption Investment Net Export

Contribution of Each Expenditure to GDP Growth (%)

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

2014-8

-6

-4

-2

0

2

4

6

8

10

12

ConsumptionInvestmentNet Export

Growth in Consumption

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20140%

5%

10%

15%

20%

25%

30%

35%

40%

Growth in Consumption

Total Consumption Private Government

Consumption: Private and Government

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20140

0.1

0.2

0.3

0.4

0.5

0.6

Government Consumption Private Consumption

Investment Growth

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-20

0

20

40

60

80

100

120

140

Growth in Investment

State Nonstate Sector

Investment Growth by Source

37987 -2052yy

yy/m

38078 -2052yy

yy/m

38169 -2052yy

yy/m

38261 -2052yy

yy/m

38353 -2052yy

yy/m

38443 -2052yy

yy/m

38534 -2052yy

yy/m

38626 -2052yy

yy/m

38718 -2052yy

yy/m

38808 -2052yy

yy/m

38899 -2052yy

yy/m

38991 -2052yy

yy/m

39083 -2052yy

yy/m

39173 -2052yy

yy/m

39264 -2052yy

yy/m

39356 -2052yy

yy/m

39448 -2052yy

yy/m

39539 -2052yy

yy/m

39630 -2052yy

yy/m

39722 -2052yy

yy/m

39814 -2052yy

yy/m

39904 -2052yy

yy/m

39995 -2052yy

yy/m

40087 -2052yy

yy/m

40179 -2052yy

yy/m

40269 -2052yy

yy/m

40360 -2052yy

yy/m

40452 -2052yy

yy/m

40544 -2052yy

yy/m

40634 -2052yy

yy/m

40725 -2052yy

yy/m

40817 -2052yy

yy/m

40909 -2052yy

yy/m

41000 -2052yy

yy/m

41091 -2052yy

yy/m

41183 -2052yy

yy/m

41275 -2052yy

yy/m

41365 -2052yy

yy/m

41456 -2052yy

yy/m

-20.000

0.000

20.000

40.000

60.000

80.000

100.000

120.000

FAI: ytd: Growth: Domestic Enterprise (DE) (China) FAI: ytd: Growth: Hong Kong, Macau & Taiwan Funded Enterprise (HMT) (China)FAI: ytd: Growth: Foreign Funded Enterprise (China)

Inflation

197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Inflation

Inflation of GDP Deflator Inflation of CPI

Y2Y Change in CPI and PPI (monthly, 1996-2015)

1996/10

1997/03

1997/08

1998/01

1998/06

1998/11

1999/04

1999/09

2000/02

2000/07

2000/12

2001/05

2001/10

2002/03

2002/08

2003/01

2003/06

2003/11

2004/04

2004/09

2005/02

2005/07

2005/12

2006/05

2006/10

2007/03

2007/08

2008/01

2008/06

2008/11

2009/04

2009/09

2010/02

2010/07

2010/12

2011/05

2011/10

2012/03

2012/08

2013/01

2013/06

2013/11

2014/04

2014/09

2015/02

2015/07-10

-5

0

5

10

15

CPI (y2y change, %) PPI (y2y change, %)

Employment

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-3

-2

-1

0

1

2

3

4

5

6

Growth in Employment (%)

Urban Employment Rural Employment

Industrial Value Added

IVA=profit+depreciation+payments to labor+tax

19901990

19911991

19921992

19931993

19941994

19951995

19961996

19971997

19981998

19991999

20002000

20012001

20022002

20032003

20042004

20052005

20062006

20072007

20082008

20092009

20102010

20112011

20122012

20132013

20142014

20152015

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

IVA (Year-to-year change, %)

Growth in Electricity Generation

19921992

19931993

19941995

19951996

19961997

19981998

19991999

20002000

20012002

20022003

20032004

20052005

20062006

20072007

20082009

20092010

20102011

20122012

20132013

20142014

2015-5.0000

0.0000

5.0000

10.0000

15.0000

20.0000

25.0000

Electricity Generation (%)GDP Growth (%)

Total Loans

19941994

19941995

19951996

19961996

19971997

19981998

19991999

19992000

20002001

20012001

20022002

20032003

20042004

20042005

20052006

20062006

20072007

20082008

20092009

20092010

20102011

20112011

20122012

20132013

20142014

20142015

20150%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Growth in Total Loans

Interest Rates and Inflation

19901990

19911991

19921992

19931993

19941994

19951995

19961996

19971997

19981998

19991999

20002000

20012001

20022002

20032003

20042004

20052005

20062006

20072007

20082008

20092009

20102010

20112011

20122012

20132013

20142014

2015-5

0

5

10

15

20

25

30

Interest Rates and Inflation (%)

