China After the Subprime Crisis 9780230_281967_01_prexviii.indd i 9/1/2010 3:41:25 PM Also by Chi Lo: ASIA AND THE SUBPRIME CRISIS: Lifting the Veil on the Financial Tsunami UNDERSTANDING CHINA’S GROWTH: Forces that Drive China’s Economic Future PHANTOM OF THE CHINA ECONOMIC THREAT: Shadow of the Next Asian Crisis THE MISUNDERSTOOD CHINA: Uncovering the Truth behind the Bamboo Curtain WHEN ASIA MEETS CHINA IN THE NEW MILLENNIUM: China’s Role in Shaping Asia’s Post-Crisis Economic Transformation 9780230_281967_01_prexviii.indd ii 9/1/2010 3:41:25 PM China After the Subprime Crisis Opportunities in the New Economic Landscape Chi Lo Chief Economist and Strategist for a Major Investment Management Company based in Hong Kong, China 9780230_281967_01_prexviii.indd iii 9/1/2010 3:41:25 PM © Chi Lo 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–28196–7 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Lo, Chi, 1960– China after the subprime crisis : opportunities in the new economic landscape / Chi Lo. p. cm. Includes bibliographical references. ISBN 978–0–230–28196–7 1. China – Economic conditions – 2000– 2. China – Economic policy – 2000– 3. Financial crises – China. 4. Global Financial Crisis, 2008–2009. I. Title. HC427.95.L62 2010 330.951—dc22 2010027532 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne 9780230_281967_01_prexviii.indd iv 9/1/2010 3:41:26 PM Daring to ask Eager to learn Brave to explore Born to lead Yielding to none 9780230_281967_01_prexviii.indd v 9/1/2010 3:41:26 PM 9780230_281967_01_prexviii.indd vi 9/1/2010 3:41:26 PM Contents List of Tables and Figures viii Acknowledgements xi Preface xii About the Author xvii Introduction 1 1 The Subprime Crisis Is Not a Normal Crisis 13 2 Post-Subprime World Still Unbalanced 26 3 Subprime Lessons: East Meets West 42 4 Asia, a Guilty Bystander 54 5 China Becomes a Superpower? 74 6 Opportunity for Learning 89 7 Opportunity for Economic Expansion 106 8 Opportunity for Structural Changes 123 9 Risks behind the Opportunities 138 10 More Crises Brewing? 154 11 The Post-Subprime World 172 Notes 184 Bibliography 191 Index 195 vii 9780230_281967_01_prexviii.indd vii 9/1/2010 3:41:26 PM Tables and Figures Tables 1.1 Subprime crisis in a nutshell 14 4.1 Chinese banks’ exposure to the US subprime crisis 60 6.1 Urban fixed-asset investment breakdown (2008) 93 8.1 Consumption takes off after per capita income reaches US$6,000 133 8.2 China far behind in consumption 133 Figures I.1 Current account balances before crisis 6 I.2 Loan-to-deposit ratios before crisis 7 I.3 Foreign debt before crisis 7 1.1 Asia has not learned its lessons 21 1.2 US job and income growth 22 1.3 US housing inventory (surging) and retail sale (contracting) 24 2.1 US capital markets rebounded 27 2.2 Global loan growth collapsed 29 2.3 TED spread returning to normal 30 2.4 Monetary multipliers collapsed 31 2.5 Americans de-leveraging aggressively 34 2.6 China’s RMB4 trn (US$586 bn) stimulus plan 39 4.1 Asia’s current account surplus 56 4.2 Asia’s basic balance 56 4.3 Foreign exchange reserves growth 57 4.4 Gross foreign debt (2008) 57 4.5 Short-term foreign debt cover ratio (2008) 58 4.6 Asian banks awashed by liquidity 58 4.7 Chinese banks holding less foreign assets 60 4.8 Improving Chinese bank asset quality 61 4.9 Loan-to-deposit ratios 62 4.10 Three-month China interbank offered rate (CHIBOR) 62 viii 9780230_281967_01_prexviii.indd viii 9/1/2010 3:41:26 PM Tables and Figures ix 4.11 Rising Indian GDP growth ... 