Compared to the global economies, the Indian and Chinese economies were relatively less hurt due to the economic downturn after Sep 2008 financial crisis. This PPT analyzes the reasons from 'Financial Systems' perspectives.
2. 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 2
3. 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 Predictive connection between performance and promotions 3
4. 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
5. 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 5
6. 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 6
7. 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 7
8. 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
9. 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 9
10. 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! 10
11. 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 11
