Transcript Macroeconomic Policy in China

China’s Macro-economy and
Financial System
Professor Kuo-Ping Chang
Macroeconomic Policy in China
● After 1949, the Chinese economy
experienced relative price stability for
more than 30 years.
● Following the economic reform in 1979,
price increases remained a substantial
and common phenomena almost
throughout the 1980s and mid-1990s.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
From 1978 to 1992, China’s liberalization was
gradual with a fairly stable price level and
extraordinary rapid output growth.
● Since 1989 in Eastern Europe and the former
Soviet Union, rapid liberalizations attempted in the
face of falling real output generated much higher
inflation.
● Yet, both regions’ fiscal policies were surprisingly
the same. Like its socialist counterparts in Europe,
the Chinese government’s revenue, as a share of
Gross National Product (GNP), has fallen sharply.
●
Professor Kuo-Ping Chang
Macroeconomic Policy in China
● How did China manage to avoid inflation while its
government was such a heavy borrower from the
state bank system?
(1) It first liberalized the areas like agriculture where
subsequent productivity growth was rapid.
In 1978, agriculture communes began to break up
into small farm leases (household responsibility
system with duration of 10-15 years). Between
1979-1983, with over three quarters of the
population still in agriculture, farm output surged by
8-10 percent per year.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
By 1984, the focus of rapid economic growth had
shifted to rural light industry, which began to absorb
much of the labor force released by productivity
improvements in agriculture.
Small-scale private traders flourished. Unlike the
state firms, those market-driven town- and villageowned enterprises (TVEs) were outside of the
official price and output control.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
(2) China imposed very hard budget constraints on,
and gave little bank credit to, the newly liberalized
non-state sectors in industry and agriculture.
Along with the household responsibility system
(HRS), state procurement prices paid farmers for
compulsory quotas of grains and foodstuffs were
sharply raised toward world-market levels. The
remaining surpluses could then be freely sold to
private markets.
Together with the increase in output, the big
improvement in the newly-independent farmers’
terms of trade greatly increased their cash flows.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
In the early 1980’s, the improved cash position
enabled farmers to self-finance their on-farm
investments.
While building up their cash and saving deposits
relative to their rising incomes, farmers (who
were over three-quarters of the population)
became big net lenders to the government
through the state banking system.
Professor Kuo-Ping Chang
Professor Kuo-Ping Chang
Macroeconomic Policy in China
(3) China set positive real interest rates on saving
deposits. The resulting enormous growth in saving
and stocks of financial assets allowed the
liberalized sector to finance itself, the Chinese
government, and the deficits of the slowly reforming
state enterprises.
From the mid-1980s to near present, this dramatic
and voluntary buildup of savings by rural
households was replicated throughout the rest of
the economy as industry succeeded agriculture as
China’s leading growth sector.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
The enormous increase in broad money
holdings (M2) from about 28% of GNP in
1978 to about 97% in 1991.
Because of central government’s continued
ownership of the state banking system, it
could offset its deteriorating fiscal position by
borrowing back these rapidly rising financial
surpluses of urban and rural households or
of the non-state sector generally.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
Why were these so high savings kept in the banks?
(1) No places to go: not in capital markets or
precious metals or real estate or foreign investment;
(2) Price control though not perfect but stable;
(3) More importantly, when inflation soared (e.g., in
1988-1989, it was about 18%), the government
responded by fully indexing some interest rates.
Professor Kuo-Ping Chang
Macroeconomic Policy in China
Professor Kuo-Ping Chang
The Exchange Rate Regime
China may have the potential problem of socalled “conflicted virtue”:
(1) As the stock of dollar claims cumulates,
domestic holders of dollar assets worry more
about a self-sustaining run into the domestic
currency forcing an appreciation.
(2) Foreigners start complaining that the country’s
ongoing flow of trade surpluses is unfair and the
result of having an undervalued currency.
●
Professor Kuo-Ping Chang
The Exchange Rate Regime
● Several
ways to solve this problem:
(1) Reduce its current-account surplus:
Let imports expand more rapidly by reducing
trade barriers faster than its WTO timetable
requires, and eliminate special incentives given
to exporters.
