China Article IV Consultation
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Transcript China Article IV Consultation
Carnegie Endowment for International Peace
September 16, 2011
Nigel Chalk
International Monetary Fund
1
Motivating Financial Reform
At a time when China faces fundamental
changes in the economic environment
There is a risk that macroeconomic
control may be increasingly diluted
Social Financing
(In trillion RMB)
16
16
Other
Equity
12
Corporate bonds
12
Bankers' acceptances
Trust loans
Bank loans
8
8
4
4
0
0
2006
2007
2008
2009
2010
2011Q1
Demographic changes
and potential for rise in
labor costs
Continued inflationary
pressures from food
Property price inflation
Growing non-bank
channels of
intermediation
A waning influence of
credit controls
2
Motivating Financial Reform
In part because households are
getting short-changed on their share
of the returns to capital
Catalyzing consumption is
constrained by low household
income
Average Consumption Expenditure, 2004-10
Distribution of the Returns to Bank-Intermediated Capital
(real returns, in percent)
(Industrial countries and emerging markets)
8
Private consumption (% of GDP)
100
8
Corporate Sector
Banks
Depositors
Total Return to Capital
100
6
80
80
60
6
4
4
2
2
40
0
0
20
-2
60
40
China
20
0
10
20
30
40
50
GDP per capita (US$ thousands)
60
70
-2
China
India
Japan
Korea
UK
US
3
Motivating Financial Reform
But unsuccessful cases elsewhere
have resulted in an unintended
loosening of credit conditions…
…a fall in real interest rates,
overheating, and sometimes
financial crisis
Real Interest Rates
Private Credit (percent of GDP)
(In percent; 3 year average, post-interest rate liberalization)
(T = time of interest rate liberalization, normalized to equal 100)
235
10
Date of banking crisis
10
235
Argentina (1977)
5
195
Thailand (1990)
Norway (1985)
195
0
Finland (1986)
155
155
Sweden (1983)
115
115
75
75
T
T+1
T+2
T+3
T+4
T+5
T+6
T+7
5
Argentina
(1977)
Chile
(1974)
Mexico
(1994)
Australia Belgium
(1981)
(1986)
Canada
(1980)
0
-5
-5
-10
-10
-15
-15
4
Sequencing Matters
Strategy should remain flexible—there will be unanticipated
events—but with a roadmap :
1. A stronger exchange rate
2. Rethinking the monetary framework
3. Improved regulation and supervision
4. Market development
5. Liberalizing interest rates
6. Opening up the capital account
5
1. A Stronger Exchange Rate
There is a need for currency
appreciation to…
Exchange Rate & Foreign Reserves
3.5
Reduce the scale of BOP
inflows
Lower FX intervention
Have the flexibility to use
reserve requirements not
merely as a sterilization
tool
Greater scope for an
independent monetary
policy
6.0
Foreign Reserves (Trillion US$)
3.0
Exchange Rate (RMB/US$), RHS
6.5
2.5
7.0
2.0
1.5
7.5
1.0
8.0
0.5
0.0
8.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
6
2. Rethinking The Monetary Framework
First, absorb excess liquidity in
the financial system and move
to a point where interest rates
clear the credit market, not
quantity controls
With greater exchange rate
flexibility and likely instability in
monetary aggregates, China
will need an alternate monetary
policy approach
Shift to a framework that
establishes clear objectives on
growth, inflation, and financial
stability and deploys a
combination of monetary and
macro-prudential tools
7
3. Improved Regulation and Supervision
Regulation and Supervision
Establish a coordinating
regulatory body (Financial
Stability Committee)
Operational autonomy for
regulatory agencies
Increased staffing and
funding
Effective enforcement and
resolution powers
Tackle data quality and
collection
Continued progress in regular
stress testing
Crisis Management Framework
Procedures for intervention
and orderly exit of weak
institutions
Clear definition of the scope of
fiscal support
Deposit insurance scheme
Limits on emergency liquidity
support to solvent banks
facing short-term liquidity
problems
Standing facilities should
operate automatically with
common conditions to provide
8
liquidity support to all
4. Market Development
Financial Markets
Bonds
Bond issuance strategy of government
Increase connectivity between markets
Disclosure-based listing
Money Markets
Increase repo market liquidity
Remove tax and regulatory hurdles
Interest rate hedging tools
Equities
Legacy issues related to nontradable, A and B
shares
Expand free float of shares of public companies
Non-bank Intermediation
Insurance
Consolidation
More comprehensive risk-based capital
requirements
Clearer voluntary exit rules
Asset allocation limits
Stronger actuarial oversight
Mutual Funds
Expand scope of investments to lower-rated fixed
income products and medium-term notes
Assess the regulatory approach
9
5. Liberalizing Interest Rates
Once liquidity has been
absorbed and monetary policy
is conducted by indirect
instruments, can move to
liberalize interest rates
Raise deposit rate ceiling first,
making loan rate floor more
binding
Need to ensure banks do not
“over-compete”, eroding their
margins and creating financial
stability risks
Adapt monetary policy as
interest rate regulations
become less binding to prevent
7-day Repo rate
1-year deposit rate
1-year lending rate
1-year PBC paper rate
8
8
6
6
4
4
2
2
0
2005
0
2006
2007
2008
2009
2010
2011
10