China and the Global Economic Crisis Forum


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China and the Global Economic Crisis Forum

  1. 1. China and the Global Financial Crisis<br />Presented by <br />Dr. Meiji Fong, Ph.D. Fin.; D.B.A.<br />MGAM - CEO, Global Investment StrategistChina Peoples political Consultative Conference - Advisor<br />Sun Yat-Sen University, Professor of Finance and Management<br />
  2. 2. The Analysis<br />The Analysis – Introduction<br />The Analysis - Diversity<br />The Platform Analysis – Collapse of the CML and SML<br />The Analysis - The Total Analysis<br />Triggers and Sensitivities<br />Economic Stresses<br />World Bank<br />The Economic Collapse<br />The TARP and The Stimulus<br />China, The Crisis and the Stimulus Package<br />
  3. 3. The Analysis - Introduction<br /><ul><li>All primary observations are assumptions are inductivetruth; deduction is the tool to seek truth; and only then can a conclusion or perception can be argued; further monitor; or vetted
  4. 4. Micro -> Macro -> Business Environment -> Currency Parity -> Commodities then the reverse.
  5. 5. The Economic Stresses must be analyze from a bottom-up, then top-down, hence the Balance Sheets (financial statements, income statements and cash flow to the business environment; then
  6. 6. The sensitivities to county risk, to currency risk and to international risk need to be assessed in correlation for clarity of market movements and; the purpose to serve global policy or domestic regulations.</li></li></ul><li>The Analysis - Diversity<br />Diversity in the common perception in assumed Efficient Markets<br />Theory of Diversity<br />(Investment Risk Diversity)<br />Modern Portfolio Theory<br />Harry Markowitz<br />
  7. 7. The Platform Analysis – Collapse of SML and CML<br />Note: with the collapse of credit; Market-to-Market values require Cash to resupply the market.<br />
  8. 8. The Analysis – The Total Analysis<br />Bottom-Up, Across, then Top-Down<br />International Risk Exposure<br />(Expanded Corporations, Politics, Favorable investment environment, Currency restrictions, Safety and War)<br />Country Risk Exposure <br />(Monetary and Fiscal Policies)<br />Currency Risk Exposures<br />(Parity Exchange, Sales Exports, Import of Goods, services, resources for production)<br />Gross Domestic Product (GDP)<br />Most sensitive indices to USD Value<br />Market<br />Consumer Prices Index (CPI)<br />Market Analysis and Valuation<br />P/E Ratio, Price/Earnings, Price/Book Value, Enterprise Value,/EBITA, Economic Value Added and Discounted Cash Flow<br />International Trade<br />(Deficit/Surplus)<br />Industrial Production/Capacity utilization<br />Financial Statements Analysis<br />Income Statement, Cash Flow analysis,<br />Profit and Loss Statement<br />Public<br />Manufacturing<br />Balance Sheet<br />(Assets = Liabilities + Shareholders’ Equity)<br />Employment Situation<br />Current Account/Monetary Base<br />Private<br />Country’s economy<br />Corporate Analysis<br />
  9. 9. Triggers and Sensitivities: Signs of Pressure<br />Corporate Stress<br />Economic Stress<br /><ul><li>Discounted Cash Flow
  10. 10. Economics Value Added
  11. 11. Fundamental Analysis
  12. 12. Intrinsic Value
  13. 13. Price-Earnings Ratio – P/E Ratio
  14. 14. Price-To-Book Value – P/B Ratio
  15. 15. Quantitative Analysis
  16. 16. Ratio AnalysisNote: In a summary, what the company owns; what it requires in cash to operate; when and how does it repay debt; and the organizational plans and managements’ responsibility to the market-investors and shareholders.
