Money, Banking and FDI

1
Money, Banking and FDI

• October 3, 2001

2
Chinas reform in comparative perspective

• Debate on optimal pace and sequence of reforms
• Transitional economies e.g. Central Europe and
  former USSR.
• Rapid privatization
• overnight price reform
• dismantling trade barriers

3
Problems postponed

• Employment in State-owned enterprises (SOE)
  expanded between 1978-1994.
• Fixed asset investment and subsidies in SOE also
  rose.
• policy loans by state-owned banking system,
  keeping inefficient SOEs alive.
• Costing some10 percent of GDP/yr

4
Unsustainable trends

• SOEs become more indebted
• borrow to meet payrolls, pensions, loans not used
  to increase productivity
• State banks accumulate bad loans
• loans outstanding vs GDP doubled from 1978 to
  1997
• Government runs deficits

5
Steps to alleviate the strain

• Commercialize the banking system.
• Convert SOEs to modern share-holding companies.
• Tax reforms
• Did the government print money to finance the
  deficits?

6
Skeptics

• Official growth data inflated.
• deflator used by State Statistics Bureau was too
  low World Bank uses an alternative method which
  cut the growth by over one pct/yr
• High savings misused by bank.
• productivity gain quite poor, moving from
  agriculture to manufacturing.

7
Nicholas Lardy, Chinas Unfinished Economic
Revolution

• Brookings, 1998

8
Banking Reforms

• Financial intermediation
• Peoples Bank of China
• Central Bank created in the 1980s
• Classification of bad loans
• To securitize loans through debt-to-equity swaps.
• Set goal to conform to Basle Agreement

9
Four State Banks

• Bank of China
• Bank of Communication
• Bank of Construction
• Bank of Agriculture
• Regional Banks, e.g. Pudong Dev Bank
• Private Bank, Minsheng Bank

10
Investment Trust Co

• China International Trust and Investment
  Companies (CITIC)
• Provincial ITICs
• Collapse of GITIC

11
Banking activities

• Interest rates are set by the state
• No one knows the cost of money
• Very little consumer credit
• Encourage people to spend
• mortgage, car loans, education loans, vacation
  loans, etc.
• Why fear foreign banks?
• Will there be bank runs one day?

12
Foreign Direct Investment

• Total 320 billion in 1978-99
• In recent years 40-50 billion/yr
• Second largest in the world
• WTO reduces regulatory risks and open up sectors
  previously off limits to foreign cos
• Scheduled payback of FDI

13
Foreign Currency Reserves

• Gold Foreign Exchange Reserves (June 2001)
• Gold ( 10,000 Fine Troy Ounce ) 1267.00
• Foreign Exchange Reserves ( 100 million USD )
  1808.38