Interest Rate on One-Year Deposit One-Year Loan Inflation

Overnight Money Market Rate

2000/01

2000/05

2000/09

2001/01

2001/05

2001/09

2002/01

2002/05

2002/09

2003/01

2003/05

2003/09

2004/01

2004/05

2004/09

2005/01

2005/05

2005/09

2006/01

2006/05

2006/09

2007/01

2007/05

2007/09

2008/01

2008/05

2008/09

2009/01

2009/05

2009/09

2010/01

2010/05

2010/09

2011/01

2011/05

2011/09

2012/01

2012/05

2012/09

2013/01

2013/05

2013/09

2014/01

2014/05

2014/09

2015/01

2015/05

2015/090

1

2

3

4

5

6

7

Overnight Money Market Interest Rate on One-Year Deposit

Content• Overview• Key Macroeconomic Variables

• GDP• Consumption• Investment• Inflation• Employment• Industrial Output• Loans• Interest Rates

• Current Problems

The Impact of the Global Financial Crisis• From 2003 to early 2008, the US consumption had been unusually strong, under the loose

monetary policy and the housing bubble. With strong external demand and investment passion, the Chinese economy enjoyed double-digit growth in this period.

• In mid-2007, signs were clear that Chinese economy was over-heating and PBC started to raise interest rates and the deposit requirement ratio for banks.

• As the GFC hit the US consumption, the Chinese manufacturing sector was also badly hit. • Under the fear of mass unemployment, the state council decided to stimulate the economy

with a massive (RMB 4 trillion) investment program. • Local government use cheap lending from the state-controlled banks to finance the

investment drive. As a result, the leverage ratio for local government financing vehicles increased dramatically.

• The state-controlled banks loosened lending standards. And interest rates were cut for the mortgage borrowers. As a result, housing price soared across the country.

Housing Price Since 2007

The Cooling of Housing• From 2010, the central government tried to cool down the housing

market. • Measures include purchase restrictions, differential interest rates for

second and third-home buyers, restrictions on bank lending to developers, etc. • These measures had limited success.

Monetary Tightening• As the inflation rate approaches 5% at the end of 2010, the central

bank started tightening. • The required reserve ratio for banks was raised to over 20%, an

unprecedented level. • Although interest rate was only moderately raised, borrowing costs

for the private sector soared. The interest rate on a typical “trust loan”, which was considered risk-free, would be around 12%. Interest rates on more risky lending were much higher. As a result, a bubble on high-interest private lending occurred in many regions.

Required Reserve Ratio (2006-2012)

20062006

20062006

20062006

20062006

20072007

20072007

20072007

20072008

20082008

20082008

20082008

20082009

20092009

20092009

20092009

20102010

20102010

20102010

20102010

20112011

20112011

20112011

20112012

20122012

0%

5%

10%

15%

20%

25%

Small Banks Big Banks

The Slowing Down of Chinese Economy• As local governments found it more and more difficult, and expensive,

to finance investment, public investments slowed down. The same was true for private investment. • Under the weight of weakening external demand and internal

investment due to tight monetary policy, the economy started to slow down. • The housing price finally stopped rising and started to decline in most

cities.

The Stock Boom and Crash in 2014-2015

2008-12

2009-02

2009-03

2009-05

2009-07

2009-08

2009-10

2009-11

2010-01

2010-03

2010-04

2010-06

2010-08

2010-09

2010-11

2010-12

2011-02

2011-04

2011-05

2011-07

2011-08

2011-10

2011-12

2012-01

2012-03

2012-04

2012-06

2012-08

2012-09

2012-11

2012-12

2013-02

2013-04

2013-05

2013-07

2013-09

2013-10

2013-12

2014-01

2014-03

2014-05

2014-06

2014-08

2014-09

2014-11

2015-01

2015-02

2015-04

2015-05

2015-07

2015-090

1,000

2,000

3,000

4,000

5,000

6,000

SSECI (1990-2015)

Exchange Rate Realignment

2009-01

2009-03

2009-05

2009-07

2009-09

2009-11

2010-01

2010-03

2010-05

2010-07

2010-09

2010-11

2011-01

2011-03

2011-05

2011-07

2011-09

2011-11

2012-01

2012-03

2012-05

2012-07

2012-09

2012-11

2013-01

2013-03

2013-05

2013-07

2013-09

2013-11

2014-01

2014-03

2014-05

2014-07

2014-09

2014-11

2015-01

2015-03

2015-05

2015-07

2015-095.6

5.8

6.0

6.2

6.4

6.6

6.8

7.0

USDCNY

Concluding Remarks• Investment occupies a large share in Chinese GDP. This makes the

economic cycles more volatile. • As the Chinese economy grows and become more and more open,

the economy becomes more synced with the world economy.• Since 2010, the economy has been slowing down. The policy makers

are more concerned with structural reforms that may lead to a more balanced and sustainable growth path.