LEADING INDICATORS OF A FINANCIAL CRISIS: THE CASE OF CHINA

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LEADING INDICATORS OF A FINANCIAL CRISIS:

THE CASE OF CHINA

SIJMEN H. PEREBOOM

THESIS (APPENDICES & BIBLIOGRAPHY) INTERNATIONAL BUSINESS & MANAGEMENT

University of Groningen

Faculty of International Business & Economics Landleven 5

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LEADING INDICATORS OF A FINANCIAL CRISIS: THE CASE OF CHINA

Sijmen Pereboom 2

APPENDIX A

Figure A1: China’s framework to predict the likelihood of a financial crisis

Source: Author. Overview leading indicators existing literature Characteristics Chinese financial system MATCH Potential leading indicators for China

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APPENDIX B

Table B1: Explanatory variables: theory

Indicator Interpretation External sector/current account

Real exchange rate A measure for the change in international competitiveness and a proxy for

over(under)valuation. Overvalued real exchange rate may produce a higher probability of financial crises.

Terms of trade Increases in terms of trade should strengthen a country’s balance of payments position

and hence lower the probability of crises. Terms of trade deteriorations may precede a currency crisis.

Openness to trade An open economy is more vulnerable to international shocks than a closed economy.

Therefore, an open economy bears greater risk of spillover effects of financial crises elsewhere.

Import growth Weak external sector is part of currency crises. Enormous import growth could lead to

worsening in the current account and often related to currency crises.

Export growth Export growth is an indicator for a loss of competitiveness in the international good

market. Declining export growth may be caused by an overvalued domestic currency and hence a proxy for currency overvaluation. On the other hand, if export growth slows due to reasons unrelated to the exchange rate, this might cause devaluation pressure. In both cases, declining export growth can be a leading indicator for a sizeable devaluation.

Export expectations See export growth.

Ratio current account to GDP A rise in this ratio is generally associated with large external capital inflows intermediated

by the domestic financial system and could facilitate asset price and credit booms. However, increases in the current account surplus are expected to indicate a diminished probability to devalue and thus to lower the probability of a crisis.

External sector/capital account

Growth foreign reserves Declining foreign reserves is a reliable indicator that a currency is under devaluation

pressure. A drop in reserves is not necessarily followed by devaluation; central bank may be successful in defending a peg, spending large amounts of reserves in the process. On the other hand, most currency collapses are preceded by a period of increased efforts to defend the exchange rate, which are marked by declining foreign reserves. Total value of foreign reserves is also used as indicators of a country’s financial difficulty dealing with debt repayment.

Ratio M2 to reserves Captures to what extent the liabilities of the banking sector are backed by reserves. In the

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Ratio M2 to foreign reserves Captures to what extent the liabilities of the banking sector are backed by foreign

reserves. In the event of a currency crisis, individuals may rush to convert their domestic currency deposits into foreign currency, so that this ratio captures the ability of the central bank to meet their demands.

Disequilibrium BOP A strong balance of payments decreases the probability of a crisis. A deterioration of the

balance of payments can be the result of a deterioration of the terms of trade, which may precede a currency crisis.

Ratio short-term debt to total debt Short-term debt is highly liquid capital, which means that it can be withdrawn in a very short period. A high ratio of short-term debt bears a risk that a country is unable to repay its debt in the event of a crisis.

Foreign debt growth A country may suffer a short-run liquidity problem when the available reserves are

insolvent relative to the overall burden of foreign debt. A crisis may take the form of a pure liquidity shortfall and the risk is higher when a large portion of foreign debt is short-term.

Capital flight Capital flight is often associated with financial crises.

Short-term foreign debt growth See foreign debt growth.

Ratio short-term foreign debt to foreign reserves

Captures to what extent the short-term foreign liabilities are backed by foreign reserves. This ratio captures the ability of the country to meet the demands from individuals that withdraw their money in the event of a crisis.

Level of indebtness A country with a high level of indebtness in combination with low reserves bears a great

risk of repayment difficulties in the event of a crisis. Ratio foreign exchange reserves

to IMF quota

When foreign exchange reserves are in line with IMF quota, lowers the probability of a crisis. Declining foreign exchange reserves increases the possibility of debt rescheduling. Ratio debt-service plus short-term

debt to foreign reserves

See ratio short-term foreign debt to foreign reserves.

Ratio foreign debt to GDP See foreign debt growth.

Ratio total foreign debt to foreign reserves

See ratio short-term foreign debt to foreign reserves,

Ratio import to reserves This indicator positively influences the probability of a debt rescheduling, which means a

higher ratio increases the probability of debt rescheduling. Financial sector

Domestic credit growth Very high growth of domestic credit may serve as a crude indicator of the fragility of the

banking system.

Credit to the public sector Excessive money creation may result from very high growth of credit to the public sector,

which in turn may result in upward pressure on prices. Upward pressure on prices leads to inflation. High inflation rates often precede financial crises.

M1 & M2 growth These indicators are measures of liquidity. High growth of these indicators might indicate

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Ratio domestic credit to GDP This ratio usually rises in the early phase of a banking crisis. It may be that as the crisis

unfolds, the central bank may be injecting money to the bank to improve their financial situation.

Ratio bank reserves to bank assets

Adverse macroeconomics shocks are less likely to lead to crises in countries where the banking system is liquid.

Real interest rate Real interest rates can be considered as proxy of financial liberalisation, in which the

liberalisation process itself tends to lead to high real rates. High real interest rates signal a liquidity crunch or have been increased to fend off a speculative attack.

