FINANCIAL CRISIS

V-Shaped rebound by China and

India

Role played by the Financial

system

Presented by
Ganesh Jayaraman
China’s Banking system
 State controlled
 Priority funding to State Owned Enerprises
(SOE)
 High levels of NPA
 Inefficient allocation of funds (preserve
employment)
 Mckinsey (Nov 2006)– Potential to boost the
economy by USD 321 billion
 Efficient
channel to transfer funds from
Government to the society

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
China’s Banking system
 Minimal participation from Private Banks
 Stronger Banks vis-à-vis Equity market
 Higher level of savings in China’s banks
 Lessons learnt from the 1997-98 Asian
crisis
 RMB is not fully convertible – cross border
capital flow is limited
A very weak link to the mortgage backed
securities
 Predictiveconnection between
performance and promotions
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
India’s Banking system
 Nationalization of banks in late 60’s
 75%of Banks assets owned by state
 Compulsory priority sector lending
 Indian banks invest 25% in Government
bonds – lend only 61% to the market
 Inefficient allocation of funds (preserve
employment)
 Mckinsey
(Nov 2006)– Potential to boost the
economy by USD 48 billion
 Efficient
channel to transfer funds from
Government to the society


 4
India’s Banking system
 Low NPA’s (10.4% in 2001 to 3.5% in 2004)
- Banks well capitalized
 Balanced growth in the financial sector –
between Banks, Equity market and Bonds
market
 Due to Government borrowing – higher
cost of capital to corporate
 Weak link to Mortgage backed securities
 Informal lending worth 30% of formal
(Bank) lending
 Highly regulated

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China’s problems
 Collapse in Global demand
 Economy contracted significantly between 2008-H2
till 2009-H1
 Trade crisis rather than Banking crisis
 Risks:
 Export
 Value of $ reserve
 Rescue not successful
 Bad return on overseas investment
 Confidence in economy
 Choice:
 Best use of the $ reserve
 Maintain economic growth
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India’s problems
 Equity market - Huge dependence for
foreign funds
 Dependence on export

 Dependence on FDI

 Liquidity crunch
 Increase in petroleum prices in 2008
 Cautious banks

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China – what worked?
 No dependence on International market for
domestic investment
 Reforms were protected from political
pressure
 US and India – Informed voters vs
uninformed voters
 Fiscal
stimulus measures – Public
investment and Subsidy for agriculture
and some industries
 Ready made plans were available
 Huge surge in new lending – 50% of GDP in
H1 2009. 8
China – what worked?
 Property price bubble and diversion to
speculation – only 60% loan
 Focus on mass housing – sub-prime housing
market did not need sub-prime loans
 Easy loans (flexible and negotiable) – “Get the
money out of the door”
 Stimulus package reached the mass
 Land was used to liquefy the system
 Regulations (pension fund, ban on IPO etc)
 Rate cuts – lending and deposit, reserve
requirements; scrap loan quotas

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India – what worked?
 Strong regulator
 RBI Governor (Reddy) resisted pressure
to open up for capital account
transactions
 Rate cuts
 Lending rate cuts were slow
 Smaller stimulus – due to bigger fiscal
deficit
 Slow and steady helped in the long run?

 Elections!
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The road ahead?
 Dependency on global economy
 Stimulus package – Exit strategy?
 Over-reliance on particular region
 India – sluggish transmission of rate cuts
to consumers/corporates
 India – tame the fiscal deficit
 China – stock and bond market
 China – effective regulator


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 Thank You

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