Nomura Institute of Capital Markets Research
How major macroeconomic variables move around their medium-term trends
13 November, 2012
The Business Cycle in China since the Lehman Crisis
Nomura Institute of Capital Markets Research
Senior Fellow
C. H. Kwan
-4
-2
0
2
4
6
8
10
12
14
16
Q3
01 02 03 04 05 06 07 08 09 10 11 12
CPI
Real GDP growth rate
8.07.4
(Year-on-year, %)
1.9
(Year, quarter)
12.1
14.8
6.6
-1.5
6.3
Economic Growth versus Inflation in China
1
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
-4
-2
0
2
4
6
8
10
0 2 4 6 8 10 12 14 16 Economic growth rate lagged three quarters (Year-on-year, %)
10Q1
10Q2
10Q3
10Q411Q1
11Q2
11Q3
11Q412Q1
12Q2
12Q3
Inf lation rate (Year-on-year, %)
Correlation between the Economic Growth Rate and the Inflation
Rate (2001Q1~2012Q3)
2
Note: Estimation results:
Inflation rate = -5.70 + 0.82 × economic growth rate lagged three quarters (6.54) The number in parentheses denotes t-value. = 0.48
Estimation period: Q1 2001 through Q3 2012.
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
2R
-5
0
5
10
15
20
25
0 5 10 15 20
Economic growth rate lagged three quarters (Year-on-year, %)
2011Q22011Q1
2011Q3
2011Q4
2012Q1
2012Q22012Q3
Rate of increase in food prices (Year-on-year, %)
Correlation between the Economic Growth Rate and Increase in
Food Prices (2001Q1-2012Q3)
3
Note: Estimation results:
Rate of increase in food prices = -14.00 + 2.00 × economic growth rate lagged three quarters (6.62)
The number in parentheses denotes t-value, = 0.48
Estimation period: Q1 2001 through Q3 2012.
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
2R
Phases of the Business Cycle Defined by the Relationship
between the Economic Growth Rate and the Inflation Rate
4
Boom Bust Boom
Economic growth rate
↓
Inf lation rate→
(Growth rate)a) Without time lags
b) With time lags
↓Economic growth rate↓Inf lation rate
(4)Stagflation
(1)Recession
(2)Recovery
(3)Overheating
(Growth rate)
Low growthHigh inflation
Low growthLow inflation
High growthLow inflation
High growthHigh inflation
Average(benchmark)
Average(benchmark)
Source: Compiled by Nomura Institute of Capital Markets Research.
Boom Bust Boom
Economic growth rate
↓
Inf lation rate→
(Growth rate)a) Without time lags
b) With time lags
↓Economic growth rate↓Inf lation rate
(4)Stagflation
(1)Recession
(2)Recovery
(3)Overheating
(Growth rate)
Low growthHigh inflation
Low growthLow inflation
High growthLow inflation
High growthHigh inflation
Average(benchmark)
Average(benchmark)
Business Cycle Described by the Interaction between Economic
Growth and Inflation
5
Source: Compiled by Nomura Institute of Capital Markets Research.
Economic growth rate down
Economic growth rate up
Infl
atio
n ra
te u
p
Infl
atio
n ra
te d
ow
n
Economic growth rate High →← Low
Infl
ati
on
rate
H
igh
→
Benchmark
←Lo
wThe inf lation rate turns downward following a
decrease in the economic growth rate.
The economic growth rate turns downward
following monetary tightening.
The economic growth rate turns upward following
monetary easing.
The inf lation rate turns upward following an
increase in the economic growth rate.
(4) Stagflation
(3) Overheating
(1) Recession
(2) Recovery
Benchmark
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0
2
4
6
8
10
12
14
16 Q
4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2008 2009 2010 2011 2012
(Year, quarter)
Inf lation rate 1.9%
7.4%Economic growth rate
(Year-on-year, %)
(1)Recession (2)Recovery (3)Overheating
average: 9.1%
average: 2.7%
(4)Stagflation (1)Recession
Phases of the Business Cycle in Post-Lehman China
6
Note: Phase (1): low growth and low inflation; phase (2): high growth and low inflation;
Phase (3): high growth and high inflation and phase (4): low growth and high inflation.