  17. 17. Consumer Price Index
  18. 18. Produce Price Index
  19. 19. Employment Cost Index
  20. 20. Non-Farming Productivity Unit Labor Costs
  21. 21. Import and Export Prices
  22. 22. Employer Costs for Employee CompensationNote: In a summary, the triggers for country sensitivities for cost, consumption and continual income for the government – making influences to fiscal and monetary policies</li></li></ul><li>Signs of Pressure<br />Economic Stress<br />Economic Activity Indicators<br />Economic Indicators Most Sensitive toSTOCKS<br /><ul><li>Employment Stimulus Report (Payroll Survey)
  23. 23. ISM Report – Manufacturing (Reports on Business)
  24. 24. Weekly Claims for Unemployment Insurance
  25. 25. Consumer Prices
  26. 26. Retail Sales
  27. 27. Consumer Confidence and Sentiments Surveys
  28. 28. Advance Report on Durable Goods (orders of goods to be produced – goods, shipments, inventories, and orders)
  29. 29. Industrial Production
  30. 30. Gross Domestic Product (GDP)</li></ul>Economic Indicators Most Sensitive to<br />BONDS<br /><ul><li>Employment Situation Report (Payroll Survey)
  31. 31. Consumer Prices
  32. 32. ISM Report - Manufacturing (Reports on Business)
  33. 33. Producer Prices
  34. 34. Weekly Claims for Unemployment Insurance
  35. 35. Retail Sales
  36. 36. Housing States
  37. 37. Chicago Purchasing Managers Report
  38. 38. Industrial Production/Capacity Utilization
  39. 39. GDP</li></li></ul><li>Focus of the Analysis<br />Cash Flow of Companies<br />The affects of international risk to income statements<br />The affects of derivative accounting to balance sheets<br />Resulting to lower reflected earnings from dividends<br />Currency Performances and Parity<br />Bretton Woods Conference, 1944 Mount Washington Hotel, in Bretton Woods, New Hampshire, US (monetary management establishing rules for commercial and financial relationships among industrial Nations (Sovereign ‘States’) – primarily to fight poverty by means of financing States)<br />Establishing the IMF and International Bank for Reconstruction and Development (IBRD); which today are both part of the World Bank<br />
  40. 40. World Bank –IBRD<br />International Bank of Reconstruction and Development (comprised of the World Bank Group)<br />Established in 1944, 184 members; cumulated lending $420.2Billion<br />Provides loans to governments and public enterprise, funds for this lending from the World Bank Bonds on the global capital markets rated AAA because they are backed by member states’ share capital<br />Primary funding (focus):<br />Large-scale infrastructure,<br />Building highways,<br />Power plants<br />To Growth Economies Africa, Asian and Latin America<br />Note: Japan and Europe are no longer growth economies because they have achieved certain levels of income per capita)<br />
  41. 41. World Bank – IMF and IBRD<br />GDP Per Capita Index<br />Sources from World Bank Annual Report (1995-2005)<br />Note: Demand for loans are reflecting the GDP indices<br />
  42. 42. World Bank –IDA<br />The International Development Association (IDA)<br />Established 1960, 165 members; Cumulated lending $170 billion<br />Financing interest free to the world’s 81 poorest countries;<br />Countries have little or no capacity to borrow on market terms<br />IDA financing are from contributions from the IBRD’s net income<br />Allocating interest-free credit, grants and loans for strategies in key policy:<br />Raising productivity<br />Providing accountable governance<br />Building health investment climate<br />Improving access to basic services, including educational and health care<br />
