lecture outline global economic crisis and east asian economy
TRANSCRIPT
Lecture Outline
Global Economic Crisis and East Asian EconomyEast Asian Economy
August 2009
JUNG Ku-HyunSamsung Economic Research Institute
Topics to be covered
• Global Economic Crisis: Causes and Prospect
• Impact on Korean economy and Government Policy
• Impact on China and Japan
• Regional Cooperation: Finance and Real Sectors
1
• Regional Cooperation: Finance and Real Sectors
• Impact on Corporations: Japan vs. Korea
• Implications for Hokkaido Economy
2008 Global Financial and Economic Crisis
VIX Index
Real Economy Citi, GMCrisis
� 2007. 8 Subprime Mortgage Crisis Emerged
� 2008. 9 Lehman Brothers Bankruptcy
� 2008. 10 From Financial Crisis to Economic Crisis
� 2009. 5 Financial Market Stabilized
2
15
25
35
45
55
65
75
08/1/1 08/3/1 08/5/1 08/7/1 08/9/1 08/11/1 09/1/1 09/3/1 09/5/1
6/128.9
32.2428.54
Bear StearnsCrisis of GSEs
31.01
Monoline 36.22
Lehman Brothers Chapter 11
70.33
Real Economy Nosedived Crisis
80.86
32.1
Stress Test ofAmerican Banks
600
700
800
250
300
NASDAQ(1995.1 = 100)
Housing index(1995.1 = 100)
WTI spot(2002.1 = 100)
IT Bubble
Two Bubbles Burst after “Goldilocks Economy”
Bubble Cycles
3
0
100
200
300
400
500
600
1995 96 97 98 99 00 01 02 03 04 05 06 07 200850
100
150
200
* source : Global Insight
Housing Bubble
Commodity Bubble
Causes of Global Financial Crisis of 2008
� Immediate Reasons
Low interest rates and excess liquidity of 2002-2004
Manufactured products of China keeping inflation under control
Liquidity flowing into asset markets: real estate and stock
Housing market bubble and Subprime Mortgage Crisis
� Structural Reasons
Global Imbalance: the U.S. vs. East Asia and Oil Exporters
4
Global Imbalance: the U.S. vs. East Asia and Oil Exporters
Triffin Dilemma: Role of U.S. Dollar as Global Currency
� Systemic Problems
Anglo-American Capitalist System
Lax Regulation of Financial Markets/Institutions (derivatives market)
Management of Financial Institutions: risk-taking and compensation
Global Responses and Policy Coordination
� Massive government spending and Zero Interest Rates
Massive Capital Infusion on Financial Institutions
Fiscal Deficits of G7 Countries: 3-14% in 2009
Zero interest rates and unlimited supply of money
� Policy Coordination
Main Reason for Great Depression: Lack of Leadership
Spread of Protectionism has been under control
5
Spread of Protectionism has been under control
New Coordination Mechanism developed: G20 meetings
� Prospect of Recovery
Financial Meltdown unlikely
Emerging Markets seem to be robust, esp. China
Reaching the bottom of cycle?