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
-2
-1
0
1
2
3
4
5
6
7
4 5 6 7 8 9 10 11 12 13 14
09Q2
09Q1
09Q3
09Q4
10Q1
10Q210Q3
08Q4
11Q2
10Q4
11Q1
11Q3
12Q1
11Q4
12Q2
Inf lation rate (Year-on-year, %)average: 9.1%
(4)Stagflation
(3)Overheating
(1)Recession
(2)Recovery
Economic growth rate (Year-on-year, %)
average:2.7%
12Q3
Cyclical Changes in the Economic Growth and Inflation Rates in
Post-Lehman China
7
Note: Phase (1): low growth and low inflation; phase (2): high growth and low inflation;
phase (3): high growth and high inflation and phase (4): low growth and high inflation.
The economy circulates counterclockwise in the order of (1) → (2) → (3) → (4) → (1).
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
8
The Taylor rule proposes that the policy interest rate should be determined in response to the divergence of
actual inflation from the long-term inflation target and the divergence of current economic activity from its
equilibrium level (measured by the GDP gap).
General form
The optimal level of the policy interest rate = actual inflation rate + equilibrium real interest rate
+ 0.5 × (actual inflation rate - target inflation rate)
+ 0.5 × (GDP gap).
The case of the United States
The optimal level of the FF rate = actual inflation rate + 2%
+ 0.5 × (actual inflation rate - 2%) + 0.5 × (GDP gap)
= 1.5 × (actual inflation rate) + 0.5 × (GDP gap) + 1%
Taylor principle
– The policy interest rate must be raised by more than the rise in the inflation rate in order to stabilize the macro
economy.
The Taylor rule can be treated as a reaction function showing how the policy interest rate actually responds
to changes in the inflation rate and the GDP gap.
The Taylor Rule
4
5
6
7
8
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
2005 2006 2007 2008 2009 2010 2011 2012
(Year, quarter)
(%)
Actual value
Estimated value
Changes in the One-Year Base Lending Rate
— Actual versus Predicted Values —
9
Note: The predicted value is based on the following regression equation.
Base lending rate= 1.68 + 0.11 × inflation rate + 0.06 × economic growth rate + 0.57 × base lending rate lagged one quarter (3.70) (2.43) (5.66) Figures in parentheses are t-values. = 0.84 The base lending rate has a one-year maturity.
Estimation period: Q3 2005 to Q3 2012
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
2R
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-2
0
2
4
6
8
10
9
2005 2006 2007 2008 2009 2010 2011 2012
(%)
(Year, month)
Inf lation rate (year-on-year) Nominal base lending rate
Real base lending rate
Real Base Lending Rate Inversely Correlated with the Inflation
Rate
10
Note: The base lending rate has a one-year maturity. Real base lending rate = Nominal base lending rate
- inflation rate (year-on-year) Source: Compiled by Nomura Institute of Capital Markets Research Based on CEIC database.
-2
0
2
4
6
8
10
12
Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2005 2006 2007 2008 2009 2010 2011 2012
(Year-on-year, %)
(Year, quarter)
Actual value
Estimated value
RMBappreciation
Changes in RMB Exchange Rate against the U.S. Dollar (USD/ RMB)
— Actual versus Predicted Values —
11
Note: The predicted value is based on the following regression.
USD per RMB = -3.30 + 0.53 × inflation rate lagged one quarter + 0.29 × economic growth rate + 0.62 × USD per RMB lagged one quarter (7.23) (4.53) (9.47)
Figures in parentheses are t-values. =0.93 Figures for the RMB rate are based on period averages.
Estimation period: Q3 2005 to Q3 2012
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC database.
2R
-4
-2
0
2
4
6
8
10
12
7 9
2005 2006 2007 2008 2009 2010 2011 2012
(Year-on-year, %)
CPI →
US dollar per RMB
(Year, month)
RMBappreciation
Rate of RMB Appreciation Moving in Tandem with the Inflation Rate
12
Note: Monthly average of the RMB exchange rate (U.S. dollars per renminbi).
