World Financial Crisis and World Financial Crisis and China China

Professor Shujie Yao

SCCS amd GEPUniversity of Nottingham

World Financial Crisis and China

Introduction: overviewEvolution of crisisPolicy methodsChina in the crisisImplications on world geo-political

economyKey conclusions

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

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

Trade balances of UK, US and China ($ billion)

Sources: Official statistics of three countries

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

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

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)

GDP growth by quarter 2007Q1 – 2009Q1 (%)

Sources: Official statistics of three countries

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

Volumes of trade 2007Q1 – 2009Q1 ($ billion)

Sources: Official statistics of three countries

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.

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.

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)

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

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

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

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

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

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

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