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World Financial Crisis and China

World Financial Crisis and China. Professor Shujie Yao SCCS amd GEP University of Nottingham. World Financial Crisis and China Introduction: overview Evolution of crisis Policy methods China in the crisis Implications on world geo-political economy Key conclusions.

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World Financial Crisis and China

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  1. World Financial Crisis and China Professor Shujie Yao SCCS amd GEP University of Nottingham

  2. World Financial Crisis and China • Introduction: overview • Evolution of crisis • Policy methods • China in the crisis • Implications on world geo-political economy • Key conclusions

  3. 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

  4. 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

  5. Trade balances of UK, US and China ($ billion) Sources: Official statistics of three countries

  6. Evolution 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 09 G20 London

  7. Falling share prices in the world 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.

  8. Colossal losses of giant banks & other MNCs • US: Lehman Brothers, Citigroup, AIG, GM, etc. • UK: RBS, HBOS (Lloyds) • Example 1: AIG • Losses: 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)

  9. GDP growth by quarter 2007Q1 – 2009Q1 (%) Sources: Official statistics of three countries

  10. Sharp contraction in prices, production • And 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

  11. Volumes of trade 2007Q1 – 2009Q1 ($ billion) Sources: Official statistics of three countries

  12. 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.

  13. 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.

  14. 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)

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

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