Prospect of Economic Recovery
� Exit Strategy very difficult to manage
Unemployment still increasing and housing prices declining
Government budget deficits, excess liquidity and inflation pressures
������ ������ �������
6Source : BEA, C.Romer(1989), Datastream
-15
-10
-5
0
5
10
15
1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
(yoy: %)
Slump + Recovery
U.S. Economic Growth after Great Depression
Korean Economy: Vulnerable but Resilient
� Vulnerable Because of ‘open, small economy’ High Dependence on External Trade
High Degree of Capital Market Openness
Small Domestic Market
Case Study: ‘Success Cost’ of Shipbuilding Industry and Short-term Capital Problem
� Resilient thanks to 1997 Financial Crisis, or “IMF Crisis” IMF Imposing Austerity Policy as Conditions for Emergency Funding
7
IMF Imposing Austerity Policy as Conditions for Emergency Funding
More than one half of 30 Business Groups Closed down or Sold out
Business: Low Debt-to-Equity Ratio and Emphasis on Liquidity
Housing Loans were Regulated through Strict Rules (LTV and DTI)
Government Debt Level on Lower side among OECD Countries
� Other Reasons for Relative Stability Social Costs Reduced Thru ‘Job Sharing’
Chinese Economy Showing Robust Growth thanks to Fiscal Spending
Stock Market and Foreign Exchange Market Performance
KOSPI : 1,435.26 (2007.1.2) � 1,360.54 (2009.6.23)
Won/USD : 925.6 (2007.1. 2) � 1,372.80(2009.6.23)
1,800
2,000
2,200
1,800
2,000
2,200
KOSPI
KOSPI Won/USD
8
800
1,000
1,200
1,400
1,600
800
1,000
1,200
1,400
1,600
2007.1 07.7 08.1 08.7 09.1 2009.6
Won/USD
Why is the Korean Won Vulnerable to Global Instability?
22.6 30.562.8 71.9 69.4
337.0
23.8 31.560.7 72.4
92.3
361.4
USA Japan China Germany Korea Singapore
2007 2008� Foreign Trade/GDP (%)
9
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
19.6
42.0
32.4
28.8
37.3
39.740.1
3636.6
30.1
21.9
29.3
2009 6
� Foreign Investors’ Share in Equity Market(%)
Korean Economy Bottomed out in 2Q 2009
� Quarter on quarter, the economy recorded positive growth of2.3% in 2Q 2009 thanks to government spending.
� Year on Year base, the economy will move to positive growth in 4Q, 2009.
GDP Growth Rates
�������������� ������������6.0
10
Q on Q, %
Y on Y, %
-6.0
-4.0
-2.0
0.0
2.0
4.0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2007 2008 2009
1997 Crisis and the Current Global Crisis
� Similarities Sharp drop of stock prices and currency (won) value
Outflows of foreign portfolio investment
Pessimistic views on Korean economy prevailing in the market
� Differences Sound Public and Corporate Sector
• Government Budget in Surplus
11
• Government Budget in Surplus
• Debt/equity ratio of manufacturing industry− 1997 : 396.1% ��2007 : 97.8%
Banking Sector more robust compared to 1997(BIS ratio)• 1998.6.: 9.14% - 6 of 12 commercial banks’ ratios below 8%
• 2008.6.: 11.16% - all banks’ ratios above 10%
Foreign Exchange Reserves over 240 billion U.S.dollars
Prospect of Korean Economy in 2009 and 2010
� Signs of Recovery
Stock market index (kospi) back to pre-Lehman period
Corporate profit performance surprising in 2009.2Q: Is this a sign of competitiveness or result of weak Korean won?
Retail sales and credit card sales back to pre-crisis level
Real estate prices in Kangnam(Seoul) area back to pre-crisis level
� Uncertainties and Problems
12
� Uncertainties and Problems
Exports still sluggish, especially excluding ships
Exports Very much dependent on Chinese Economy
Corporate investments still lagging: -22.8% in 1H, -7.5% in 2H
Corporate performance sustainable with higher value of Won?
Decrease of jobs(20,000), mainly due to closing-down of subsistence retail stores and service est.
