The adjustment of China’s growth strategy and macroeconomic stability
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Transcript of The adjustment of China’s growth strategy and macroeconomic stability
The adjustment of China’s growth strategy and macroeconomic
stabilityYu Yongding
Institute of World Economics and Politics
The Key features of the East Asian model
High investment rate supported by high saving rate and capital inflows
Running current account deficit, but having a high growth rate of exports
The sustainability of the East Asian Model conditional on Current account deficit/GDP ratio Net foreign debt/GDP ratio There should be a point of model–shift, when the economy
reaches a new stage of development The vulnerability of the East Asian Model: susceptible
to sudden reversal of capital flows
The key featurs of the Chinese model
High investment rate supported by high saving and FDI inflows
Trade promotion A competitive exchange rate Domination of state-owned banks in
financial intermediation Capital control
The merits and demerits of the Chinese model
The strong point of the Chinese model: Not vulnerable to external shock. With 1.2 trillion
Fx reserves, It is difficult to envisage how a balance of payments crisis and a currency crisis can possibly happen to China
The weak points of the Chinese model: Double Misallocation of resources
As a result, the number 128 poorest country in the world becomes the third largest capital exporting country in the world
While running huge current account surplus, its investment income is in deficit (in sharp contrast to Japan)
Twin surpluses+ inflexibility = excess liquidity
China’s twin surpluses
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cur rent account FDI
200 bil + 60 bil
The increase in foreign exchange reservers
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200 bil a year
Rewards for being a debtor
Punishment for being a creditor:
China’s current account surplus and investment income deficit
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Current accountI nvestment i ncome
Except for 2005, over the past 25 years, investment income balance has always been in deficit
Due to appreciation expectations
Japan’s investment income account surplus since it has run current account surplus
Twin surpluses mean misallocation of resources
The 128th poorest country in the world, the third larget capital export country in the world
The 3rd largest FDI attracting country, fails to translate capital inflows into current account deficit
The USD1.2 trillion foreign exchange reserves represent a huge subsidy to the US
Why China should be worried
China’s growth relies on the high investment rate supported by the high saving rate
China’s high saving rate, in the long run, is attributable to the low dependency ratio
China is aging. “Demographic dividend” will disppear in 15 years
Need investment income surplus to supplement deficiency in saving, otherwise China will not be able to maintain a decent investment rate. Japan’s investment income surplus has surpassed trade
surplus since 2005
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投资收入
Trade balance
Current account
saving
investment
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Net worth
Investment income
Six stages of economic development: where is China
Stage China is inWith positive net worth, Investment income is in deficit, which implies that investment income may not be enough to supplement savings in the future when China is aged.
A comprehensive policy mix has been adopted to address the abnormal pattern of
international balance of payments
Combination of fiscal policy and monetary policy to stimulate domestic demand More decent public goods, to stimulate consumption
Abolishing market distorting preferential policies to reduce twin surpluses
Exchange rate policy Address
Deterioration of Environment Exhaustion of energy Widenning gap between the rich and poor and
different regions
Instability of the Economy
Current account surplus continues to increase
Equity price is soaring Inflation rate is approaching the
implicit target growth rate of investment continues to
be significantly higher than that of GDP
Equity bubble
100 million retail accounts (maybe half of them are active)
200,000-300,000 new accounts a day since April Price has tripled in less than 2 years From 2000 to 3000: 18 months From 3000 to 4000: 31 working days Turnover supassed London, Japan+13 major
Asian economies in some trading days in May Number of daily transaction is 18 times of that of
Hong Kong P-E ratio doubles the international level
Control of Excess liquidity holds the key
Given the momentum of current account surplus
To achieve the objectives of controlling inflation assets bubble slowing down the growth rate of FAI
excess liquidity must be mopped up
The sources of excess liquidity High M2/GDP: 160% (previously frozen)
The growth rate of M2 has been consistently much higher that of GDP (“tigher” in the cage is out)
The most important componen of M2 is household deposits receiving very low interest (the real rate more often than not below zero)
Attracted by much higher capital gains in the equity market Tiger is out (in April 170 billion household depoists left banks and
entered the equity market twin surpluses (newly created)
$250 billion twin surplus Trade surplus and normal capital inflows Speculative capital inflows (what is the proportion?) aimed at
Assets Capital gain Revaluation expectation + carry trade
PBOC intervention aimed at RMB stability Increase in commercial banks’ deposits with the PBOC—
Reserves Fully sterilization is difficult (why?)
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1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
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Chi na P. R. I ndi a I ndoni si aBrazi l Pol and Uni ted StatesJ apan Korea Germany
M2-GDP ratios of different countries
Policy measures used to mop-up the excess
liquidity
To sell central bank bills to commercial banks To raise reserve requirments To raise interest rate
The constraints on sterilization
The negative impact on commercial banks’ performance
Resulting higher interest rates may attract more capital inflows
The impact on the real economy may be too great
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央行票据%在商业银行资产中的占比( )
Central bank bills/total assets rate is increasing steadily
reserve requirments are increasing steadily
time adjustment
2003(09/21) 7%
2004 (04/21) 7.5%
2006 8%
2006 8. 5%
2006 9%
2007( 01) 9. 5%
2007 ( 02) 10%
2007 ( 03) 10. 5%
2007 (04) 11%
2007 (05) 11.5%
Impact of sterilization on commercial banks’ profitability
Share of low yield assets over total assets may have surpassed 20 percent
The gap between deposits and loans is huge Lending rate × total lending – deposit rate × total
deposits = 90 percent of total bank profits Sterilization reduce the ability of lending by banks and
hence their profits in 2005 finanical instituts held 28.7 trillion deposits and
extended 19.5 trillion loans. The gap was 9.2 trillion, accounted for more than 30 % of
deposits To compensate the losses, more reckless lendings (equity
speculation)
Recent PBOC policy annoucement
Increase the band of floating from 0.3% to 0.5%
Increase reseve requirements from 11% to 11.5%
27-basis-point (bp) hike in the deposit rate , lending rate hike is smaller for the first time.
Monetary policy is not enough
Continue to sterilize to mop-up Lure the money back banks to contain
equity bubble Failue of the policy
Too small But if bigger, how about the real economy
Fiscal policy (stamp tax) Government should not be fear of
intervention (assets price zone)
Lack of flexibility of exchange rate is a foundamental cause of excess
liquidy, independece monetary policy is needed
Why pace for RMB exchange rate appreciation is so slow: textile, 19 million, 3.5% profitability, massive unemployment
Will the pace of appreciation speed up?
It depends on Development of current account surplus Development of inflation and assets bubble Growth of FAI Sustainability of sterilization operation Effectiveness of the management of capital
account
A more positive attitude towards appreciation should be adopted
RMB should be revalued to Help to reduce trade surplus, which is more than we
need Provide enterprises impetus for upgrading their positions in
the value chains Improve terms of trade Reduce trade frictions
To share the burden of reducing excess liquidity, so that the PBOC could enjoy more freedom in conducting monetary policy
Illusion should not be given to enterprises so that time will not be wasted and opportunities will not be lost
Concluding remarks
Adjustment of growth strategy Macroeconomic stability Deepening the reform Promising future