  43. 43. World Bank – IMF and IBRD<br />World Bank functions and facts and the IMF<br />Maintains fair currency exchanges and parity of exchange pooled within the IMF. Approximately 3.2 trillion USD is exchanged every day.<br />Global Economy is estimated at USD54.62 Trillion (2008 Est)<br />GDP (PPP) is estimated at USD70.65 Trillion (2008) Est)<br />Changes in Terminology<br />Following statistical practice, the World Bank has adopted the following terminology in line with the 1993 System of National Accounts (SNA). The changes in terms are listed below<br />Previous Terminology<br />New Terminology<br />Gross national product, GDP<br />GNP per capita<br />Private Consumption<br />General government consumption<br />Gross domestic investment<br />Gross national income, GN<br />GNI per capita<br />Household final consumption<br />General government finance consumption expenditure<br />Gross capital formation<br />
  44. 44. The World Bank and IMF<br />IMF Allocation of SDR<br />Originally defined as equivalent to 0.888671 grams of fine gold – which at the time, was also equivalent to one U.S. Dollar pre-1973.<br />SDR rates are subject to Currency Amount X Exchange Rate against the SDR x Interest Rate which averages about 0.40 for major currencies (Euro, Japanese Yen, UK Pound, US Dollar)<br />Gold in the IMF<br />Gold played a central role in the international monetary system until the collapse of the BrettonwWoods System of fixed exchange in 1973.<br />IMF Holds 103.4 Million ounces (3.217 Metric Tones) of gold at the designated depositories). The IMF balance sheet at SDR 5.9 Billion (about USD8.7 Billion)<br />Quota<br />Votes<br />Million<br />Of SDR<br />Percent<br />Of Total<br />Number<br />Percent of Total<br />Member<br />13,312<br />6.13%<br />133,378<br />3.02<br />10,738.5<br />4.94%<br />107,635<br />4.86<br />37,149.3<br />17.09%<br />371,743<br />16.77<br />8,090.1<br />3.72%<br />81,151<br />3.66<br />10,738.5<br />4.94%<br />107,635<br />4.86<br />13,008.2<br />5.99<br />130,332<br />5.88<br />Japan Yen<br />UK Pound<br />US Dollar<br />France<br />Germany<br />China (accepted obligations)<br />
  45. 45. The Economic Overview<br />Global Output (gross world product) (GWP) rose 3.2% in 2008<br />Led by China 9%, equal to 21% of global growth)<br />The US (1.1% or 12% growth)<br />The European Union (0.9%) for 10.5% share growth)<br />India (7.3%, equal to 5.6 of the total rise.<br />12 largest economies: US, Japan, China, Germany, France, the United Kingdom, Italy, Russia, Spain, Brazil, Canada and India) – contributed to just over half of the world GDP<br />
  46. 46. The Equity Relation to Gold<br />Demand for parity from the IMF now indicates the Central Banking references to interest rates and lending. <br />In maintaining GNI growth rates to lending commodities and precious metals are purchased by governments, treasury functions and fund managers (either private or sovereign, e.g.. Temasek, Singapore)<br />CRB spot index<br />Commodities are commonly used such as Copper, Oil, Gold, etc are considered trading cycles to bear increases in profitability for both risk and return levels due to the liquidity of the asset.<br />
  47. 47. The Beginning<br />Correlations to Equity Composite to Commodity Index<br />(1956-2004 relationship)<br />
  48. 48. Parabolic relation to Gold and Copper<br />Copper<br />Due to the demands from a nations GDP, and the demands from multiple nations, this commodity is used primarily as a liquid asset. The countries which use this commodity which has a restricted currency of exchange would use this as a median of exchange for trade deficit payments and government financial securities<br />Gold<br />Gold as a traditional medium of exchange and is used for leveraging within monetary bases (also invested from demand accounts) of the government treasury or reserve.<br />Gold is used in Food and Drink, Industry, Electronics, Government Mints (coins)<br />
  49. 49. Equity Reporting and Market Reactions<br />Dow Joes Index – 2005 Performance (resulting to asset boom)<br />Bear Sterns Companies, Inc (former New York Stock Exchange ticker symbol) based in New York, was once known for it top risk management and one of the largest investment banks and securities trading and brokerage firms prior to its distress sale to JP Morgan Chase.<br />