Impact of Global Crisis on China’s Economy
� China Expected to Achieve 8% GDP Growth in 2009 Despite Sharp Export Decline of over 20% in 1H
Thanks to expansionary government programs
� China’s stimulus package includes Government spending of 5.6 trillion yuan over 2 years (2009-2010)
• 60% to stimulate domestic demand (such as farm income support)
• 40% to enhance growth potential (such as solar energy and electric cars)
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• 40% to enhance growth potential (such as solar energy and electric cars)
Monetary Policy
Interest rate reduction from 7.47% to 5.31%
Increase of money supply to stimulate investments
� Key Question: Can domestic consumption and investments substitute for export declines? China’s economy has been export- and investment-driven
Investments driven by size expansion of SOEs and monetary incentives that local government officials get from land sales and other incomes
China’s Export and GDP Growth
Export Growth GDP Growth
� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � ! � " # $ % � & ' ( � ) * + , � - � . / 0 ! . 1 2 3 � 4 � � � ! � 5 6 � � 7 8 � 9 : � x � � � 6 8 " ; < = � � � � � � > ? ! @ A ! � 5 6 � �
30
40
800
1,200
Exports Growth
Imports Growth
(US$100 mil.)(Year-on-year growth, %)
Net Exports � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � ! � " # $ % � & ' ( � ) * + , � - � . / 0 ! . 1 2 3 � 4 � � � ! � 5 6 � � 7 8 � 9 : � x � � � 6 8 " ; < = � � � � � � > ? ! @ A ! � 5 6 � �� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � ! � " # $ % � & ' ( � ) * + , � - � . / 0 ! . 1 2 3 � 4 � � � ! � 5 6 � � 7 8 � 9 : � x � � � 6 8 " ; < = � � � � � � > ? ! @ A ! � 5 6 � �16
18
Year-on-Year
(%)
Year-on-Year
(%)
14
-40
-30
-20
-10
0
10
20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
-1,200
-
-400
0
400
800
2007 2008 2009
-
-
-
-
-800
-
2
4
6
8
10
12
14
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Year-on-Year
Quarter-on-Quarter
2007 2008 2009
Year-on-Year
Quarter-on-Quarter
Consumption and Investments in China’s GDP
China’s GDP Components
15
30%
35%
40%
45%
50%
55%
60%
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007
ConsumptionWage
Weights of Consumption and Wages to GDP
Difficult Policy Choices facing PRC
� Foreign Exchange Reserves: 2 trillion dollar question
China’s foreign exchange reserves reaching 2 trillion U.S. dollars
2/3 of reserves are dollar-denominated securities, including close to 800 billion U.S. T-bills and T-bonds
China is concerned about sudden fall of value of dollar, but does not have viable alternatives
Talking about SDR and diversifying out of dollar holdings, but actually purchasing U.S. government securities
16
� Basic Dilemma of China’s Economic Policy
China’s economic policy: “state-managed mercantilist policy”
• Export promotion by managing exchange rates
• Centralized foreign exchange control
Strong incentives to increase investments
• Creating unemployment problems and social unrest
Difficulties of increasing private consumption
• Shares of wages and consumption are gradually decreasing relative to GDP
Impact of Global Crisis on Japan’s Economy
� Most Severe Impact on Japan
2008 4Q -13.5% and 2009 1Q -14.2% Growth (Q-on-Q base)
Exports Declining 11.9% in 2008 4Q and 38.7% in 2009 1Q (on dollar base, Y-on-Y base)
Export Decline affecting production, profits, employments, investments and consumption in a vicious chain reaction
� Why So Severe Export Decline?
