nan | 楠木

Lecture Notes 1

Recommended resources:

www.NYTimes.com The New York Times.

www.stern.nyu.edu/globalmacro/ “best economics site in the world”

www.atimes.com Asian times.

www.washingtonpost.com Washington Post.

zhongwen.ft.com/zhongwen Chinese version of the Financial Times

Key points of lecture:

l China‘s balance of payments

Figures:

Current account: short-term business flows +30 billion surplus

Capital account: investment (perhaps FDI) +60 billion surplus

Hot money. +100 billion

Change in reserves -210 billion

Errors & omissions: things unaccountable +20 billion

Basic concept: dollars coming in must equal dollars going out-balance of payments must equal 0. Thus trade surplus and foreign direct investment means that China central bank must purchase foreign bonds (using dollars coming in), as reflected by the -210 billion change in reserves. What this means is that China is in turn actually helping the US economy–since China central bank is buying US bonds, which means more dollars flow into US financial market, US companies can get more loans at good rates from US banks.

A reflection of this fact is that a trade surplus, which might seem to be a good thing, is actually in conflict with the wish of wanting our bank to invest more money in China. This shows that in financial markets a lot of events are interrelated.

l China‘s currency regime

China has a fixed currency rate, the RMB pegged to the US dollar. This is possible because of the following fact: the central bank is willing to buy/sell unlimited amount of dollars. Otherwise a fixed currency rate is impossible.

In theory, a fixed currency rate assisted with a capital control can achieve the same results of a floating currency rate, but in practice this is hard to realize, and China’s capital control has many loopholes.

As a result, the central bank cannot control the money supply.

l China‘s banking system

China‘s banking system is bankrupt.

The official number for bad loans is 15%, but economists estimate 30% to 50%.

Bad loans= nonperforming loans.

And while the ratio of bad loans appear to have decreased last year, the actual numbers may well have risen- ratio= bad loans/total loans, and total loans have greatly increased. A potential threat is that many new loans are potentially bad loans, such as further loans to badly managed state-owned companies, which means the bad loans crisis is worsening.

The banks are insolvent but not inliquid. Insolvent means that the banks can not repay all their debts-their liabilities are greater than their profits. Not inliquid means that they have a lot of cash flow, and can “pretend” to be not bankrupt.

The system must be reformed, and this is perhaps the greatest obstacle for China’s economy.

l China‘s financial markets

The function of a market is to allocate capital to its best use. Currently China has a very bad financial market, because the banking system is performing badly, and capital is being misallocated-small businesses cannot get money through loans, and state-owned companies losing money continue to get loans, which in future turn into more and more bad loans.

l China‘s stock market

Stock market is not functioning, and is too small.

l Global liquidity

Too much money in the world? Evidence: stock markets too high/ risk premiums too low.

l US current account deficit