1. Macroeconomic Trends and Cycles Junhui Qian 2015 October

2. Content Overview Key Macroeconomic Variables GDP Consumption Investment Inflation Employment Industrial Output Loans Interest Rates Current Problems

3. Overview Major Cycles (Year of overheat) 1978-1983 (1980) 1984-1986 (1985) 1987-1990 (1988) 1991-1997 (1994) 1998-2005 (2004) 2006-2008 (2008) 2009- (2011) Before 1998, each cycle was accompanied by pushes for reform and ideological backlashes. After 1998, macroeconomic cycles were driven by the business cycle itself and policy (fiscal and monetary).

4. Content Overview Key Macroeconomic Variables GDP Consumption Investment Inflation Employment Industrial Output Loans Interest Rates Current Problems

5. Annual GDP Growth

6. Chinese GDP Quarterly Growth

7. GDP Components (Expenditure)

8. Contribution of Each Expenditure to GDP Growth (%)

9. Growth in Consumption

10. Consumption: Private and Government

11. Investment Growth

12. Investment Growth by Source

13. Inflation

14. Y2Y Change in CPI and PPI (monthly, 1996-2015)

15. Employment

16. Industrial Value Added IVA=profit+depreciation+payments to labor+tax

17. Growth in Electricity Generation

18. Total Loans

19. Interest Rates and Inflation

20. Overnight Money Market Rate

21. Content Overview Key Macroeconomic Variables GDP Consumption Investment Inflation Employment Industrial Output Loans Interest Rates Current Problems

22. The Impact of the Global Financial Crisis From 2003 to early 2008, the US consumption had been unusually strong, under the loose monetary policy and the housing bubble. With strong external demand and investment passion, the Chinese economy enjoyed double-digit growth in this period. In mid-2007, signs were clear that Chinese economy was over-heating and PBC started to raise interest rates and the deposit requirement ratio for banks. As the GFC hit the US consumption, the Chinese manufacturing sector was also badly hit. Under the fear of mass unemployment, the state council decided to stimulate the economy with a massive (RMB 4 trillion) investment program. Local government use cheap lending from the state-controlled banks to finance the investment drive. As a result, the leverage ratio for local government financing vehicles increased dramatically. The state-controlled banks loosened lending standards. And interest rates were cut for the mortgage borrowers. As a result, housing price soared across the country.

23. Housing Price Since 2007

24. The Cooling of Housing From 2010, the central government tried to cool down the housing market. Measures include purchase restrictions, differential interest rates for second and third-home buyers, restrictions on bank lending to developers, etc. These measures had limited success.

25. Monetary Tightening As the inflation rate approaches 5% at the end of 2010, the central bank started tightening. The required reserve ratio for banks was raised to over 20%, an unprecedented level. Although interest rate was only moderately raised, borrowing costs for the private sector soared. The interest rate on a typical “trust loan”, which was considered risk-free, would be around 12%. Interest rates on more risky lending were much higher. As a result, a bubble on high-interest private lending occurred in many regions.

26. Required Reserve Ratio (2006-2012)

27. The Slowing Down of Chinese Economy As local governments found it more and more difficult, and expensive, to finance investment, public investments slowed down. The same was true for private investment. Under the weight of weakening external demand and internal investment due to tight monetary policy, the economy started to slow down. The housing price finally stopped rising and started to decline in most cities.

28. The Stock Boom and Crash in 2014-2015

29. Exchange Rate Realignment

30. Concluding Remarks Investment occupies a large share in Chinese GDP. This makes the economic cycles more volatile. As the Chinese economy grows and become more and more open, the economy becomes more synced with the world economy. Since 2010, the economy has been slowing down. The policy makers are more concerned with structural reforms that may lead to a more balanced and sustainable growth path.