Contribution of Net Exports to GDP Growth Rate very high
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Contribution of Net Exports to GDP Growth Rate very high
Yen Appreciation adding further declines due to price competitiveness
Dollar exports are translated into even smaller Yen exports, further weakening exports’ contribution to GDP
Yen appreciating due to wind-down of Yen Carry Trade
� Export Declines Hitting Leading Industries Heavily
Autos(-64.5%), auto parts(-47.7%), heavy machinery(-59.7%) and electronics(-40.7%) in 2009 1Q on dollar base(Q-on-Q)
Sales and Profits of Large Corporations Severely Hurt by Export Declines1
Japan’s GDP Growth Rates
Quarter on Quarter Year on Year
(%)
6.0
3.0
0.0
(%)
4.0
2.0
18
Net Exports
Gov’t Expenditures
Private Investment
Private Consumption
0.0
-3.0
-6.0
-9.0
-12.0
-15.0
2005
GDP growth rate
2006 2007 2008 20092005
-10.0
Net Exports
Gov’t Expenditures
Private Investment
Private Consumption
GDP growth rate
0.0
-2.0
-4.0
-6.0
-8.0
2005 2006 2007 2008 2009
Government Stimulus Package has Limited Impact
� Government Stimulus Package totaling Yen 75.4 trillion
Including 11.8 trillion Yen Budget Expenditures
Projected Budget Deficit of 9.9% of GDP for 2009
Others include Increase in Bank financing/guarantees and tax reductions
97.2% of the package directed at vulnerable families and SMEs, with only 2.8 % on expanding growth potential
� Freefall slowing down in recent months
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But unemployment is increasing, consumption sluggish and private investments continue to decline in 2H, 2009
GDP Expected to decrease by 6.9 % in 2009 on top of 0.7% in 2008
Potential growth rate of Japanese economy could decline to 1.5 % level, meaning almost five years required to recover 2007 level of economic activities
Summary: Impact of Global Crisis on Three Countries
� China: Robust but Systemic Imbalance
Robust economic growth thanks to strong growth momentum
“State-managed Growth at any cost” strategy creating imbalances
External imbalance generating exchange rates/reserves dilemma
� Japan: Shock Absorbing but Ineffective Policy Response
Deep pockets (savings and reserves) absorbing external shocks
Trapped in Low Growth/Deflation spiral
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Trapped in Low Growth/Deflation spiral
Government has limited options to tackle economic stagnation
� S. Korea: Vulnerable but Resilient
Vulnerable due to high degree of openness in trade and capital
High crisis management capability due to Financial Crisis of 1997
Government policy: responsive and flexible
Can Regional Cooperation Help Reducing Vulnerabilities?
� Forex reserves to increase shock absorption capacity
Three Countries have over 3 billion dollar reserves
Large amounts of reserves both costly and problematic
China, in particular, has a dilemma
� Pooling Forex reserves in East Asia can reduce high costs of maintaining reserves – Chiangmai Initiative(CMI)
Multilateralized Currency Swaps totaling USD 120 billion
80 percent of the total shared by three NEA countries
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80 percent of the total shared by three NEA countries
A good start, but still a small amount compared to total reserves that the region has
� Future Direction of Regional Monetary Cooperation
Next 10 years: US Dollar and Euro will be dominant
IMF-Compatible Asian Monetary Cooperation?
Asia Monetary Fund or Regional Currency Bloc Unrealistic
Tasks in Real Side: Expanding Regional and Domestic Growth
� East Asia’s Dependence on External Markets
Consumption in the U.S. expected to decline from 72% to 67% of GDP over the next few years.
Global economy and Asia should find alternative markets to substitute for American consumption.
Asian exports’ dependence on external markets is still 67%, including processed exports. (In terms of initial destination, 48%)
� Policy options to expand regional demand
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� Policy options to expand regional demand
Freer Trade and Investments
• Regional FTA
• Regional Development Bank for Infrastructure Investments
Tapping Services Sector
Low-carbon, Green Growth
Does the Services Sector Have the Promised Potential?
� Is the Regional Services Sector really underdeveloped?
Services Sector in emerging markets undervalued due to non-tradable goods
Services Sector has more traditional establishments due to social reasons; e.g. one-man est. account for ¼ of S. Korea’s labor force
Asian services sector has more employment due to high standard of services demanded by Asian consumers.
� Areas of Potential Growth in Asian Services Sector
Finance
24
Finance
Education and Professional Services
Health Care
Tourism
Retail and Physical Distribution
� What is needed?
