Transcript China`s economic stimulus program

China’s economic stimulus program
BUSI 3001 SBLC
Week 2(3), Spring 2015
Charles Mo & Company
March16, 2015
China Stimulus Program of 2008 and Investments in China
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November 9, 2008 stimulus program
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Foreign investments in China
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Why did the Chinese need a stimulus program while its economy was
still growing?
Global financial crisis started from a US liquidity crisis extended
worldwide and led to China’s decision to a stimulus program
Comparison between the US Stimulus Program and that of the Chinese
Components of the Chinese stimulus program
Did the Chinese stimulus program work?
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Chinese GDP rebounded
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Export recovered
Foreign firms facing issues from Chinese media and regulators
Chinese investments overseas
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CIC (China Investment Corp)
Reasons for the Chinese Stimulus Program
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Social stability is China’s priority
Maintain the 8% GDP growth rate
Export dependent which totaled 35% of the GDP in 2008
Maintain a low unemployment rate
US global leadership – During the G 20 summit in 2008,
President Bush called the leaders of the largest
economies for a global economic cooperation in continued
free and open trade.
Chinese introduced the Stimulus Program
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In 2008, the US financial crisis in the banking and financing
system resulted in a severe liquidity strain which eventually
affected the rest of the world and started the worst recession in
the developed countries since the Great Depression.
After Lehman Brothers failed in September 2008, confidence in
banks declined, credit risks soared, triggering the 3 month Libor
(London Inter Bank Offer Rate) to reach 5%
By December 2008, all the world developed economies such as
US, European Union, and Japan were in recession(except
Australia).
In November, 2008 China announced the first stimulus program of
$585 b to revive the economy.
Date
Events
Victim
Bailout sponsor
Feds cut interest rate by 75 percentage basis, largest
January 22, 2008 since October, 1984 to 3.5%.
February 11, 2008 Bush Stimulus Package
167
March 16, 2008
Feds step in and intervened. JP Morgan Chase
acquired Bear Stearns for $2 a share for 236 million Bear Stearns
March 18, 2008
Cut interest 75 base point to 2.25%
July 14, 2008
Announced to assist FREDDIE MAC and FANNIE
MAE
Treasury nationalized the two largest mortgage
September 7, 2008 companies in the housing mortgage industry
Treasury nationalized the two largest mortgage
companies in the housing industry
September 15, 2008 Bank of America to acquired Merrill
Cost in billion
JP Morgan and
Treasury
67
Federal Reserves
FREDDIE
Treasury
FANNIE
Treasury
Merrill Lynch
Bank of America
September 15, 2008 185 year old Lehman Brothers filed for bankruptcy Lehman Brothers None
15
15
50
0
September 17, 2008 Treasury nationalized AIG
September 29
DOW dropped 700 points to 10371
AIG
Treasury
85
October 3, 2008
Americans
Congress
700
Emergency Economic Stabilization Act of 2008
December 16, 2008 Interest rate cut to 0.25%
Feds
•Prime rate, federal funds rate, COFI
Updated 3/11/2015
WSJ Prime Rate
3.25
3.25
3.25
Federal Discount Rate
0.75
0.75
0.75
Fed Funds Rate (Current target rate 0-0.25)
0.25
0.25
0.25
11th District Cost of Funds
0.698
0.692
0.768
By Bankrate.com
The prime rate, as reported by The Wall Street Journal's bank survey, is among the most widely used
benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the federal
funds rate, which is set by the Federal Reserve. The COFI (11th District cost of funds index) is a widely
used benchmark for adjustable-rate mortgages.
Read more: http://www.bankrate.com/rates/interest-rates/prime-rate.aspx#ixzz3URU7CRG6
Follow us: @Bankrate on Twitter | Bankrate on Facebook
What is Recession?