M1 balances Loose monetary policy can lead to currency crises.

M2 multiplier An indicator associated with financial liberalisation. Large increases in the money

multiplier can be explained by draconian reductions in reserve requirements.

Bank credit growth Excessive credit growth in the banking sector can lead to a large number of NPL’s.

Ratio bank loans to deposits Captures the amount of loans that are backed by deposits. In the event of bank runs,

investors may withdraw their deposits. The ratio captures the ability of the banks to meet their demands.

Deposit-rate decontrol Decontrol may create an unsustainable lending boom. Monitoring borrowers becomes

more difficult when the volume of lending increases; hence, the quality of loans declines.

Deposit insurance Explicit deposit insurance increases the probability of crises, especially under financial

liberalisation and a weak institutional environment. The positive effect operating through a reduction in self-fulfilling panics is more than offset by the negative effect operating through moral hazard.

Type of banking Universal banking increases the probability of a banking crisis.

Number of bankruptcies A great number of bankruptcies indicate a fragile banking system and lead to a fall in

investor’s confidence in the economy. A loss of investor’s confidence often precedes financial crises.

Central bank independence Independent central banks are not forced to finance government debt, while dependent

central banks are forced. Independent central banks fare better, decreasing the probability of a banking crisis.

Level of branching A high level of branching decreases the probability of a banking crisis.

Ratio unallocated credit to total borrowing

An increase of unallocated credit to total borrowing decreases the probability of a debt rescheduling.

Ratio undisbursed credit

commitment to total bank lending

Undisbursed credit is funds committed by the creditor but not utilised by the borrower. A high ratio of undisbursed credit commitment to total bank lending increases the probability of debt rescheduling.

Weighted average grace-periods of rescheduling

Periods of debt rescheduling indicate periods that a country is facing difficulties in its debt repayment. Periods of debt rescheduling often lead to a debt crisis.

Ratio medium – long-term debt to total bank borrowing

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when the ratio medium – long-term debt to total bank borrowing increases.

Debt-servicing ratio The debt-servicing ratio also known as the debt service payments divided by exports. An

increase in the debt-servicing ratio increases the probability of debt rescheduling.

Ratio debt-amortization to debt Debt amortization is a gradual elimination of a liability in regular payments over a specified

period. An increase of debt amortization as a proportion of debt decreases the probability of a debt rescheduling.

Arrears in interest payment A high level of arrears in interest payment decreases the probability of the adoption of an

IMF programme. The adoption of an IMF programme is often associated with financial crises.

Lending and deposit rate spread An increase of this indicator above some threshold level possibly reflects deterioration in

credit risk, as banks are unwilling to lend or decline in loan quality.

Interest rate differential International interest rates increases are often associated with capital outflows.

Moral hazard Moral hazard is often associated with deposit insurance. A high level of deposit insurance

feeds moral hazard, because investors do not fully bear the risks of their decisions. Excessive risk taking may take place, increasing the probability of a financial crisis.

Rate of NPL’s A high rate of NPL’s indicate an inefficient banking sector and can lead to liquidity

problems due to large outflow of funds, which in turn may lead to a financial crisis.

Reserve requirements Lower reserve requirements can lead to liquidity problems due to large outflow of funds,

which in turn may lead to a financial crisis.

Capital-to-asset ratio The capital-to-asset ratio captures the liquidity of banks. A high capital-to-asset ratio

indicates high liquidity.

Bank deposit growth Domestic bank run and capital flight occur as crises unfold.

Financial liberalisation Rapid financial liberalisation when having a fragile financial system increases the risk of a

financial crisis. Domestic real and public sector

Domestic saving growth High domestic savings may be expected to lower the probability of debt rescheduling.

Changes in stock market prices Burst of asset price bubbles often precede financial crises.

Ratio public debt to GDP Higher indebtness is expected to raise vulnerability to a reversal in capital inflows and

hence to raise the probability of a crisis.

Ratio fiscal balance to GDP Higher deficits are expected to raise the probability of crisis, since the deficits increase the

vulnerability to shocks and investor’s confidence.

Inflation rate The inflation rate is likely to be associated with high nominal interest rates and may proxy

macroeconomic mismanagement, which adversely affects the economy and the banking system.

GDP per capita High-income countries may be less likely to reschedule their debt than poorer countries

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Level of unemployment Recessions often precede financial crises.

Growth rate government consumption

See level of investment.

Level of investment A high level of investment can create an investment bubble, which eventually can lead to

an investment burst in the event of a financial crisis.

Ratio investments to GDP See level of investment.

Growth of industrial production See level of unemployment.

GDP growth See level of unemployment.

Policy uncertainty Policy uncertainty may fuel speculative attacks on the currency, thus leading to a currency

crisis. In addition, policy uncertainty can also negatively affect investor’s confidence increasing the possibility of a financial crisis.

Policy instability See policy uncertainty.

Global economy

US interest rate See interest differential.

OECD GDP growth Higher foreign output growth should strengthen exports and thus reduce the probability of

a crisis.

World interest rates See interest differential.

Growth world oil prices High oil prices are associated with recessions.

