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Lecture 3: Country in Focus:
China and East Asian Crisis
Topics today
Why China, India and Russia have had different experience?
Brief history of China’s reforms and capital market
Is China going to follow the “Tigers” experience next?
What caused the East Asian Financial Crisis?
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From a historical perspective
Share of World GDP 1820-1998
% of World Total GDP
1820
1870
1913
1950
1973
1998
Total Western Europe
23.6
33.6
33.5
26.3
25.7
20.6
France
5.5
6.5
5.3
4.1
4.3
3.4
Germany
3.8
6.5
8.8
5.0
5.9
4.3
Italy
3.2
3.8
3.5
3.1
3.6
3.0
United Kingdom
5.2
9.1
8.3
6.5
4.2
3.3
Eastern Europe
3.3
4.1
4.5
3.5
3.4
2.0
Total Latin America
2.0
2.5
4.5
7.9
8.7
8.7
US
1.8
8.9
19.1
27.3
22.0
21.9
Mexico
0.7
0.6
1.0
1.3
1.7
1.9
Total Asia (excl. Japan)
56.2
36.0
21.9
15.5
16.4
29.5
Japan
3.0
2.3
2.6
3.0
7.7
7.7
China
32.9
17.2
8.9
4.5
4.6
11.5
India
16.0
12.2
7.6
4.2
3.1
5.0
Africa
4.5
3.6
2.7
3.6
3.3
3.1
Former USSR
5.4
7.6
8.6
9.6
9.4
Source : A. Maddison "the World Economy -- A Millennial Perspective"
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3.4
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China, India and Russia
(PPP-adjusted per-capita GDP)
China
India
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
Russia
19
82
19
80
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
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China, India and Russia:
(growth in PPP-adjusted GDP)
15
China
India
10
Russia
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-5
-10
-15
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China vs India: Why?
 In “China is outperforming India” (IHT, Jan. 7), Ramesh Thakur
states:
A decade ago, China's per capita GDP was about
the same as India's. Today it is double.
China is outperforming India in almost every
facet of national competitiveness, attracting
more than 10 times as much foreign capital,
increasing its share of world markets and being
courted as a responsible manager of global order.
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Ramesh Thakur continues:
While keeping costs as low as India's and
offering the allure of an even bigger domestic
market, China has built much better highways,
telecommunications, power supply, seaports,
airfields and other infrastructure than India.
Meanwhile, some of India's long-standing
advantages over China are eroding or becoming
less relevant, including English language
competency, democracy and the rule of law. 7
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 EDITORIAL
DESK
| August 29, 2003, Friday, New York Times
Freedom's In 2nd Place?
By NICHOLAS D. KRISTOF (NYT)
 ABSTRACT - Nicholas D Kristof Op-Ed column contrasts
economic conditions in Ukraine and China, which took
diametrically opposite political paths in late 1980's and early
1990's; says Ukraine held presidential election and pronounced
itself a democracy, while China massacred protesters demanding
more freedom and democracy; says that since then, China's
economy has tripled in size and Ukraine's has shrunk by half; says
authoritarian orderliness is sometimes more conducive to economic
growth than democratic chaos; says perhaps best explanation for
different paths of Ukraine and China is not policy but culture (M)
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A Gradual Privatization Process: Trial-and-Error
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The Private Sector’s Share Today
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How has China grown so much?
Besides a focus on manufacturing
and other “hard” industries,
capitalization and financialization
has played a crucial role in
energizing the economy for growth
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Government debt issuance has
generated supply of “capital”
RMB 100 millions
7000
New government debt issues
6000
5000
4000
Fiscal deficit
3000
2000
1000
20
01
20
03
19
99
19
97
19
95
19
91
19
93
19
89
19
87
19
81
19
83
(1000)
19
85
0
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China’s Fiscal Deficit as Percentage of GDP:
issuing debt against future government income
6%
4%
2%
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
-2%
1952
0%
Data source: China Data Center at University of Michigan
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Government Expenditure as Percentage of GDP
50%
40%
30%
20%
10%
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
1952
0%
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China’s main highway network: Every year
constructing around 4,000 km of expressways, towards its target
of connecting every city to an 85,000 km network.
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Capitalization of corporate assets & future cashflows has
generated much capital supply
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A-Share mkt capitalization in RMB trillions
10
8
6
4
2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total bond mkt value = RMB 6 trillion
Sources: Federal Reserve Flow-of18
Funds
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Figure 1: The Shanghai Stock Exchange Composite Index
6000
5000
4000
3000
2000
1000
Data source: The CCER Database provided by SinoFin Financial Information
Service, www.ccerdatabase.com.
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Aug-07
Oct-06
Dec-05
Feb-05
Apr-04
Jun-03
Aug-02
Oct-01
Dec-00
Feb-00
Apr-99
Jun-98
Aug-97
Oct-96
Dec-95
Feb-95
Apr-94
Jun-93
Aug-92
Oct-91
Dec-90
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Typical Ownership Pie for Listed
Companies
B-shares
5%
State
37%
A-shares
30%
RIS
28%
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China’s Stock Market Today
1,400+ publicly traded stocks
Total market cap: RMB 20 trillion
120+ securities firms, with 100,000+
professionals
110+ million investor accounts
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Chinese companies listed overseas
First overseas listing in 1993
Now, overseas listed companies have
a market cap of RMB ~15 trillion
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China’s Capitalization of Land &
future labor income
Total home mortgage loans in RMB billions
2,500
2,000
1,500
1,000
500
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Sources: State Statistical Bureau
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Emerging consumer credit market in China
Consumer credit started in 1995:
auto loans
Credit cards emerged in 1999. Now,
30 million card holders
Student loans, other loans
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China today vs the U.S. of 1945
As % of GDP
Stk Mkt
Cap
Mortgages
Consumer
Credit
China today
48%
11%
1.10%
U.S. in 1945
53%
9%
3%
U.S. in 2006
156%
77%
18%
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What is going to happen next in China?
Political risk & corruption
Institutional reform (e.g., legal reform, free press)
Non-performing loans (NPL) and assets: too
much growth is financed by government
borrowing & spending
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Too much wealth invested in real estate
Real Estate as % of Household Net Worth
80%
68.50%
70%
60%
50%
48%
Germany
China
35%
40%
30%
46.8%
22.30%
20%
10%
0%
USA
Britain
Italy
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Some of the problems caused by
financial under-development
% of Household Net Worth in Financial Assets
70%
61%
60%
50%
35%
40%
38%
43%
45%
Germany
Britain
30%
20%
13%
10%
0%
Italy
China
Japan
USA
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Too much money in bank savings:
is there any problem?
% of Cash & Savings in Banks
84.5%
90%
80%
70%
60%
52.1%
50%
40%
30%
20%
21.5%
23.6%
Britain
USA
35.7%
37.0%
Italy
Germany
10%
0%
Japan
China
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Financial Market Development and
Income Inequality: any effect?
All as % of Financial Assets: household portfolios
% in Cash & Bank Savings
% in Stocks
% in Bonds
China
84.5%
7.7%
5.8%
Italy
35.7%
11.3%
37.8%
Japan
52.1%
15.5%
5.2%
Germany
37.0%
16.9%
17.0%
Britain
21.5%
19.9%
9.2%
USA
23.6%
34.6%
5.2%
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Risk Factor:
Income Inequality
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In comparison with other countries
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