Recession is the economy shrinking for two
consecutive quarters (=6 months) with a
decrease in the GDP (=Gross Domestic Product)
GDP = Value of all the reported goods and services
produced by the people operating in the country
GDP = MONEY VALUE OF {C + I + G + (X – M)}
C = Consumables, I = Gross Investments, G = Government Spending,
X = Exports, M = Imports
Depression
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Long-term downturn in economic activity
More severe downturn than a recession that is part of a normal
business cycle
Considered a rare and extreme form of recession
Elements of Depression
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a depression is characterized by its length,
and by abnormal increases in unemployment,
falls in the availability of credit,
shrinking output and investment,
numerous bankruptcies,
reduced amounts of trade and commerce,
as well as highly volatile relative currency value fluctuations, mostly
devaluations.
Price deflation,
financial crisis and bank failures
1) a decline in real GDP exceeding 10%, or 2) a recession lasting 2
or more years.
Reaction from the Chinese business
people on Global Financial Crisis
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Most business people in China ”didn’t imagine that
these events in the U.S. would affect them,” “For
most of the last 18 years, the economy has been
continually growing, so they’ve gotten used to
continued economic growth.”
4 Trillion Yuan ($585 b) Stimulus Program
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Resulted in budget deficit - 3% of GDP
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1998
1.1% deficit of GDP
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1999
1.9%
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2000
2.5%
18 months stimulus program
Details of the program
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How much comes from central government spending?
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How much comes from tax credits?
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Central government will contribute 1.18 trillion
 2009 & 2010
600 billion each
 Rest from private sectors and local governments
Budget deficit
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3% China GDP 2009
Fiscal policy aiding the economy
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Central bank cut key lending rate by a 108 basis
point November 24, 2008
Willingness to create budget deficit to stimulate
the economy
Encouraged the banks to lend
Bank loans designed to spark economy
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Feb 13, 2009 - Chinese banks issued 1.62 trillion yuan ($237 billion) in new loans in
January, up 101 percent year-on-year.
The massive jump in lending is equal to about one-third of the loans issued in the
whole of 2008,
April 11 (Xinhua) -- Credit extended by China's banks in the first quarter hit 4.58
trillion yuan (670 billion U.S. dollars), the People's Bank of China (PBOC)
In March alone, new yuan-denominated loans increased by 1.89 trillion yuan. It was
the third straight month that new loans exceeded 1 trillion yuan.
June 19 (Caijing.com.cn) China's credit boom has increased bank lending by more
than 6 trillion yuan since December. Many analysts think an economic boom will
follow in the second half 2009. They will be disappointed. Much of this lending has not
been used to support tangible projects but, instead, has been channeled into asset
markets.
The current surge in commodity prices, for example, is being fueled by China's
demand for speculative inventory. Damage to the domestic economy is already
significant.
Wsj06-10-09
China’s stimulus program sparks surge in borrowing
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Research Institute of Fiscal Science estimated the total local government debts
amounting to 4 trillion RMB or 16.5% of GDP before the stimulus program
Total state debts estimated at 35% of GDP rather than the official 18%
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Thus budget deficit may end up with 3-4% by the end of the year
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Hidden cost of local government borrowing is difficult to estimate
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Reason is unreported government debt
Some local government are paying off old debts with BJ stimulus funds
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LIBOR = London Inter Bank Offer Rate
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Boosting the economy
Breakdown of China’s stimulus package
Total spending:4 trillion yuan ($585.76 billion)
45%
25%
Railways.
Post disaster
Highways
reconstruction
airports,
power grids
9.25%
8.75%
7%
4%
1%
Rural
Development
And
infrastructure
Projects
Ecology
And
Environment
Housing
Security
Independent
Innovation
Health
Culture
And
education
The US and the China Stimulus Program
US
700 B & 785 B
China
585 B
% of GDP
10.7%
20%
Government
Spend per year
20% of GDP
20% of GDP
Tax
Credit/reduction
1/3 or 295 B
VAT on imports
Infrastructure
33%
45%
Healthcare
14%
1%
Budget deficit
$1.7 trillion
$139 b (950 b
RMB)
Did the stimulus program work?