63 4.12 ... boosted by capital inflows 64 4.13 India’s credit growth outpaced GDP growth 65 4.14 India current account balance 65 4.15 India had the worst fiscal balance (2008) 66 4.16 Asian foreign debt (% of FX reserves, 2008) 66 4.17 Hong Kong’s loan-to-deposit ratios 68 4.18 Hong Kong current account (% of GDP) in persistent surplus 69 4.19 HK funding cost soared on the subprime shock 69 4.20 Exports absorbing China’s capacity utilisation 72 4.21 Exports driving Chinese investment 72 5.1 China’s trade balance with Asia 83 5.2 Exports to China as % of total exports 84 5.3 Elasticity of total exports to total Chinese imports (1999–2008) 85 5.4 Elasticity of housing-related exports to China’s housing-related imports (1999–2008) 86 6.1 China’s export growth 90 6.2 Chinese export share to the G3 91 6.3 Exports absorbing capacity utilisation 92 6.4 Lopsided growth 94 6.5 China’s falling consumption 95 6.6 Exports driving investment 96 6.7 Prolonged decline in China’s real interest rate 97 6.8 Consumer loans remain minimal in China 99 6.9 Massive loan growth boosts GDP growth (with a one-quarter lag) 105 7.1 Chinese direct investment abroad 107 7.2 China’s chronic disinflation 111 7.3 Hot money flows to China 112 7.4 Only allowing capital inflow, not outflow 113 7.5 A-H share premium 114 7.6 China’s trade balance by region (2009) 116 7.7 What does China import? 117 7.8 Chinese imports of ATP products 119 7.9 Chinese machinery imports 119 7.10 US ATP exports to China (2009) 120 8.1 Net exports’ contribution to China’s GDP growth 124 8.2 China real retail sales 125 8.3 Number of enterprises in the non-ferrous metals sector 126 9780230_281967_01_prexviii.indd ix 9/1/2010 3:41:27 PM x Tables and Figures 8.4 Initial signs of structural shift in China’s growth 127 8.5 Growth rebalancing 128 8.6 Investment re-shuffling towards inland 128 8.7 Household medical & medicine expenses 130 8.8 Rising government speninding on social safety net 130 8.9 Beijing aims at increasing medical coverage sharply 131 8.10 Consumer goods/100 households 132 8.11 Stock market capitalisation 135 9.1 No credit bubble in China 141 9.2 China has little foreign debt (2008) 142 9.3 China’s interest rate distortion 143 9.4 Big government is returning 149 9.5 Relative size of the public sector 152 10.1 Falling US public sector debt-service cost-to-income ratio 156 10.2 US interest rate on a secular decline 156 10.3 Falling UK public sector debt-service cost-to-income ratio 157 10.4 Rising US household debt-servicing cost-to-income 160 10.5 No signs of long-term government bond yields rising 161 10.6 Loss-making SOEs on the decline 164 10.7 World official gold holding (March 2009) 168 10.8 Marshallian K and gold price 170 10.9 Output gap 170 11.1 Gross national savings 175 11.2 Asia remains export-dependent 178 11.3 China’s lending craze to combat the subprime impact 179 9780230_281967_01_prexviii.indd x 9/1/2010 3:41:27 PM Acknowledgements All economic data, data estimates and figures used in this book are cre- ated from the databank provided by CEIC Data Company Limited (CEIC). Founded in 1992 and acquired in 2005 by ISI Emerging Markets, CEIC has built its reputation on delivering accurate and comprehensive eco- nomic, industrial and financial data for economists globally. In particu- lar, it has the most comprehensive economic research data on Asia and some of the emerging markets. CEIC implements meticulous measures to ensure the accuracy of its data, which are maintained by experienced researchers who aggregate data from close to 2,000 primary sources. xi 9780230_281967_01_prexviii.indd xi 9/1/2010 3:41:27 PM Preface The world economy has been stuck in a ‘stable disequilibrium’ state for over a decade, with excessive consumption in the developed world (led by the US) being balanced by excessive saving in Asia (led by China) until the subprime crisis erupted in late 2007.