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LEADING INDICAT O RS O F A F INANCI AL CRI SI S: THE CA SE O F CHI NA S ijm en P er eboom 10 Ti nak orn (2002) Cu rr e nc y cr isis − Th e e xc ha nge rate is under pre ss ure if th e va lu e of a c ons tru cted in de x e xc eeds a c erta in t hre sh o ld. T he in de x c o ns is ts of w ei gh ted re la tiv e c ha nge s of th e rea l e xc ha nge rate an d ne t re se rv e s. T he t hre sh o ld is t im e-depen de nt. For th e dati ng of a cu rr e nc y cr is is , t he e xc ha nge ra te m ar ket i nde x t hr e sh o ld i s se t to tw o s ta nda rd devi at io ns of th e m ean . − A c urre nc y c ris is i s a si tu at io n w here o ne of th e f ol low in g s itu at io ns tak es p lac e: 1) T here is a n ac cu m ul ated t hr ee-m on th deprec ia tio n in e xc ha nge rate of 15 perc en t or m ore, or 2) Th ere is an ac cu m ul ated three-m on th depl et io n in n et res er ve s of 15 perc en t or m ore. B urk art & C oudert (2002) Cu rr e nc y cr isis − To i de nt ify c ri se s, t he m eth od s of K am ins ky a nd R e in ha rt (1996) 3 , an d Mi le si -Ferrett i a nd R az in (1998) 4 are c om bi ned to s tu d y po in ts w here t he c om pon en t in di ca tor s g iv e oppo si te res ul ts by s ubm itti ng t hem to th e j udgem en t o f e m erg in g co un tr y e xp er ts. E di son (2003) Cu rr e nc y cr isis − Th e e xc ha nge rate is under pre ss ure if th e va lu e of a c ons tru cted in de x e xc eeds a c erta in t hre sh o ld. T he in de x c o ns is ts of w ei gh ted a verage of perc en t c ha nge s in t he bi la tera l n om in a l e xc ha nge rate a nd t he perc e nt c ha nge in f orei g n res er ve s. A ll va riabl e s in th e i nde x are rel at iv e to a ref er en ce c oun tr y a nd th e t hre sh o ld i s ti m e-depen de nt. T he us ed ref eren ce c oun tr y is e ith er t he U ni ted S tates or Germ any . For t he dati ng of a c urre nc y c ris is , t he e xc ha nge rate m ark et in de x t hre sh ol d is s et to 2.5 st a ndard de vi at io ns of th e m ean . K rz nar (2004) Cu rr e nc y cr isis − A c urre nc y c ri si s is a si tu ati o n c harac ter is ed b y a c o ns id e rabl e no m in a l deprec iat io n of th e K un a aga in st t he e uro ( on a m on thl y l e ve l) an d/or a f al l in i nter nat io na l res er ve s. T he ex ch a nge m ark et pres su re in de x is gi ve n as t he w ei g ht ed av erage of th e m on thl y rate of c ha nge i n t he K un a no m in a l e xc ha

nge rate aga

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LEADING INDICAT O RS O F A F INANCI AL CRI SI S: THE CA SE O F CHI NA S ijm en P er eboom 15 real ef fe ct iv e e xc ha

nge rate, real

dom es tic cr edi t grow th , e xpo rts p lus im ports /GD P . E di son (2003) C urre nc y c ris is 28 dev e lopi ng an d de ve loped coun tr ie s, m on thl y data 1970-1995(9). Sign a ls approac h. R eal e xc ha nge r ate, e xpor t gr ow th , r at io M 2 to fo re ig n ex ch an ge r e se rv es . − Im por t gr ow th , gr ow th of f or ei gn e xc ha nge r e se rv es , M 2 m on ey m ul tip lier, rati o dom es tic c red it to GD P , ex ce ss rea l M 1 bal a nc e, dom es tic rea l in te re st rat e, le nd in g a nd depo si t rat e s pread, co mm erc ial ban k depo si ts , grow th i nd us tr ia l prod uc tio n, c ha nge s i n st ock m ar ket pr ic es , g row th of w or ld o il pr ic e s, U S in ter e st r ate a nd OE C D GD P gr ow th w er e n ot f oun d si g ni fic a nt. K rz nar (2004) Cu rr e nc y cr isis Cr oa tia , Ja nu a ry 1996-Marc h 2003. S ign a ls an d m ult iva ria te probi t m odel . R ati o pu b lic debt to GD P , rati o c urre nt ac coun t to GD P , i nf lat io n, rati o f reel y a va ilabl e ban k r e se rv e s to total ba nk a ss et s, e xte rn al debt, m ul tip lier M 2, r eal e xc ha nge r ate, r ati o fo re ig n a ss ets to M 4, dom es tic cr ed it gr ow th . − A n apprec iat io n of th e real e xc ha

nge rate bel

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LEADING INDICAT O RS O F A F INANCI AL CRI SI S: THE CA SE O F CHI NA S ijm en P er eboom 16 − A si a n ec o nom ie s w ere f ar f ro m h eal th y, w ith c lear si g ns of di st res s su rf ac in g a s e a rly as ei gh te en mo nt hs b efo re th e c ur re nc y c ol la ps e. D emi rgüç -K unt & D etragi ac he (2000) B an ki ng c ri si s 61 dev e lopi ng an d de ve loped coun tr ie s, 1980-1997. Mult iva ria te lo g it mo de l. GD P gr ow th , r eal i nter e st r ate, in flati o n, r ati o M 2 to r es er ve s, ba nk cr edi t g row th . − C ha nges i n th e term s of trade, ex ch a

nge rate deprec

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APPENDIX C

Table C1: Breakdown of bank loans

Total % of GDP Short-term Manufacturing sector Agricultural sector Hybrid sector 1997 74,914.1 100.0 55,418.3 36,474.3 3,314.6 7,313.5 1998 86,524.1 109.5 60,613.2 39,302.6 4,444.2 8,539.1 1999 - - 63,613.2 39,316.7 4,792.4 9,765.2 2000 99,371.1 111.2 65,748.1 36,504.9 4,889.0 9,765.2 2001 112,314.7 113.9 67,327.2 39,299.7 5,711.5 10,594.5 2002 131,239.9 128.2 74,247.9 40,911.6 6,884.6 10,568.5

Notes: The numbers are end-of-year figures in RMB 100 millions.

