CHINA AND THE GLOBAL FINANCIAL CRISIS

PRESENTED BY

DR. MEIJI FONG, PH.D. FIN.; D.B.A.

MGAM - CEO, Global Investment StrategistChina Peoples political Consultative Conference - Advisor

Sun Yat-Sen University, Professor of Finance and Management

The Analysis – IntroductionThe Analysis - Diversity

The Platform Analysis – Collapse of the CML and SMLThe Analysis - The Total Analysis

Triggers and SensitivitiesEconomic Stresses

World BankThe Economic Collapse

The TARP and The StimulusChina, The Crisis and the Stimulus Package

THE ANALYSIS

The Analysis - Introduction

All primary observations are assumptions are inductive truth; deduction is the tool to seek truth; and only then can a conclusion or perception can be argued; further monitor; or vetted Micro -> Macro -> Business Environment -> Currency Parity ->

Commodities then the reverse.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

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.

The Analysis - Diversity

Diversity in the common perception in assumed Efficient Markets

Theory of Diversity(Investment Risk Diversity)

Modern Portfolio TheoryHarry Markowitz

The Platform Analysis – Collapse of SML and CML

Note: with the collapse of credit; Market-to-Market values require Cash to resupply the market.

The Analysis – The Total Analysis

Bottom-Up, Across, then Top-Down

Balance Sheet(Assets = Liabilities + Shareholders’ Equity)

Financial Statements AnalysisIncome Statement, Cash Flow analysis,

Profit and Loss Statement

Market Analysis and ValuationP/E Ratio, Price/Earnings, Price/Book Value,

Enterprise Value,/EBITA, Economic Value Added and Discounted Cash Flow

Private

Public

Market

Country Risk Exposure (Monetary and Fiscal Policies)

Currency Risk Exposures(Parity Exchange, Sales Exports, Import of Goods, services, resources for production)

International Risk Exposure(Expanded Corporations, Politics, Favorable investment environment, Currency

restrictions, Safety and War)

CORPORATE ANALYSIS COUNTRY’S ECONOMY

Current Account/Monetary Base

Employment Situation

Manufacturing

Industrial Production/Capacity utilization

International Trade(Deficit/Surplus)

Consumer Prices Index (CPI)

Gross Domestic Product (GDP) Most sensitive indices to U

SD Value

Triggers and Sensitivities: Signs of Pressure

Corporate Stress Economic Stress•Discounted Cash Flow•Economics Value Added•Fundamental Analysis•Intrinsic Value•Price-Earnings Ratio – P/E Ratio•Price-To-Book Value – P/B Ratio•Quantitative Analysis•Ratio Analysis

Note: 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.

•Consumer Price Index•Produce Price Index•Employment Cost Index•Non-Farming Productivity Unit Labor Costs•Import and Export Prices•Employer Costs for Employee Compensation

Note: In a summary, the triggers for country sensitivities for cost, consumption and continual income for the government – making influences to fiscal and monetary policies

Signs of Pressure

Economic Stress

Economic Indicators Most Sensitive toSTOCKS

•Employment Stimulus Report (Payroll Survey)•ISM Report – Manufacturing (Reports on Business)•Weekly Claims for Unemployment Insurance•Consumer Prices•Retail Sales•Consumer Confidence and Sentiments Surveys•Advance Report on Durable Goods (orders of goods to be produced – goods, shipments, inventories, and orders)•Industrial Production•Gross Domestic Product (GDP)

Economic Indicators Most Sensitive toBONDS

•Employment Situation Report (Payroll Survey)•Consumer Prices•ISM Report - Manufacturing (Reports on Business)•Producer Prices•Weekly Claims for Unemployment Insurance•Retail Sales•Housing States•Chicago Purchasing Managers Report•Industrial Production/Capacity Utilization•GDP

Economic Activity Indicators

Focus of the Analysis

• Cash Flow of Companies– The affects of international risk to income statements– The affects of derivative accounting to balance sheets

• Resulting to lower reflected earnings from dividends

• Currency Performances and Parity– 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)

• Establishing the IMF and International Bank for Reconstruction and Development (IBRD); which today are both part of the World Bank

World Bank –IBRD

• International Bank of Reconstruction and Development (comprised of the World Bank Group)– Established in 1944, 184 members; cumulated lending

$420.2Billion– 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

– Primary funding (focus):• Large-scale infrastructure,• Building highways,• Power plants• To Growth Economies Africa, Asian and Latin America• Note: Japan and Europe are no longer growth economies because they

have achieved certain levels of income per capita)

World Bank – IMF and IBRD

GDP Per Capita Index

Sources from World Bank Annual Report (1995-2005)Note: Demand for loans are reflecting the GDP indices

World Bank –IDA

• The International Development Association (IDA)– Established 1960, 165 members; Cumulated lending $170

billion– Financing interest free to the world’s 81 poorest countries;– Countries have little or no capacity to borrow on market terms– IDA financing are from contributions from the IBRD’s net

income– Allocating interest-free credit, grants and loans for strategies in

key policy:• Raising productivity• Providing accountable governance• Building health investment climate• Improving access to basic services, including educational and health

care

World Bank – IMF and IBRD

World Bank functions and facts and the IMF• Maintains fair currency exchanges and parity of exchange pooled

within the IMF. Approximately 3.2 trillion USD is exchanged every day.

