The Nature of Chinas Economy and Global Financial Crisis

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The Nature of Chinas Economy and Global
Financial Crisis

• Professor Jun Zhang
• China Center for Economic Studies,
• Fudan University

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Stylized Facts

• Higher Saving Rates
• Higher Investment/GDP ratios
• Rising Export/GDP ratio
• Low productivity growth in non-tradable sector
• Employment created in manufacturing sectors
• Bank-based financial system
• Interest rates and exchange rates fixed
• De facto capital mobility

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Chinas Exchange Rate (Yuan against US Dollar)
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Export/GDP
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Inflow of FDIs
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Balance of Trade (1978-2004)
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Balance of Trade by Partners
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Foreign Exchange Reserves
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• The most dynamic part of Chinese real economy is
  the private and exporting sectors But they have
  been consistently facing financial constraints
• Since 1999, however, one of the important drivers
  of Chinas boom has been the emergence and
  expansion of urban real estate markets

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• Free housing system terminated nationally in
  1999
• Since then, urban housing sector was stimulated
  with continuous expansion of bank credits
• Urban housing boom created huge revenues for
  local governments and stimulated housing
  investments

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• Real estate investments accounted for rising
  share of capital construction in China
• Housing boom transmitted into stock market boom
  and assets prices soar
• Housing boom led to improved profitability in
  upstream and basic industries

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• Chinas boom (1998-2007) was due to
• Expansion of exports
• Assets boom

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• Fixed exchange rates invited rapid inflow of
  capital and induced passive expansion of money
  supply
• M2/GDP has been rising
• Excessive liquidity growth fueled assets prices
  and later on led to inflation of non-tradable
  goods

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Profitability
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• Chinese economy began the downward process of
  adjustments in 2007 when assets prices recorded
  historical high and supply-side inflation began
  to break out
• Monetary policy faced dilemma contraction works
  assets sector, but hurts exporting sector due to
  lack of market-based financing institutions

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• Chinese government decided to tighten bank
  credits in the early of this year, and by May,
  exporting sector faced inadequacy of finance and
  closures of business happened
• Chinas exporting sector deteriorated due to
  external market shrinkage
• Inflow of FDIs slows down

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• The slow down of Chinas economy is largely a
  result of its domestic issues and global
  financial crisis deepens this process
• Expansion of banking credit triggered housing
  markets and stock exchange
• Rising M2/GDP reflects financial deepening into
  assets sector related to real estate, not
  exporting sector

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• Exporting sector is highly venerable to external
  shock
• China therefore needs overcome structural problem
  to facilitate financial resources to support the
  productivity-enhancing sectors and create more
  jobs to sustain its high growth

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The Recent Deceleration

• The Chinese economy shows deceleration of the
  growth in output and industrial VAs
• The rate of inflation has dropped down to 2
  last month, PPI was 4
• Housing price index was up by 0.2
• Electricity generation went down by 4
• Exports turn into negative growth in November

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Real Estate Investment
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Industrial Value Added
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Output Change of Power, Steel and Cement
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Short-Run Contributors of Growth
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