“Asia-centered Hub and Spoke Network”
“Asia-centered Knowledge and Intellectual Leadership”
Areas of Collaboration in Low-Carbon, Green Growth
� New Engines of Growth for the Coming Decade Renewable and New Energy Low-carbon Production and Consumption Bio and Healthcare
� What East Asia has in Low-carbon, Green Growth Most energy-efficient economy Technology leaders in electric and energy-efficient cars High R&D expenditures of East Asian countries
25
� Areas of Potential Collaboration Cap and Trade in greenhouse gas Technology collaboration Combating cross-border pollution, such as yellow dust
Critical Question: How to derive synergy in the coming technology
competition in East Asia?
Impact of Global Crisis on East Asian Corporations
� Global Financial Crisis and Global Corporations
Non-financial corporations are relatively robust despite slow-down in sales and profits
Biggest shock waves in the global auto sector due to GM and Chrysler –Global industry shakeout likely in coming years
Even in other industries, new winners will emerge from current crisis: companies with liquidity and intangible assets
� Impact of Current Crisis on East Asian corporations
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� Impact of Current Crisis on East Asian corporations
Japanese giants in electronics and heavy industry are hard hit.
Korean global corporations are in good shape: depreciation of won helped them, but competitiveness of some KGCs are at high end.
Big Chinese companies are least affected by the crisis due to the stable value of yuan and strong domestic demand – they are likely to emerge as actors in the next wave of M&A globally, especially in high-tech and resources industries
Recent Performance of Korean vs. Japanese Companies(’08.1Q � ’09.1Q)
Toyota
20
40
80
Japanese companies
Korean companies
Revenue (U.S. $.billion))
Honda
27
10
20
-25 -20 -15 -10 -5 0 5 10 15 20 25
OperatingProfit Margin(%)
Honda
Sony Panasonic
Nippon Steel
Canon
Samsung Elec.
Mitsubishi Heavy
POSCOHyundai Heavy
LG Elec.
Hyundai Motor
note1: Sales revenues were converted into dollars by multiplying quarterly average of won/dollar and yen/dollar exchange rates.2: Sales revenues of Korean companies were based on parent-only financial statements and those of Japanese companies were
based on consolidated financial statements.Source: KIS-Value (Korean companies), Thomson One Banker (Japanese Companies)
Some Bold Projections for the Next Decade(2010-2020)
� The Global economy enters a period of low-growth, high-inflation.
� Center of Economic Growth will shift to Emerging Markets, esp. BRICs and Asia
� For the next decade, the United States will maintain the leadership position, but Pax Americana will gradually change into more fluid, multi-polar era.
� U.S. Dollar and Euro will share the role of reserve and transaction currencies, and the role of RMB will be limited.
28
currencies, and the role of RMB will be limited.
� Biggest Challenge for the world and region will be how to live with ‘rising China.’
� It is possible that new values emerge in capitalism and management philosophy; ‘sustainable, post-growth economy.’
� Key words for next growth industries will be low-carbon, green and bio/health (green, smart and secure).
New Perspectives on East Asia
� East Asia as Multiple Hubs and Spokes Still dominated by three nation-states, but
East Asia has six main economic hubs and multiple sub-hubs
Hubs and sub-hubs should have multiple linkages with others
� East Asia as a Time Machine Has Five Centuries living together
Backward, Agricultural, Industrial, Information and Post-IT sectors
29
Backward, Agricultural, Industrial, Information and Post-IT sectors at the same time
Advanced sectors have information and knowledge to share
� Japan as an advanced society is in a peculiar position: Most aged society
Most energy-efficient, clean society
Sophisticated, post-growth consumption society
Galapagos Islands or Regional Life-style Hub?
Implications for Hokkaido Economy: Three Key Words
� Emerging Markets Linkages to Northeast China, Russia and North Korea Should develop logistics networks Utilize Tokyo and Honshu but develop linkages with other hubs
� Low-Carbon, Green Growth Excellent Potential as “Clean and Green” lifestyle Climate Change can have positive effects on Hokkaido
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Climate Change can have positive effects on Hokkaido Should have “active population policy”
� Service Industry Bio and Healthcare Natural or organic food Sports tourism Alternative Energy How to reduce costs?