Manufacturing sector includes industrial loans, commercial loans and infrastructure construction loans. Hybrid sector includes loans to TVE’s, Private/Individually-owned and JVs & Cooperative firms. Source: Allen et. al., 2005: 80.

Table C2: A comparison of non-performing loans of banking systems

China Hong

Kong

India Indonesia Japan South Korea Taiwan 1997 n/a 1.3 (3) n/a 0.3 (0.2) 2.7 (5.4) 2.9 (5.1) 2.4 (3.2) 1998 2.0 (2.2) 4.3 (10.2) 7.8 (1.6) 11.8 (4.6) 5.1 (10.8) 4.8 (6.3) 3.0 (3.9) 1999 9.5 (10.6) 6.3 (13.9) 7.0 (1.6) 8.1 (2.0) 5.3 (10.9) 12.9 (12.9) 4.0 (5.7) 2000 18.9 (24.9) 5.2 (12.6) 6.6 (1.6) 13.6 (3.2) 5.8 (11.5) 8.0 (8.6) 5.2 (7.6) 2001 16.9 (22.7) 4.9 (12.9) 4.6 (1.7) 9.9 (2.2) 9.2 (15.3) 3.4 (3.4) 6.2 (9.4) 2002 12.6 (15.2) 3.7 (9.6) 2.2 (0.8) 4.5 (0.9) 7.4 (12.8) 2.5 (2.6) 4.1 (5.2) Notes: NPL is measured as a percentage of total loans made, and as a percentage of GDP (numbers in brackets). Both the loan and NPL are the aggregate of all banks in a country.

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Table C3: Current account

Exports Imports Balance

1997 182,670 136,448 36,963 1998 183,529 136,915 31,472 1999 194,716 158,734 21,115 2000 249,131 214,657 20,518 2001 266,075 232,058 17,401 2002 325,651 281,484 35,422 2003 438,270 393,618 45,875 2004 593,393 534,410 68,659

Notes: Exports, imports and balance are in millions U.S. dollars. Source: IMF International Financial Statistics.

Table C4: Trade balance with the United States

Exports Imports Balance

1997 6,2557.7 12,862.2 49,695.5 1998 7,1168.6 14,241.2 56,927.4 1999 8,1788.2 13,111.1 68,677.1 2000 100,018.2 16,185.2 83,833.0 2001 102,278.4 19,182.3 83,096.1 2002 125,192.6 22,127.7 103,064.9 2003 152,436.1 28,367.9 124,068.2 2004 196,682.0 34,744.1 161,938.0

Notes: Exports, imports and the trade balance are in millions U.S. dollars.

Source: U.S. Census Bureau, Foreign Trade Division, Data Dissemination Branch.

Table C5: FDI

FLOWS Inward Outward Inward % gross

FCC13 Outward % gross FCC 1998 45,463 2,634 13.6 0.8 1999 40,319 1,775 11.3 0.5 2000 40,715 916 10.3 0.2 2001 46,878 6,884 10.5 1.5 2002 52,743 2,518 10.4 0.5 2003 53,505 -152 8.6 -

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2004 60,630 1,805 8.2 0.2

STOCKS Inward Outward Inward % of GDP Outward % of

GDP 1998 265,603 23,113 27.6 2.4 1999 305,922 24,888 30.9 2.5 2000 193,348 27,768 17.9 2.6 2001 395,192 32,688 3.1 n/a 2002 447,966 35,206 35.4 2.8 2003 501,471 37,006 35.6 2.6 2004 245,467 38,825 14.9 2.4

Notes: the FDI flows and stocks are in millions of U.S. dollars.

Source: UNCTAD, World Investment Report 2000, 2001, 2003, 2004, and 2005.

Table C6: Deposit and lending interest rates per quarter

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LEADING INDICATORS OF A FINANCIAL CRISIS: THE CASE OF CHINA Sijmen Pereboom 31 Deposit 1.98 1.98 1.98 2.25 2.25 Lending 5.31 5.31 5.31 5.58 5.58 2004 Difference 3.33 3.33 3.33 3.33 3.33

Notes: One-year deposit and lending interest rates in percentages. Source: IMF International Financial Statistics.

Table C7: Private Equity Funds

2004 China Australia South Korea India South Africa

Number of PE funds 26 122 243 86 22 Total Fund Capitalisation 1,457 5,142 4,297 2,816 1,245 Average Capitalisation 56.0 42.1 17.7 32.7 56.0

Notes: The total fund capitalisation and the average capitalisation are in millions of U.S. dollars. Source: Allen et. al., 2005: 90.

Table C8: Total savings and total investments

Gross domestic saving Gross domestic saving/GDP Gross fixed capital formation Gross fixed capital formation/GDP 1997 3,131.4 38.0 2,515.4 33.6 1998 3,259.7 41.3 2,763.1 35.0 1999 3,295.1 39.9 2,947.6 35.7 2000 3,472.5 38.9 3,262.4 36.5 2001 3,964.1 40.2 3,681.3 37.3 2002 4,509.9 41.8 4,191.8 38.8 2003 5,406.8 44.5 5,124.8 42.2 2004 6,705.4 49.1 6,235.1 45,7

Notes: Total savings and total investments are in billions Yuan. Source: IMF International Financial Statistics.