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GDP grew 10.4% in 2009
GDP grew 11.5% in Q1, 2010. 10.5% in Q2
Official inflation rate in 2010 was 2.8%
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Housing property price increase 9.7% in August, 10.3% in July
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New home prices rose 11.7 percent in August compared with 12.9 percent in
July this year. (China Daily:9-13-2010)
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Per sq meter housing in SH average 14000 in 2008, now around 30000
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Food price up 7.5% in August, 2010
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Rice Is up by 50%
Noodles up 50%
Cooking oil up 50%
Export recovered
Trade surpluse with trading countries resumed
China exiting stimulus program
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Lending and investment spending slowed in Feb, 2010
Economists urges BJ to unwind its stimulus measures because of
warnings about inflation pressures
Fixed asset investment in urban areas rose 26.6% in JanuaryFebruary, 2010 period from a year earlier compared with 30.5% in
2009 according to National Bureau of Statistics.
CPI rose 2.7% in February
PBOC will gradually normalize monetary conditions
$102.6 b new loans in February compared with 1.07 trillion last year
and 1.39 trillion in January
Issues Facing Foreign investments in China
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Change of new leadership in 2013 and new direction for foreign
invested companies in China
Some of the multinational companies affected
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Apple Inc
Volkswagen AG
Yum Brands Inc
McDonald’s
Walmart
Coca-Cola
China business is significant for these companies
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Apple China grew 67% in sales to $6.83 billion and 49% to $2.54 billion for the
quarter ended December 29, 2012. China sales accounts for 12% of total Apple
sales.
China accounts 28% of all Volkswagen sold in the world.
Issues Facing Foreign investments in China
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Apple apologized and changed its warranty policies
Volkswagen recalled 380,000 vehicles after the media complained
about overall qualities of the cars causing maintenance problems.
Walmart and Coca-Cola went local to train their managers to handle
local domestic politics. In the past, these multinational companies rely
on their executives to lead and handle consumer public relations.
China investments overseas
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China’s sovereign fund- CIC(China Investment Corp)
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Created in 2007
Has a portfolio of $600 billion
Return on investment 10.6% in 2012 and a loss of 4.3% in 2011
Invested $44 billion in oil, gas, natural gas assets in 2013, and $30 billion in
2012
North American headquarters located in Toronto, Canada
AES Corp
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CIC purchased a Virginia based energy power provider AES Corp for
$1.58 billion at $12.60 per share or 15% stake in 2010.
CIC sold 20 million shares back to AES at $12.90 reducing the 15%
stake to 8.3% in December 2013.
Regulatory filing by AES indicated this buy back is normal invesment
process in line with management strategy.
GEL-Poly Energy
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Purchased a 20% stake in GEL for $710 million in
November 2009.
GEL is a green energy supplier listed in Hong Kong.
In January, 2013 sold 7.8% in GEL for $410 million. This is
the second sale bringing CIC stake to 4.6% and reaping a
total of $689 million thus far.
New strategy for CIC
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Due to tapering of US Federal Reserve planned decision to
reduce treasury bond purchase, CIC believes the investment
fund will flow back to the US or developed countries.
And China is changing its economic model to more
consumption based than export dependant economy, making
reliance on energy supplies less urgent than before.
CIC is focusing investment in rebounding economies such as
the US and the European Union.
China’s Attempts to Invest in the US
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2005, UNOCAL bid by (CNOOC)
China_National_Offshore_Oil_Corporation
In 2008, Huawei bid for 3Com was called off due to regulatory restriction.
September, 2013 Shuang Hui bought Smithfield, the largest provider for
pork in the US
February, 2014, Gold Leaf Jewelry of China is to purchase ERG, an
energy provide in Texas and California for $665 million pending
government approval.
July, 2012, CNOOC bought $15.1 billion worth of Nexen, a Canadian
energy company.