China Bubble Burst

Capital Market Intelligence

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Apoorva Jain Kaushambi Ghosh Sumeet Jalan
Agenda
• Factsheet

• The Bubble Burst

• Components

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Factsheet
• Biggest customers of China’ s steel, United
States and Europe, are struggling in respect of
infrastructural development and hence its
exports are down more than 20 percent
• China is still throwing up good economic growth
• Now the United States and the rest of the world
is retrenching, corporations are slashing their
spending and consumption level have also gone
down

• This means that the consumption of Chinese

goods is on the decline

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 Bubble Burst
Industry friendly
Government policies

High industry High import of raw Overcapacity of Need for

growth materials production increasing Exports

Growth in
Employment
Currency Need to lower
depreciation product price
Bubble burst

Decrease in
Selling off
High Non-Performing Loans wage
foreign
investment

Rise in Interest Inflation High Liquidity 4

Rates
Industrial Policies
• An undervalued currency, which reduces real household
wages by raising the cost of imports while subsidizing
producers in the tradable goods sector
• Excessively low interest rates, which force households,
who are mostly depositors, to subsidize the borrowing
costs of borrowers, who are mostly manufacturers and
include very few households, service industry companies
or other net consumers
• A large spread between the deposit rate and the lending
rate, which forces households to pay for the
recapitalization of banks suffering from non-performing
loans made to large manufacturers and state-owned
enterprises

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Industrial Policies
• Sluggish wage growth, perhaps caused in part by
restrictions on the ability of workers to organize, which
directly subsidizes employers at the cost of households
• Unravelling social safety nets and weak environmental
restrictions, which effectively allow corporations to pass
on the social cost to workers and households
• Other direct manufacturing subsidies, including
controlled land and energy prices, which are also
indirectly paid for by households

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High Industry Growth and
import of raw materials
• China’s GDP grew at 11-12% over the 2002-2007
• China's economy grew 7.1 percent in the first half of
2009
• High Imports

– Copper: Imports of copper rebounding from July and

August slowdowns to post a 87% rise from a year
earlier. M-o-M import increased by 23%.
– Iron-ore: Imports also hit a monthly record, at 64.55
million tons in September, up 65% from a year
earlier. China bought a record 64.55 million tons of
iron ore in September which is 30% increase M-o-M.

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Overcapacity of production
1. Steel
– China´s crude steel production for September 2009
was 50.7 mmt, 28.7% higher than September 2008
2. Cement

3. Plate glass
4. Coal-chemical industry
5. Polycrystalline silicon

6. Windpower equipment

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Source: Department of Industry of the NDRC
Actions planned
• China is working on plans to curb excess capacity as the
nation faces “severe oversupply”
• The government may have detailed plans on how to
close obsolete mills, advance mergers and reduce the
number of iron ore importers by the end of the year

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Increase in exports and
lowering of product price
• Exports
– Overcapacity leading to huge stockpiling
– Limited domestic demand

• Lowering of Product price

– Low wage
– Depreciation of currency

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Loan and Foreign currency
position
• China’s new yuan-denominated loans in September rose
to 516.7 billion yuan (75.68 billion U.S. dollars) from
August’s 410.4 billion yuan
• New yuan-denominated loans in the first nine months
stood at 8.67 trillion yuan, 5.19 trillion yuan more than
the same period last year
• China’s foreign exchange reserve hit a new high of
2.2726 trillion U.S. dollars at the end of September

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Liquidity Position
• The broad measure of money supply, M2, which covers
cash in circulation and all deposits, was up 29.31
percent from a year earlier to 58.54 trillion yuan at the
end of September
• The narrow measure of money supply, M1 (cash in
circulation plus current corporate deposits), was up
29.51 percent to 20.17 trillion yuan
• This was a consequence of the massive stimulus plan
put into motion by the Chinese government. They
pumped unprecedented amounts of liquidity into their
economy to offset the world-wide economic slowdown.

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Liquidity Position

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Thank You

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