Table C9: China’s domestic inflation rate per quarter

Ι ΙΙ ΙΙΙ ΙV Ι - ΙV

1997 5.2 2.9 2.1 1.0 2.8

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LEADING INDICATORS OF A FINANCIAL CRISIS: THE CASE OF CHINA Sijmen Pereboom 32 1999 -1.4 -2.1 -1.3 -0.8 -1.4 2000 0.1 0.1 0.3 0.6 0.3 2001 0.1 1.1 0.9 -0.1 0.5 2002 -0.6 -1.1 -0.8 -0.6 -0.8 2003 0.5 0.7 0.8 2.7 1.2 2004 2.8 4.4 5.3 3.6 4.0

Notes: Inflation rates are percentage changes over corresponding period previous year. Source: IMF International Financial Statistics.

Table C10: A comparison of annual inflation rates

European Union United States China

2001 2.3 2.8 0.5

2002 2.3 1.6 -0.8

2003 2.1 2.3 1.2

2004 2.1 2.7 4.0

Notes: Inflation rates are percentage changes over previous year. Source: IndexMundi, CIA Fact book 2001-2002.

Figure C1: Comparison of financial markets in 2003

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APPENDIX D

Table D1: Five-category loan classification system

Classification Explanation

Pass Indicates that borrowers are able to honour the terms of the contracts and there is

no reason to doubt their ability to repay the principal and interest of loans in full and in a timely manner.

Special-mention Borrowers are able to serve their loans currently, although repayment may be adversely affected by specific factors.

Substandard The borrowers’ abilities to service their loans are in question. Borrowers cannot

depend on their normal business revenues to repay the principal and interest so losses may ensue, even when guarantees are involved.

Doubtful Indicates that borrowers cannot repay the principal and interest in full and significant

losses will be incurred, even when guarantees are invoked.

Loss The principal and interest of loans cannot be recovered or only a small portion can

be recovered after taking all possible measures and resorting to necessary legal procedures.

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APPENDIX E

Table E1: Frequency indicators found significant

Leading indicator Frequency

Real exchange rate 13

Inflation rate 7

Terms of trade 6

Export growth 6

Ratio M2 to foreign reserves 6

Domestic credit growth 6

Real interest rate 6

Ratio current account to GDP 4

Growth foreign reserves 4

Ratio M2 to reserves 4

Ratio short-term foreign debt to foreign reserves 4 Ratio domestic credit to GDP 4 Changes in stock market prices 4

M2 multiplier 3

Bank credit growth 3

GDP per capita 3

GDP growth 3

Openness to trade 3

Foreign debt growth 2

Ratio total foreign debt to foreign reserves 2

Ratio import to reserves 2

M1 and M2 growth 2

Credit to the public sector 2

Ratio public debt to GDP 2

Ratio fiscal balance to GDP 2

Ratio investments to GDP 2

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Figure E1: Real effective exchange rate (annual data)

90 95 100 105 110 1997 1998 1999 2000 2001 2002 2003 2004 Year Inde x num be rs

Notes: The index numbers are period averages and the reference year is 2000. Source: IMF International Financial Statistics.

Figure E2: Openness to trade (annual data)

0 10 20 30 40 50 60 70 80 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e Openness Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Notes: Percentages indicate the percent change over the corresponding period of the previous year. Source: IMF International Financial Statistics.

Figure E3: Export growth (annual data)

0 10 20 30 40 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

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Figure E4: Current account balance in per cent of GDP (annual data)

0 1 2 3 4 5 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Source: IMF International Financial Statistics.

Figure E5: Growth foreign exchange reserves (annual data)

0 10 20 30 40 50 60 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Figure E6: Ratio M2 to foreign exchange reserves (annual data)

0 1 2 3 4 5 6 7 8 1997 1998 1999 2000 2001 2002 2003 2004 Year Ra ti o M2 to for.reserves Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

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Figure E7: Ratio M2 to reserves (annual data)

0 2 4 6 8 1997 1998 1999 2000 2001 2002 2003 2004 Year Ra ti o

Figure E8: Foreign debt growth (annual data)

-30 -20 -10 0 10 20 30 40 1998 1999 2000 2001 2002 2003 2004 Year Pe rc en ta g

e Foreign debt growth_{Mean+2 STDEV}

Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E9: Total foreign debt in per cent of foreign exchange reserves

(annual data)

0 5 10 15 20 25 30 35 40 45 50 1997 1998 1999 2000 2001 2002 2003 2004 Year Ra ti o Foreign debt to foreign exch. res. Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

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Figure E10: Import in per cent of reserves (annual data)

0 50 100 150 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Figure E11: Domestic credit growth (annual data)

0 5 10 15 20 25 30 35 1998 1999 2000 2001 2002 2003 2004 Year Pe rc en ta g e Domestic credit growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E12: Bank credit growth (annual data)

0 5 10 15 20 25 30 35 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g

e Bank credit growth

Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

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Figure E13: Credit to the public sector growth (annual data)

0 20 40 60 80 100 120 140 160 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Credit to the public sector growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E14: Domestic credit in per cent of GDP (annual data)

0 20 40 60 80 100 120 140 160 180 200 1997 1998 1999 200 0 200 1 2002 2003 2004 Year P er cen ta g e DC to GDP_{Mean+2 STDEV} Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E15: M1 and M2 growth (annual data)

0 5 10 15 20 25 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e M1+M2 growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

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Figure E16: M2 multiplier (annual data)

0 5 10 15 20 25 30 1998 1999 2000 2001 2002 2003 2004 Year Pe rc en ta g e M2 growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV Notes: M2 multiplier is in billions of Yuan.

