1. The Global Economic Bubbles Bursting & China’s Choices Prof
The Global Economic Bubbles Bursting & China’s Choices Prof. Hua Min Director of Institute of World Economy, Fudan University

2. Part 1. A Financial Crisis Sweeping Through the World

3. The change of global financial markets in last three months
October, 2008

4. 2、The world stock markets bubble bursted
The decline of world stock markets in history
2、The world stock markets bubble bursted
U.S. stock market crashed in 1929
Japan stock market bubble bursted in 1989
U.S. dotcom bubble bursted in 2000
Vietnam stock market in 2008
Taiwan stock market in
China stock market in
Hong Kong’s Hang seng index in financial crisis in Asia
Hong Kong’s Hang seng index in financial crisis in Asia
China stock market in
Singapore’s STI index in Asia’s financial crisis
U.S. dotcom bubble bursted in 2000
Taiwan stock market in
Vietnam stock market in 2008
Japan stock market bubble bursted in 1989
U.S. stock market crashed in 1929

5. 3、Why is it a “100-Year Crisis”？ Collapse of silver standard
Countries involved in financial crisis in
3、Why is it a “100-Year Crisis”？
The Great Depression in
The big crisis in 1830
Financial crisis
in Latin America
and Japan
Collapse of
gold standard
in 1914
Collapse of
gold standard
in 1979
Collapse of silver standard
in the early 19th century

6. Part 2. U.S. Dollar hijacking the World

7. U.S. dollar separated from gold (gold standard collapsed)1、
Feature: sluggish years in 1970s
U.S. dollar separated from gold
(gold standard collapsed)

8. 2、Feature: strong dollar in 1980s, the rise of S&P index in debt crisis of developing countries and the steep decline of gold
The appreciation of dollar worsened the
dollar-based foreign debts of Latin America.
U.S. dollar hijacked Latin America.

9. 3、 Feature: depreciated dollar and economy bubble in Japan: 1985-1995
After the "Plaza Accord" in 1985,
the dollar depreciated while the yen appreciated,
which created the bubble economy in Japan.
U.S. dollar hijacked Japan.

10. Japan’s economy bubble4、
Feature: bubble bursted in Japan and prosperity of U.S. :
Japan’s economy bubble
bursted in 1989

11. “Trilogy” of Japan’s stockmarket5、
Feature: Japan stock market VS U.S. stock market:
Japan was stronger than U.S. before 1990
Japan was weaker than
U.S. between
Japan followed U.S.
after 1999
“Trilogy” of Japan’s stockmarket

12. The Clinton administration: interest rate rise cycle6、
Feature: strong dollar during Clinton Administration:
The Clinton administration:
The dollar was in
interest rate cut
and devaluation cycle
in 2002
The dollar was in
interest rate rise cycle

13. Nominal effective exchange rate U.S. dollar hijacked Europe
Real effective exchange rate

14. 7、 Feature: Southeast Asia's financial crisis: 1997.7-1998.7
Thailand’s SET50 index
Composite index of Jakarta, Indonesia
Korea’s KOSPI 200 index
Hong Kong’s Hang seng index
S&P 500
The dollar accelerated appreciation in 1997.
U.S. dollar hijacked Southeast Asia.

15. 8、 Feature: dot-com bubble and bubble bursted: 1995-2002
Fundamentals of America
worsened in 2002.
The dot-com bubble bursted.
The dollar depreciated
in 2002.
It began to
hijack the world.

16. Prelude of the hijacking:9、
Feature: dot-com bubble bursted and US Federal Reserve cut interest:
Prelude of the hijacking:
a big rate cut of dollar

17. 10、
Feature: USA Federal Fund Rate and gross sales of newly-built one family dwelling:
Hijacking:
Creating housing
price bubble
Gross sales of newly-built one family dwelling

18. 11、 Feature: a new round of dollar depreciation : 2002-?
Interest rate rise of dollar
bursted global economy bubble.
The world is paying the bill
for America.

