Transcript The adjustment of China’s growth strategy and

The adjustment of China’s growth
strategy and macroeconomic
stability
Yu 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
200 bil + 60 bil
250000
150000
100000
50000
current account
FDI
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
-50000
19
84
0
19
82
In USD Millions
200000
The increase in foreign exchange
reservers
12000
10000
8000
6000
4000
2000
200 bil a year
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Rewards for being a debtor
Punishment for being a creditor:
China’s current account surplus and
investment income deficit
180,000
160,000
140,000
120,000
100,000
80,000
Current account
Investment income
60,000
40,000
Due to
appreciation
expectations
20,000
0
1999
2000
2001
2002
2003
2004
2005
-20,000
-40,000
Except for 2005, over the past 25 years, investment income balance has always
been in deficit
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
Six stages of economic
development: where is China
i
investment
IV
III
s
V
II
VI
saving
I
Net worth
投资收入
0
Current account
ca
Investment
income
Stage China is in
Trade
balance
With 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?)


M2-GDP ratios of different countries
160.0
China P.R.
Brazil
Japan
Ratio of Money to GDP (%)
140.0
India
Poland
Korea
Indonisia
United States
Germany
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1978
1980
1982
1984
1986
1988
Year
1990
1992
1994
1996
1998
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
20
05
.
20 01
05
.
20 02
05
.
20 03
05
.
20 04
05
.
20 05
05
.
20 06
05
.
20 07
05
.
20 08
05
.
20 09
05
.
20 10
05
.
20 11
05
.
20 12
06
.
20 01
06
.
20 02
06
.
20 03
06
.
20 04
06
.
20 05
06
.
20 06
06
.
20 07
06
.
20 08
06
.
20 09
06
.
20 10
06
.
20 11
06
.1
2
Central bank bills/total assets rate is
increasing steadily
40000
20000
0
12.0
35000
10.0
30000
25000
8.0
6.0
15000
4.0
10000
5000
2.0
0.0
央行票据
在商业银行资产中的占比（%）
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
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
 Lending
 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