Figure E17: Real interest rate (annual data)

-2 0 2 4 6 8 10 1997 1999 2001 2003 Year P er cen ta g e Nominal interest rate Inflation rate Real interest rate

(41)

LEADING INDICATORS OF A FINANCIAL CRISIS: THE CASE OF CHINA Sijmen Pereboom 41

B

-80 -60 -40 -20 0 20 40 60 80 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e Shengzhen index Mean-2 STDEV Mean-1.75 STDEV Mean-1.5 STDEV Mean-1.1 STDEV

Notes: Percentages indicate the percent change over the corresponding period of the previous year. Source: HKex Fact Book 2001 and 2004.

Figure E19: Public debt in per cent of GDP (annual data)

0 2 4 6 8 10 12 14 16 18 20 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e Public debt to GDP Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E20: Fiscal balance in per cent of GDP (annual data)

-5 -4,5 -4 -3,5 -3 -2,5 -2 -1,5 -1 -0,5 0 1997 1998 1999 200 0 2001 2002 200 3 2004 Year P er cen ta g e Fiscal balance to GDP Mean-2 STDEV Mean-1.75 STDEV Mean-1.5 STDEV Mean-1.1 STDEV Notes: The negative percentages indicate fiscal deficits.

(42)

Figure E21: Investment in per cent of GDP (annual data)

0 5 10 15 20 25 30 35 40 45 50 1997 1998 1999 2000 2001 2002 2003 2004 Year Pe rc en ta g e Invest. to GDP Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E22: Inflation rate (annual data)

-2 -1 0 1 2 3 4 5 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e Inflation rate Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E23: GDP per capita (annual data)

-10 -5 0 5 10 15 20 25 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

(43)

Figure E24: Growth industrial production (annual data)

0 10 20 30 40 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Notes: Percentages indicate the percent change over the corresponding period of the previous year. Source: IMF International Financial Statistics and IndexMundi, 2005.

Figure E25: GDP growth (annual data)

0 5 10 15 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Figure E26: Rate of NPL’s in per cent of GDP (annual data)

A

0 5 10 15 20 25 30 35 40 1998 1999 2000 2001 2002 Year Pe rc en ta g e Percentage Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

(44)

LEADING INDICATORS OF A FINANCIAL CRISIS: THE CASE OF CHINA Sijmen Pereboom 44

B

0 5 10 15 20 25 30 35 40 2002 2003 2004 2005 Year Pe rc en ta g e Percentage Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Source: Roubini and Setser (2005).

Figure E27: Domestic saving growth (annual data)

-5 0 5 10 15 20 25 30 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e

Figure E28: Openness to trade (quarterly data)

0 10 20 30 40 50 60 70 80 1999 I III 2000 I _III 200 1 I III 2002 I III 2003 I _III 2004 I III Quarter Pe rc en ta g e Openness Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

(45)

Figure E29: Ratio M2 to foreign exchange reserves (quarterly data)

0 1 2 3 4 5 6 7 8 1997 I III 1998 I _III 1999 I III 2000 I _III 2001 I _III 2002 I III 200 3 I III 2004 I _III Quarter Ra ti o M2 to for. reserves Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E30: Foreign debt growth (quarterly data)

-15 -10 -5 0 5 10 15 20 25 1997 II IV 1998 II IV 1999 II _IV 2000 II IV 2001 II IV 2002 II IV 2003 II IV 2004 II IV Quarter Pe rc en ta g

e Foreign debt growth

Figure E31: Total foreign debt in per cent of foreign exchange reserves

(quarterly data)

0 10 20 30 40 50 60 1997 I III 1998 I III 1999 I III 2000 I III 2001 I III 2002 I III 2003 I III 2004 I III Quarter Ra ti o

Foreign debt to foreign exch. res.

(46)

Figure E32: Domestic credit growth (quarterly data)

-2 0 2 4 6 8 10 12 14 16 18 1997 I I _IV 1998 I I _IV 1999 I I _IV 2000 II _IV 2001 II _IV 2002 I I _IV 2003 II _IV 2004 II _IV Quarter P er cent age

Domestic credit growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1STDEV

Figure E33: Bank credit growth (quarterly data)

-2 0 2 4 6 8 10 12 14 16 18 20 1997 II _IV 1998 I I _IV 1999 II _IV 2000 II _IV 2001 I I _IV 2002 I I _IV 2003 II _IV 2004 I I _IV Quarter Pe rc en ta ge

Bank credit growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E34: Credit to public sector growth (quarterly data)

-20 0 20 40 60 80 100 19 97 I I IV 19 98 I I IV 19 99 I I IV 20 00 I I IV 20 01 I I IV 20 02 I I IV 20 03 I I IV 20 04 I I IV Quarter Pe rc en ta ge

Credit to public sector growth Mean+2 STDEV

(47)

Figure E35: Domestic credit in per cent of GDP (quarterly data)

0 100 200 300 400 500 600 700 800 900 199 9 I III 2000 I III 200 1 I III 2002 I III 200 3 I III 2004 I III Quarter Pe rc en ta g e DC to GDP Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Notes: Data on GDP for the period 1997 quarter I to 1998 quarter IV was not found. Source: IMF International Financial Statistics.

