Macroeconomic Policy ＆ Macroeconomic Performance in China: A Tale of Two Crises

1. Macroeconomic Policy ＆Macroeconomic Performance in China:A Tale of Two Crises - The Asian Financial Crisis (AFC) (1997-99) vs the Global Financial Crisis (GFC) (2008-09)

2. A Writing Plan for Fiscal & Monetary Policies during AFC & GFC • Data work/info collection on fiscal policy • Fiscal policies during the crises • Major fiscal projects that targets the recession (infrastructure, welfare, export rebate, aid to the laid offs, SOEs) • Change of revenue and expenditure over the crises • Data work/info collection on monetary policy • Monetary policies during the crises • Monetary instruments or measures used • M2, bank loans, bank balance sheets • Data on macro performance • Growth, breakdown into major expenditure components • CPI and PPI • Trade and FDI • Stock and property market performance • Observations from simple data analysis • Provide charts and tables for changes that can highlight 1) the impact of the crisis, 2) the immediate effect of the policy, and 3) aftermath (more discussion in the “assessment”) • Propose explanations to these effects • May consider using GARCH model to pick up abnormal movement that deviates from the “fundamentals” • Assessment of macroeconomic policies during the two crises • Lessons learned and implications for reforms

3. Progress made… • Most of planned data work have been done; still look for policy information as currently I have difficulties to access to relevant yearbooks such as banking, fiscal, central bank etc. • Some of high frequency data have been prepared by the TCB team working on China experimental LEI and CEI as the chart shown • In the middle of simple data analysis, mainly descriptive to summarize the facts; expect to produce tables and charts in the coming week • Based on which I will write discussion of the tables and charts, make comment on the impacts of the crises and the policy effects • Finally, I will suggest the implications from the observations and my view on the macro policies • Feel free to make suggestions…

4. TCB Experimental LEI & CEI for China WTO GFC AFC

5. AFC AFC struck China in early 1998 By 1997, China’s trade surplus reached the record high or 220% the 1995 level But by 1996, after some 3 years of efforts to fight overheating the economy had just achieved a “soft landing” However, as our LEI/CEI chart shows, growth of exports already decelerated before AFC Exports dropped quickly and substantially, –20 % y/y by H1/1998 Investment also declined noticeably Consumption growth slowed down substantially by 3.4% – lost the track! From 1998, China entered a 5-year long deflation – with PPI dropped more than CPI GFC GFC stuck China in mid 2008 However, by 2007 China showed how successful and sustainable its export-oriented growth since 1994! Note that after 3 years of overheating since 2005, the PBoC adopted tightening monetary measures from H2/2008 Like observed from AFC, export growth also decelerated before GFC The drop of exports was also quick and substantial, –24% y/y by early 2009 Investment dropped in late 2007 and stagnated through 2008 But, consumption stayed on the long-run track – contrary to AFC CPI began to decline in Q2/2008, whereas PPI started to drop in Q4/2008; while CPI stabilizing, no sign for PPI to rise yet The Economy Prior to & During the Crises

6. GFC The easy monetary policy to fight the crisis was much more effective than that in AFC – noticeably bank loans rose more quickly than M2 increase! (opposite to what observed in AFC) Investment in fixed assets (FAI) rose 41% y/y in real terms in May 2009, surpassing FAI growth during Zhu’s post-1997 fiscal stimulus drive (as SCB estimated) The Central’s 4 tl. yuan fiscal stimulus package was announced but requiring substantial local government support over 2 years There were similar fiscal supports to consumption as in AFC but came with very contradictory tax policy that expected to raise fiscal revenue at the same rate of GDP growth AFC The monetary policy responded to AFC proved ineffective due to reluctance of banks to provide loans because of external risks A proactive fiscal policy was quickly adopted in late 1998 and since played a key role in fighting the crisis 360 bl. yuan (1 tl. today) T-bonds issued to invest in economic and social infrastructures, especially in those areas seen as bottlenecks Raised export rebates for several times Substantially increased salaries of civil servants, developed consumption credit, and subsidized laid-offs Macroeconomic Policies Fighting the Crises

7. AFC The official 7.8% growth for 1998 is doubtful as it was not supported by the observed real output measured by major commodities Zhu’s fiscal stimulus package further increased the capacity in manufacturing and hence driving a new round of PPI drop in 2000-02 It was China’s WTO entry at the end of 2001 that played a major role to get China back to the track of its export-driven growth However, the new export opportunities following WTO facing China left no time for China to fixed its structural problems and severe internal imbalance that later became part of global imbalance Distorted factor costs (i.e. underpaid land, labor, energy, environment costs) used to attract investors during AFC also played a major role in China’s new export boom that lasted till it was hit by the current global crisis GFC Investment in infrastructure has shown some effect as material industries have picked up and high energy-consuming industries grown more rapidly since Q2/2009 However, the majority of the bank loans has gone to large & medium sized SOEs, weakening the role of the non-state sector Due to huge surplus capacity, very weak world demand esp. from rich economies, and less opportunities in investing in bottleneck areas, a huge amount of the liquidity has led to a stock and property market boom/bubble, which was not seen in AFC The official target of 8% growth for 2009 seems to be assured but doubts arisen because of incentives to show good-looking accounting books (e.g. capital gains from the stock/ property markets could be translated into “corporate profits”) and to show good efforts of local governments to support the Central Policy Aftermath: What Happened or What May Happen?