Credit crunch are regarded as a worldwide financial fiasco in 2008. People always related terms like sub-prime mortgages, CDO and credit rating with credit crunch. Now let me give a brief introduction about what are these terms mean and the reason to why Chinese companies didn’t suffer such a big lost during this crisis compared with US and other European companies.
Credit crisis is caused by two groups of people, the first is house owners which refer to their mortgages, and the other is investors like pension funds and investment banks. Here is how it works: a family who wants for a house should save money for their down-payments and contact the mortgages broker, then the broker will contact a lender who provide mortgage, hence family own a house after they received the mortgage. This is great for families as the price of house will rise forever. But how can the lender get money? They will sell those mortgages to investment banks; this means that every month investment banks will receive the payment from those house owners. Investment banks packed those mortgages into a box know as collateralized debt obligations (CDO), which will be divided into safe, OK and risky apartments based on their credit ratings. And then investment banks sell the safest CDO to the investors who only want safe investments. Therefore, those investors make a big fortune form these CDO and they ask the lender for more mortgages, but the worse thing is lends can’t find any home owners. Therefore, in order to find home owners, lenders changed their requirements which is people who need house do not require to pay down-payments and no proof of documents at all; the only thing they need to do is pay mortgages monthly. So instead of lending to responsible home owners, they choose sub-prime mortgages. This is the turning point; those sub-prime mortgages defraud their mortgages. What was worst, investment banks have no money to pay for those investors. That is why there are so many investment banks like Lehman Brothers announced bankruptcy at that moment.
But why Chinese companies seem did not seriously affected by this serve crisis? This can be due to government’s bail-out policies. Actually, the policy used by Chinese government is in the same theory of “Keynesian” (BBC News, 2010). This theory is mainly about teaching you how to spend money. It reminds me thinking about a metaphor: Chinese government spend 100 RMB to employ ten people dig a hole, while they spend another 100 RMB to employ other ten people fill out that hole. It sounds strange, isn’t it? Some people may think this is a waste of money. But are you ever consider the subsequent influence of using these amounts of money? People who gain money from government can buy bread for themselves, which will protect those bread factories from bankruptcy, and protect factories which made bread machines against bankruptcy as well. In reality, Chinese government spends more than four trillion RMB to protect companies from bankruptcy in that serious credit crisis. These amounts of money are used to construct railway and highway during credit crisis; it is not only benefit for the public afterwards but also stimulates the whole production sectors.
I get the point that Chinese businesses were less affected because the government has suffered instead. Do you think there would be inverse effects on businesses?
ReplyDeleteI think it is better when government support demand especially in time of crisis because it prevents from recession. From my point of view the cost of recession would be higher than money spent by Chinese government.
ReplyDeleteChinesee government also lent a lot of money to banks so they could continue lending money to companies. This also was a reason that China didn't suffer that much during the credit crunch. However at the beginning of 2010 the government tighten lending policy what affected in higher cost of credit for companies.
To Thu Mai: I would like to point out that Chinese government won’t suffered during the credit crisis, actually they are Chinese companies’ saver as they pour out a large amount of money to protect companies from bankruptcy.
ReplyDeleteTo Dorota:
ReplyDeleteI agree with your opinion in that demand can be improved by the support of government. As long as central bank increase its interest rate and decrease its lending rate, people’s purchase power will be largely affected. Moreover, set aside of the fact on inflation, central bank is control by government which have the priority to print money, that is why Chinese government apply the theory of “Keynesian”. Indeed, companies who depending on banks’ loan to run their business will be serious affected by the increase of lending rates, as they have to pay more interest rates to banks.