19. 12、 Feature: dollar index, ups and downs of world economy: 1967-2007
Strong dollar,
financial crisis
in Southeast Asia,
dot-com bubble
and subprime
mortgage bubble
Bretton Woods System
collapsed and the stagflation
of world economy
Strong dollar
and debt crisis
of developing
countries
Dollar depreciation,
Japan's economy bubble
and miracle of east Asia
Dollar depreciation
and the “BRICs”,
economy bubble
in China?

20. Financial crisis happens after interest rate rise cycle of the Federal Reserve?
13、
IT bubble bursted
Financial crisis in Mexico
Bank crisis in America
S&L crisis
data source

21. 三、Crisis of paper standard management

22. Advantage： no inflation Disadvantage：maybe deflation
1、Automatic
adjustment
mechanism under
gold standard
Closed
economy
Advantage： no inflation
Currency issue is
in restrain of
gold reserve
Disadvantage：maybe deflation
Open economy
Hume’s automatic “price-specie flow" mechanism keeps trade balance
Excessive
imports
Trade
deficit
Outflow of
gold
Decline of
supply
Decline of
price
Increase of
international
competitiveness
Growth of
exports
Balance of
trade
Countries with surplus symmetrically reverse

23. 2、Why dose paper standard management lead to economy bubble?
Economic growth
is determined by
the input of external
precious metals
Countries have
no monetary power
Money supply is
in restrain of
gold reserve
Gold Standard
Double Deficit Policy of
international money
supply countries：
1、tax cut to increase
the profit of enterprises
2、import to promote
people’s welfare
Paper standard management
enables international
money supply countries
over-issue currency
The war and oil crisis
lead to the collapse of
gold standard
Global financial
crisis requires to
get back on
gold standard
Other countries
have trade surplus
Bubble will burst
when financials
deviates from
fundamentals
Surplus fund
flows to
asset market
creating
asset bubble
The money flows back
to the countries
where it was created
to cover
the “double deficit”
through
financial investment
Increase of investment
Over-capacity of production
Decline of price
Deflation
Profit losses of enterprises

24. 3、The Great Depression is the first crisis of paper standard management
Belligerents in W WⅠ abandoned the commitment
of changing paper money to gold in fixed rate,
which declaring the collapse of gold standard
Importing war goods
from America to which
large quantities of gold
flew
Three effects arising therefrom：
1、Trade imbalance effect
causing the trade surplus
of America
2、Sharp increase in gold reserve
effect
causing the increase of money
supply
（The gold reserve of America
increased by 64% in ）
3、Economy bubble effect
stimulating the economy
growth
excessive investment and
over-capacity of production ；
decrease of commodity price；
excessive money flows to
asset market, creating economy
bubble
European governments
issued credit money
to accumulate war chest,
resulting in currency
spread
Postwar Europe paid off
the debt of America,
bringing large quantities of
gold to America
Short-term：
Keynesianism
State intervention
Long-term：
Back on
gold standard
Double deviation bursted bubble,
Causing global crisis：
1. Commodity price deviated from asset price
2. Fundamentals deviated from financials

25. The oil crisis in 1970s declared the end of the gold standard
4、The breakdown of the Bretton Woods System caused the second crisis
under paper standard management（Crisis of dollar）
The oil crisis in 1970s declared
the end of the gold standard
The breakdown of the Bretton Woods System
–The legalization of floating exchange rate  -
Causing 4 effects
Trade imbalance
effect
Sovereignty of dollar
effect
Financial innovation
 effect
Flowing of international
capital effect
Dollar issue was
without restriction
America seek
private benefits
by dollar
Floating exchange rate  
lead to financial
disintermediation
Market replaced banks
Securitization stimulated
the development of
derives trade
The integration of
global financial market
strengthened the capital
liquidity
Double Deficit Policy
which maintained
by issuing dollars
lead to trade
imbalance
Financial crisis
spread all over
the world
Excess issue
of dollar
Fluidity spreading
Surplus countries’
financing for America
bought about
increase in dollar
supply
Risk trade brought
systematic risk
Trigger point
of crisis