• Global Economy is estimated at USD54.62 Trillion (2008 Est)• GDP (PPP) is estimated at USD70.65 Trillion (2008) Est)

Changes in TerminologyFollowing 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

Previous Terminology

Gross national product, GDPGNP per capitaPrivate ConsumptionGeneral government consumptionGross domestic investment

New Terminology

Gross national income, GNGNI per capitaHousehold final consumptionGeneral government finance consumption expenditureGross capital formation

The World Bank and IMF

IMF Allocation of SDROriginally defined as equivalent to 0.888671

grams of fine gold – which at the time, was also equivalent to one U.S. Dollar pre-1973.

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)

Gold in the IMFGold played a central role in the

international monetary system until the collapse of the BrettonwWoods System of fixed exchange in 1973.

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)

Quota Votes

MillionOf SDR

PercentOf Total

Number Percent of Total

Member

Japan Yen 13,312 6.13% 133,378 3.02

UK Pound 10,738.5 4.94% 107,635 4.86

US Dollar 37,149.3 17.09% 371,743 16.77

China (accepted obligations) 8,090.1 3.72% 81,151 3.66France 10,738.5 4.94% 107,635 4.86Germany 13,008.2 5.99 130,332 5.88

The Economic Overview

Global Output (gross world product) (GWP) rose 3.2% in 2008

• Led by China 9%, equal to 21% of global growth)• The US (1.1% or 12% growth)• The European Union (0.9%) for 10.5% share

growth)• India (7.3%, equal to 5.6 of the total rise.• 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

The Equity Relation to Gold

• Demand for parity from the IMF now indicates the Central Banking references to interest rates and lending.

• 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)

CRB spot index

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.

The Beginning

Correlations to Equity Composite to Commodity Index(1956-2004 relationship)

Parabolic relation to Gold and Copper

CopperDue 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

GoldGold 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.Gold is used in Food and Drink, Industry, Electronics, Government Mints (coins)

Equity Reporting and Market Reactions

Dow Joes Index – 2005 Performance (resulting to asset boom)

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.

Equity Reporting and Market Reactions

Dow Joes Index – 2003-May 20 2009 Performance

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.

Sale of Bear Stern to JP Morgan ChaseMarch 2008

Availability of Credit and Lending averaging 4.41%

Sale of Bear Stern to JP Morgan ChaseSept 15, 2008

Extensive creation of Credit Derivative OptionsBenefiting the USD as a dominate currency. Sub-prime mortgages borrowers were borrowing below 600 Bpts

American International Group (AIG)Sept 22, 2008

FED Govt TARP1 & 2 700 USD 700 Billion StimulusTargeting Collateralized Debt Obligations1) Residential or commercial mortgages before March 14, 20082) Any financial security after approval by the Federal Reserve to maintain

financial stabilitySept 15, 2008

Announcement of Stimulus Package

Availability of Credit and Lending averaging 7.46%

Evidence of WACC; Currency parity Stress

USD Economy and the Credit Collapse

fishmantobin.com.cn

Tarp and Stimulus

TARP•Troubles Asset Relief Program•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.•The bill was passed in 03,October 2008 with the passage enacted under the Emergency Economic Stabilization Act of 2008•Triggers were Lehmam Brothers, Fannie Mae, Freddie Mac and American International Group (AIG)•Goldman Sachs, Morgan Stanley even changed their charter to become commercial banks in attempts to stablize the situation•October 2008, revisions of the program allow USD250Billion to be used to buy out equity states of nine major US banks, and smaller banks.

Financial Programs from the TARP•Capital Purchase Program (CPP)•Asset Guarantee Program (AGP)•Targeted Investment Program (TIP)•Automotive Industry Financing Program•Capital Assistance Programs•Consumer and Business Lending Initiative•Making Home Affordable Program•Public-Private Investment Program•Regulatory Reform

Tarp and Stimulus

Stimulus Package•Economic Environment

• Employment fell more than 700,000 per month in Q1, 2009 compared to 550,000 in Q4 2008 (highest since March 1983)

• Employment rising from 0.4% to 8.5% proved the economy was weak

•To ease tax liabilities•To ease mortgage liabilities•To stimulate retail spending•To re-enter money to the retail and wholesale investors to maintain a market-to-market value of capitalism.•Tax Relief

• USD126ln for infrastructure and Science• USD142Bln for Protecting the Vulnerable• USD78Bln for Education and Training• USD65Bln for Energy

Source Recovery.gov

The Latest on US StimulusDow Jones Industrial Average Gold Spot

EUR/USD

China, The Crisis and Stimulus Package

• The USD added enthusiasm about the economic recovery in China is still premature. (global parity and opening of the RMB)

• GDP growth has eased from 6.1% to 6.8 in Q4, 2008 • Does China need a stimulus package in Keynesian Economics?

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

80% for Long-Term Investment rather than short-term adjustments.