Figure E36: M1 and M2 growth (quarterly data)

0 1 2 3 4 5 6 7 199 7 II IV 1998 II IV 1999 II IV 2000 II IV 2001 II IV 2002 II IV 200 3 II IV 200 4 II IV Quarter Pe rc en ta ge M1+M2 growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E37: M2 multiplier (quarterly data)

0 2 4 6 8 10 12 1997 II _IV 1998 II _IV 1999 II _IV 2000 II _IV 2001 II _IV 2002 II _IV 200 3 II IV 200 4 II IV Quarter P ercent ag e M2 growth Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

(48)

Figure E38: Public debt in per cent of GDP (quarterly data)

0 10 20 30 40 50 60 70 1999 I III 2000 I III 2001 I III 2002 I III 200 3 I III 2004 I III Quarter Pe rc en ta g e Public debt to GDP Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Notes: Data on GDP for the period 1997 quarter I to 1998 quarter IV was not found. Source: IMF International Financial Statistics.

Figure E39: Inflation rate (quarterly data)

-3 -2 -1 0 1 2 3 4 5 6 1997 I III 1998 I III 199 9 I III 200 0 I III 2001 I III 2002 I III 2003 I III 2004 I III Quarter Pe rc en ta g e Inflation rate Mean+2 STDEV Mean+1.75 STDEV Mean+1.5 STDEV Mean+1.1 STDEV

Figure E40: Credit to public sector growth (monthly data)

-10 0 10 20 30 40 50 20 00-08 200 0-12 20 01-04 20 01-08 200 1-12 200 2-04 200 2-08 200 2-12 20 03-04 20 03-08 200 3-12 200 4-04 200 4-08 200 4-12 Month Pe rc en ta ge

Credit to public sector growth Mean+2 STDEV

Notes: Data for the period January 1997 to June 2000 was not found.

(49)

Figure E41: Changes in stock market prices (monthly data)

A

-20 -15 -10 -5 0 5 10 15 20 25 30 35 1999 -0 2 1999 -0 6 1999 -1 0 2000 -0 2 2000 -0 6 2000 -1 0 2001 -0 2 2001 -0 6 2001 -1 0 2002 -0 2 2002 -0 6 2002 -1 0 2003 -0 2 2003 -0 6 2003 -1 0 2004 -0 2 2004 -0 6 2004 -1 0 Month P er cent age Shanghai index Mean-2 STDEV Mean-1.75 STDEV Mean-1.5 STDEV Mean-1.1 STDEV

B

-20 -10 0 10 20 30 40 1999-02 1999-06 1999-10 2000-02 2000-06 2000-10 2001-02 2001-06 2001-10 2002-02 2002-06 2002-10 2003-02 2003-06 2003-10 2004-02 2004-06 2004-10 Month Pe rc en ta ge Shengzhen index Mean-2 STDEV Mean-1.75 STDEV Mean-1.5 STDEV Mean-1.1 STDEV

Notes: Data for the period January 1997 to December 1998 was not found.

(50)

APPENDIX F

14

Figure F1: Ratio M2 to foreign exchange reserves (annual data)

0 2 4 6 8 10 12 14 16 1997 1998 1999 2000 2001 2002 2003 2004 Year Ra ti o M2 to for. reserves Threshold Korea Threshold Thailand Threshold Indonesia

Source: IMF International Financial Statistics, and Sussangkarn and Tinakorn, 2002: 13.

Figure F2: Ratio foreign debt to foreign exchange reserves (annual data)

0 5 10 15 20 25 30 35 40 45 50 199 7 1998 1999 200 0 200 1 200 2 200 3 200 4 Year Ra ti o Foreign debt to foreign exch. res. Threshold Korea Threshold Philippines

14_{The thresholds are from the Signals Approach (12-month window for Korea, Thailand, and Indonesia;}

(51)

Figure F3: Domestic credit growth (annual data)

0 5 10 15 20 25 30 35 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e _{Domestic credit} growth Threshold Indonesia

Notes: Percentages indicate the percent change over the corresponding period of the previous year. Source: IMF International Financial Statistics, and Sussangkarn and Tinakorn, 2002: 13.

Figure F4: Domestic credit in per cent of GDP (annual data)

0 20 40 60 80 100 120 140 160 180 200 1997 1998 1999 2000 2001 2002 2003 2004 Year Ra ti o DC to GDP Threshold Korea Threshold Thailand Threshold Indonesia

Figure F5: M2 multiplier (annual data)

0 5 10 15 20 25 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e M2 growth Threshold Korea Threshold Thailand Threshold Philippines

(52)

Figure F6: Changes in stock market prices (annual data)

A

-60 -40 -20 0 20 40 60 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e Shanghai index Threshold Korea Threshold Thailand Threshold Philippines

B

-60 -40 -20 0 20 40 60 80 1998 1999 2000 2001 2002 2003 2004 Year Pe rc en ta g e Shengzhen index Threshold Korea Threshold Thailand Threshold Philippines

Notes: Percentages indicate the percent change over the corresponding period of the previous year. Source: HKex Fact Book 2001&2004, and Sussangkarn and Tinakorn, 2002: 14.