Source: Compiled by Nomura Institute of Capital Markets Research based on data from the
National Bureau of Statistics and the State Administration of Foreign Exchange (SAFE) of China.
-30
-20
-10
0
10
20
30
40
50
○Q
3×
Q4
○Q
1○
Q2
○Q
3○
Q4
○Q
1○
Q2
○Q
3○
Q4
○Q
1○
Q2
○Q
3○
Q4
×Q
1○
Q2
○Q
3○
Q4
×Q
1×
Q2
○Q
3×
Q4
○Q
1○
Q2
○Q
3○
Q4
○Q
1×
Q2
○Q
3
2005 2006 2007 2008 2009 2010 2011 2012
(Quarter-on-quarter, %)
(Year, quarter)
←Actual value
Ris
ing
sh
are
pric
es
Fallin
gsh
are
pric
es
↓Estimated value
Changes in the SSE Composite Index
— Actual versus Predicted Values —
13
Notes: The predicted value is based on the following regression.
Shanghai Composite Index (QoQ) =
-36.90 + 4.91 × economic growth rate (YoY) - 3.52 × inflation rate (YoY) (4.98) (-4.01) Figures in parentheses are t-values. = 0.53
Figures for Shanghai Composite Index are based on period averages.
Estimation period: Q3 2005 to Q3 2012
○ indicates the predicted value rises or falls with the actual value.
× indicates The predicted value moves in the opposite direction from the actual value.
Source: Compiled by Nomura Institute of Capital Markets Research based on CEIC Database.
2R
10
15
20
25
30
35
1 7 1 7 1 7 1 7 1 7
2008 2009 2010 2011 2012 (年、月)
Money supply (M2)
(Year-on-year, %)
-4
-2
0
2
4
6
8
10
1 7 1 7 1 7 1 7 1 7
2008 2009 2010 2011 2012
CPI
(年、月)
(Year-on-year, %)
-4-202468
101214
1 7 1 7 1 7 1 7 1 7 9
2008 2009 2010 2011 2012 (Year, Month)
Home prices in 70 large and medium-sized cities(Year-on-year, %)
Soaring Inflation and Home Prices Following the Sharp Increase in the
Money Supply — Situation after the Collapse of Lehman Brothers—
14
Note: Home prices in large and medium-sized cities are based on the sales price indices of residential buildings until December 2010
and on the average sales price indices of newly constructed homes from January 2011.
Source: Compiled by Nomura Institute of Capital Markets Research based on data from the National Bureau of Statistics of China.
Collapse of Lehman Brothers
30
35
40
45
50 (Share, %)
Investment ratio (a)
Average 39.2
Average 48.2
6
8
10
12
14
16 (%)
Economic growth rate (b)
Average 10.5
Average 9.6
2
3
4
5
6
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(Times)
Marginal capital coef f icient (a/b)
(Year)
Average 3.7
Average 5.0
Changes in the Investment Ratio, Economic Growth Rate, and
Marginal Capital Coefficient
15
Note: The larger the marginal capital coefficient, the less efficient the investment.
Source: Compiled by Nomura Institute of Capital Markets Research based on data from the
China Statistics Abstract 2012 of the National Bureau of Statistics of China.
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
6
7
8
9
10
11
12
13
14
15
Q1 Q3
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(Year, quarter)
(Times)(Year-on-year, %)
Job offers-to-job seekers ratio in the urban areas
(Right axis)↓
↑ Economic growth rate
Job Offers-to-Job Seekers Ratio Diverging from the Economic
Growth Rate
16
Note: The job offers-to-job seekers ratio in the urban areas of China is calculated by dividing the number of job offers by the number of
job applicants registered in public employment service organizations in approximately 100 cities. It is based on “The Analysis on Supply
and Demand of Labor Market in Some Cities” published quarterly by the China Labor Market Information Network Monitoring Center,
which operates under the Ministry of Human Resources and Social Security.
Sources: Compiled by Nomura Institute of Capital Markets Research based on data from the National Bureau of Statistics of China and
the Ministry of Human Resources and Social Security.