26. Structure of global liquidity
802% global GDP
75% liquidity
Financial derivative products
142% global GDP
13% liquidity
Securitization of bonds
122% global GDP
11% liquidity
10% global GDP
1% liquidity
data sources

27. 5、The trigger mechanism of crisis in 2008
NASDAQ index crashed, dotcom bubble bursted in 2000
US Federal Reserve cut interest and white house cut tax
to stimulate economy growth
Low interest rates
changed financing
management model
of people
Tax cut caused
financial deficit
of America
Dollar flew
back to
America
Develop foreign capital financing
by issuing government bonds
Trade deficit
increased
dollar supply
Part of foreign exchange
earnings bought American
bonds
Trade surplus of
major U.S.
trading partners
bought in U.S. dollar
Purchasing real estate
as a mortgage for
consumption while in
debt
Part of foreign exchange
earnings made domestic
investment
Capital
flight    
Bubble
bursted
Surplus capital withdrew from
industrial sectors and flew to
financial and Real estate sectors,
causing asset price inflation
and economy bubble
Housing price crashed
Payment capacity lost
Excessive investment cause
over-capacity of production
and profit decline

28. The proportion of total value of world real estate
and FDI in world GDP
The real economy
has no
investment
opportunities
The total value of real estate
Direct foreign investment

29. A schematic drawing of subprime lending crisis in America
High level, quick liquidity, low risk and low profit
Valuation price of bonds declines
Collateralized Debt Obligation
Financial institutions
such as insurance
company
Repay mortgage in time
Sell ABS
Providing fund
Providing fund
Investment bank
People who need repay loans with low credit
Subprime
mortgage
companies
Provide mortgage
Provide cash loan
Hedge fund
Collateralized Debt Obligation
Low level, slow liquidity, high risk and high profit
Housing market declines, people fail to repay mortgage in time
mortgage money devalued, creating crisis

30. 6、U.S. dollar’s future In short-term： Collapse of gold standard
Opening of the Pandora's Box
Factors leading to
the collapse of dollar
Factors leading to
strong dollar
In long-term：
1、Ageing of population  
Lack of productivity
and taxable capacity
2、Capital shallowing
More money used in
financial investment
not turning into real
productive capital  
In static state :
1、3000 universities
2、The world top 500
3、System supporting for
innovation
In short-term：
1、Financial deficit
2、Trade deficit
3、People in debt
In dynamic state:  
New technological
innovation
The international community  
coordinating and restraining the supply of dollar

31. Opening capital account in long-term Large quantities of stocking
7、China’s choices
Market retrieval in short term（closing speculation exposure 、stabilizing asset price）；
Opening capital account in long-term
Devaluation of RMB
in 1994
WTO accession
in 2001
Influx of
rural laborers
Becoming the
world factory
China’s
economy
miracle
Peg to dollar
Reform and
opening-up
Improvement
trade  
Influx of
foreign
investment
Stocking
unemployment
Salaries remain
the same
Increase in
productivity
Deficient
internal demand
Export
orientation
Interest rate
rise and
appreciation
of RMB
Speculative
capital
spilling over
investment
Fundamentals
worsening
Trade
surplus
Nominal
exchange
rate
adjustment
“Hot money
flowing in”
Arbitrage of
rate and exchange
Capital
account
surplus
Current
account
adjustment
Remaining fixed
exchange rate
Increase of
reserve
Inflation
Appreciation of
real exchange rate
Decline in exports
Balance of
trade
Utilizing
foreign net
assets to
smooth
consumption
and promote
welfare
Adjusting
capital
account
Large quantities of stocking
unemployment
Not wise to adjust
current items
Development is of overriding importance,
underestimate of rate is normal
Frequent price
fluctuations,
high risk
Sovereign funds
Government investment
Financial assets
in narrow sense
Making use of
surplus
Making foreign
investment
Opening capital
account
People and enterprises
making foreign investment
Holding shares of
non-finance companies

32. Thank you！