Figure F7: Fiscal balance in per cent of GDP (annual data)

-16 -14 -12 -10 -8 -6 -4 -2 0 1997 1998 1999 2000 2001 2002 2003 2004 Year Pe rc en ta g e Fiscal balance toGDP Threshold Korea Threshold Thailand

(53)

Figure F8: Inflation rate (annual data)

-2 -1 0 1 2 3 4 5 6 7 1997 1998 1999 2000 2001 2002 2003 2004 Year P er cen ta g e Inflation rate Threshold Thailand Threshold Indonesia

(54)

APPENDIX G

Table G1: Domestic annual results

Threshold 2 STDEV Threshold 1.75 STDEV Threshold 1.5 STDEV Threshold 1.1 STDEV External sector/current account

Openness to trade no signal 2004 2004 2004

External sector/capital account

Ratio M2 to foreign reserves no signal no signal no signal no signal

Foreign debt growth no signal no signal no signal 2004

Ratio foreign debt to foreign exchange reserves

no signal 1997 1997 1997 1998 Financial sector

Domestic credit growth no signal 2002 2002 2002

Bank credit growth no signal 2002 2002 2002

Credit to public sector growth 1998 1998 1998 1998

Ratio domestic credit to GDP no signal no signal no signal 2003

2004

M1 & M2 growth no signal no signal no signal 2002

2003

M2 multiplier no signal no signal no signal 2002

Rate of NPL’s

“Estimate Allen, Qian & Qian”

no signal no signal no signal no signal Rate of NPL’s

“Estimate Roubini & Setser”

no signal no signal no signal 2002 Domestic real and public sector

Changes in stock market prices “Shanghai index”

no signal no signal no signal no signal Changes in stock market prices

“Shenzhen index”

no signal no signal no signal no signal

Ratio public debt to GDP no signal no signal no signal no signal

Ratio fiscal balance to GDP no signal 2001 2001 2001

Ratio investments to GDP no signal 2004 2004 2004

Inflation rate no signal no signal 2004 1997

(55)

Table G2: Domestic quarterly results

Threshold 2 STDEV Threshold 1.75 STDEV Threshold 1.5 STDEV Threshold 1.1 STDEV External sector/current account

Openness to trade no signal 2004-I to III 2004-I to III 2004-I to III

External sector/capital account

Ratio M2 to foreign reserves no signal no signal no signal no signal

Foreign debt growth 2004-II 2004-II 2000-IV

2002-I 2004-II

2000-IV 2002-I 2004-II Ratio foreign debt to foreign

exchange reserves

1997-I 1997-I & II 1997-I & II 1997-I to IV 1998-I Financial sector

Domestic credit growth 2002-I 2002-I 1998-III

2002-I

1998-III 2002-I

Bank credit growth 2002-I 2002-I 2002-I 2002-I

Credit to public sector growth 1998-III 1998-III

2001-I

1998-II & III 2001-I

1998-II & III 2001-I 2004-IV

Ratio domestic credit to GDP no signal 2004-I 2003-I

2004-I

2002-I 2003-I & II

2004-I

M1 & M2 growth no signal no signal 1997-IV

1998-III 2003-II 1997-IV 1998-III 1999-IV 2003-I & II M2 multiplier 2002-I 2003-I 2002-I 2003-I 2002-I 2003-I 2002-I 2003-I 2004-I Domestic real and public sector

Ratio public debt to GDP no signal no signal 2002-II 2002-II

2003-I 2004-I

Inflation rate 1997-I

2004-III

1997-I 2004-II & III

(56)

Table G3: Domestic monthly results

Threshold 2 STDEV Threshold 1.75 STDEV Threshold 1.5 STDEV Threshold 1.1 STDEV External sector/capital account

Ratio M2 to foreign reserves no signal no signal no signal 2000-07 to 12

2001-01, 03, 04 & 06

Foreign debt growth 2000-12

2002-01 2004-06 2000-12 2002-01 2004-01 & 06 2000-12 2002-01 2003-10 2004-01 & 06 2000-12 2002-01 & 12 2003-01 & 10 2004-01 & 06 Ratio foreign debt to foreign

exchange reserves 2000-12 2000-08 & 12 2001-01 2000-07 to 10 2000-12 2001-01, 03 & 04 2000-07 to 12 2001-01 to 05 Financial sector

Domestic credit growth 2001-11

2002-01 2001-11 2002-01 2001-11 2002-01 2001-05 & 11 2002-01

Bank credit growth 2001-11

2002-01 2001-11 2002-01 2001-11 2002-01 2001-11 2002-01

Credit to public sector growth 2001-01

2004-12 2001-01 2004-12 2001-01 2004-12 2001-01 2004-12

M1 & M2 growth 2002-01 2002-01 2001-06 & 12

2002-01 2001-06 & 12 2002-01 2003-01 M2 multiplier 2002-01 2002-01 2002-01 2002-01 & 02 2003-01 Domestic real and public sector

Changes in stock market prices “Shanghai index” no signal 2001-07 2001-07 2004-06 2001-07 2002-01 2004-04 & 06 Changes in stock market prices

(57)

Table G4: Foreign annual results

Threshold Korea Threshold Thailand

Threshold Indonesia

Threshold Philippines External sector/capital account

Ratio M2 to foreign reserves no signal no signal 1997-2002 no signal

Ratio foreign debt to foreign exchange reserves

1997-2004 n/a n/a 1997-2002

Financial sector

Domestic credit growth n/a n/a 1998-2004 n/a

Ratio domestic credit to GDP 1998-2004 1998-2004 1998-2004 n/a

M2 multiplier 1998

2001-2004

1998 2001-2004

n/a 1998-2004 Domestic real and public sector

Changes in stock market prices “Shanghai index”

2001 2002 2004

no signal n/a 2001

Changes in stock market prices “Shenzhen index”

2001 2002 2004

no signal n/a 2001

Ratio fiscal balance to GDP no signal 2001 n/a n/a

Inflation rate n/a no signal 1997

2003 2004

n/a