1. Yale School of Management 1 Lecture 3: Country in Focus: China and East Asian Crisis Topics today Why China, India and Russia have had different experience? Brief history of China’s reforms and capital market Is China going to follow the “Tigers” experience next? What caused the East Asian Financial Crisis?

2. Yale School of Management 2 From a historical perspective

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4. 4 China, India and Russia (PPP-adjusted per-capita GDP)

5. Yale School of Management 5 China, India and Russia: (growth in PPP-adjusted GDP)

6. Yale School of Management 6 China vs India: Why? In “China is outperforming India” (IHT, Jan. 7), Ramesh Thakur states: A decade ago, China's per capita GDP was about the same as India's. Today it is double. China is outperforming India in almost every facet of national competitiveness, attracting more than 10 times as much foreign capital, increasing its share of world markets and being courted as a responsible manager of global order.

7. Yale School of Management 7 Ramesh Thakur continues: While keeping costs as low as India's and offering the allure of an even bigger domestic market, China has built much better highways, telecommunications, power supply, seaports, airfields and other infrastructure than India. Meanwhile, some of India's long-standing advantages over China are eroding or becoming less relevant, including English language competency, democracy and the rule of law.

8. Yale School of Management 8 EDITORIAL DESK | August 29, 2003, Friday, New York Times Freedom's In 2nd Place? By NICHOLAS D. KRISTOF (NYT) ABSTRACT - Nicholas D Kristof Op-Ed column contrasts economic conditions in Ukraine and China, which took diametrically opposite political paths in late 1980's and early 1990's; says Ukraine held presidential election and pronounced itself a democracy, while China massacred protesters demanding more freedom and democracy; says that since then, China's economy has tripled in size and Ukraine's has shrunk by half; says authoritarian orderliness is sometimes more conducive to economic growth than democratic chaos; says perhaps best explanation for different paths of Ukraine and China is not policy but culture (M)

9. Yale School of Management 9 A Gradual Privatization Process: Trial-and-Error

10. Yale School of Management 10 The Private Sector’s Share Today

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13. Yale School of Management 13 How has China grown so much? Besides a focus on manufacturing and other “hard” industries, capitalization and financialization has played a crucial role in energizing the economy for growth

14. Yale School of Management 14 Government debt issuance has generated supply of “capital” New government debt issues Fiscal deficit RMB 100 millions

15. Yale School of Management 15 China’s Fiscal Deficit as Percentage of GDP: issuing debt against future government income Data source: China Data Center at University of Michigan

16. Yale School of Management 16 Government Expenditure as Percentage of GDP

17. Yale School of Management 17 China’s main highway network: Every year constructing around 4,000 km of expressways, towards its target of connecting every city to an 85,000 km network.

18. Yale School of Management 18 Capitalization of corporate assets & future cashflows has generated much capital supply Sources: Federal Reserve Flow-of- Funds Total bond mkt value = RMB 6 trillion A-Share mkt capitalization in RMB trillions

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20. Yale School of Management 20 Typical Ownership Pie for Listed Companies

21. Yale School of Management 21 China’s Stock Market Today 1,400+ publicly traded stocks Total market cap: RMB 20 trillion 120+ securities firms, with 100,000+ professionals 110+ million investor accounts

22. Yale School of Management 22 Chinese companies listed overseas First overseas listing in 1993 Now, overseas listed companies have a market cap of RMB ~15 trillion

23. Yale School of Management 23 China’s Capitalization of Land & future labor income Sources: State Statistical Bureau Total home mortgage loans in RMB billions

24. Yale School of Management 24 Consumer credit started in 1995: auto loans Credit cards emerged in 1999. Now, 30 million card holders Student loans, other loans Emerging consumer credit market in China

25. Yale School of Management 25 China today vs the U.S. of 1945 As % of GDP Stk Mkt Cap Mortgages Consumer Credit China today48%11%1.10% U.S. in 194553%9%3% U.S. in 2006 156%77%18%

26. Yale School of Management 26 What is going to happen next in China? Political risk & corruption Institutional reform (e.g., legal reform, free press) Non-performing loans (NPL) and assets: too much growth is financed by government borrowing & spending

27. Yale School of Management 27 Too much wealth invested in real estate

28. Yale School of Management 28 Some of the problems caused by financial under-development

29. Yale School of Management 29 Too much money in bank savings: is there any problem?

30. Yale School of Management 30 Financial Market Development and Income Inequality: any effect? % in Cash & Bank Savings% in Stocks% in Bonds China84.5%7.7%5.8% Italy35.7%11.3%37.8% Japan52.1%15.5%5.2% Germany37.0%16.9%17.0% Britain21.5%19.9%9.2% USA23.6%34.6%5.2% All as % of Financial Assets: household portfolios

31. Yale School of Management 31 Risk Factor: Income Inequality

32. Yale School of Management 32 In comparison with other countries