  50. 50. Equity Reporting and Market Reactions<br />Dow Joes Index – 2003-May 20 2009 Performance<br />Extensive creation of Credit Derivative Options<br />Benefiting the USD as a dominate currency. Sub-prime mortgages borrowers were borrowing below 600 Bpts<br />Sale of Bear Stern to JP Morgan Chase<br />March 2008<br />Sale of Bear Stern to JP Morgan Chase<br />Sept 15, 2008<br />American International Group (AIG)<br />Sept 22, 2008<br />FED Govt TARP1 & 2 700 USD 700 Billion Stimulus<br />Targeting Collateralized Debt Obligations<br />Residential or commercial mortgages before March 14, 2008<br />Any financial security after approval by the Federal Reserve to maintain financial stability<br />Sept 15, 2008<br />Announcement of Stimulus Package<br />Availability of Credit and Lending averaging 4.41%<br />Availability of Credit and Lending averaging 7.46%<br />Evidence of WACC; Currency parity Stress<br />Bear Sterns Companies, Inc (former New York Stock Exchange ticker symbol) based in New York, was once known for it top risk management and one of the largest investment banks and securities trading and brokerage firms prior to its distress sale to JP Morgan Chase.<br />
  51. 51. USD Economy and the Credit Collapse<br /><br />
  52. 52. Tarp and Stimulus<br />TARP<br /><ul><li>Troubles Asset Relief Program
  53. 53. Attempts to curb the ongoing financial crisis of 2007-2008; TARP gave the US Treasury purchasing power of $700 Billion to buy Mortgage Backed Securities (MBS) from institutions across the country.
  54. 54. The bill was passed in 03,October 2008 with the passage enacted under the Emergency Economic Stabilization Act of 2008
  55. 55. Triggers were Lehmam Brothers, Fannie Mae, Freddie Mac and American International Group (AIG)
  56. 56. Goldman Sachs, Morgan Stanley even changed their charter to become commercial banks in attempts to stablize the situation
  57. 57. October 2008, revisions of the program allow USD250Billion to be used to buy out equity states of nine major US banks, and smaller banks.</li></ul>Financial Programs from the TARP<br /><ul><li>Capital Purchase Program (CPP)
  58. 58. Asset Guarantee Program (AGP)
  59. 59. Targeted Investment Program (TIP)
  60. 60. Automotive Industry Financing Program
  61. 61. Capital Assistance Programs
  62. 62. Consumer and Business Lending Initiative
  63. 63. Making Home Affordable Program
  64. 64. Public-Private Investment Program
  65. 65. Regulatory Reform</li></li></ul><li>Tarp and Stimulus<br />Stimulus Package<br /><ul><li>Economic Environment
  66. 66. Employment fell more than 700,000 per month in Q1, 2009 compared to 550,000 in Q4 2008 (highest since March 1983)
  67. 67. Employment rising from 0.4% to 8.5% proved the economy was weak
  68. 68. To ease tax liabilities
  69. 69. To ease mortgage liabilities
  70. 70. To stimulate retail spending
  71. 71. To re-enter money to the retail and wholesale investors to maintain a market-to-market value of capitalism.
  72. 72. Tax Relief
  73. 73. USD126ln for infrastructure and Science
  74. 74. USD142Bln for Protecting the Vulnerable
  75. 75. USD78Bln for Education and Training
  76. 76. USD65Bln for Energy</li></ul>Source<br />
  77. 77. The Latest on US Stimulus<br />Dow Jones Industrial Average<br />Gold Spot<br />EUR/USD<br />
  78. 78. China, The Crisis and Stimulus Package<br />The USD added enthusiasm about the economic recovery in China is still premature. (global parity and opening of the RMB)<br />GDP growth has eased from 6.1% to 6.8 in Q4, 2008 <br />Does China need a stimulus package in Keynesian Economics?<br />China’s Economic stimulus package is for the primary issues of reconstructing the urban post-earthquake infrastructure; development of education and training for more competitive employments to rural regions<br />80% for Long-Term Investment rather than short-term adjustments.<br />