(2) Reduce the financial magnitude of the FDI
inflows by letting joint ventures finance more of
their operations within China—by borrowing
from Chinese banks, or by issuing more stocks
and bonds domestically.
Professor Kuo-Ping Chang
The Exchange Rate Regime
(3) Expanding aggregate demand domestically.
(4) QDII, Sovereignty Wealth Funds, Allow to sell
US mutual funds, etc.
Professor Kuo-Ping Chang
2009 Stock Market Indexes
Aug 17
July 17
2,870.63
3,189.47
(Shanghai and SZ)
3,140.27
3519.81
Hang Seng (HK)
20,137.65
18,805.66
SCI (Shanghai)
CSI 300
Human Capital
● As set out in the 10th (2001-2005) and
11th (2006-2010) five-year plans, the focus
on tertiary education differentiates the
Chinese case from other countries who
earlier at similar stages of development
instead stressed primary and secondary
education.
Professor Kuo-Ping Chang
Human Capital
●
The number of undergraduate and
graduate students in China has been
grown at approximately 30% per year
since 1999, and the number of graduates
at all levels of higher education in China
has approximately quadrupled in the last 6
years.
Professor Kuo-Ping Chang
Since tax reform in 1994, fiscal revenue (tax)
increase is about 2-3 times of GDP growth rate.
During 1995-2007, gov. income increased 570%;
urban citizens 160%; rural farmers 1.2%.
Gov. intervenes free markets and Chinese
privately-owned corps. wanna get out (e.g., the
case of a fruit juice co.).
In Zhejing Province, 70% capital went to real
estate and stock markets (in 1990, it’s the
opposite).
Small and medium sized enterprises in China
Contribute 60% export; 50% GDP; and 40 tax
revenues.
Why so little influence?
“Guanxi”, deference to authority, hierarchy,
don’t want confrontation.
Because: No law; No choice implies docile.
Results: Private owners migrant to overseas.
SOEs Expand and Privately-Owned Withdraw
In 2009, Increases In
The Value of Industrial Outputs:
Private 18.7%; SOEs 6.9%
●
Total Assets: Private 20.1%; SOEs 14%
Employment: Private 5.3%; SOEs 0.8%
Revenues: Private 18.7%; SOEs -0.2%
Profits: Private 17.4%; SOEs -4.5%.
CEOs of SOEs still get high pay: 18 times of
their avgerage worker (vs. 360 times in US).
● Not only petrochemical also mining etc. go to
SOEs.
● 4 trillion stimulus package mostly went to SOEs.
The results: SOEs buy more urban lands.
● In 1998, 2 trillion to reform SOEs used to retire
employees; low interest rate loan; transfer debt
to equity. And
In 2009, 10 monopolistic SOEs (Petro; Telecom
for domestic usage only) made money. The
rest lost.
●
Forecasts of 2020 China’s Economy
by Xinhua Agency (10/1/2009)
● RMB
: US dollar = 4.2 :1, appreciate slowly at first and then
fast.
● GDP annual growth rate: 8%; close to USA and double than
Japan; 20% of world GDP.
● Annual Growth rate of exports plus imports: 8%; 13% of world
trade (1st place); more than the USA. From surplus to deficit.
● New car sales more than USA in 2015; energy-saving cars.
● Deregulate banking industry: insurance, securities and mutual
funds, etc.
● Textile industry: 40% of world production.
● Stock markets: combine A and B shares; list more than 1,000
overseas companies.
● Population in cities and towns: 0.8 billion; about 60% of total
population.
Shanghai as an International Financial Center
in 2020
Shanghai as an International Freight Center
in 2020:
Modern logistics; various services;
a freight and passengers port.
Shanghai as the head of the “dragon”
(Dragon means the Yangtze River; Shanghai
is at the Yangtze River Delta; Jiangsu
and Zhejiang provinces as its two wings;
and Hunan, Anhui and Sichuan provinces as
its bases).
Shanghai as an International Financial Center
in 2020
Leading International Banking Center in
Asia:
Hong Kong: from 1900−1925, and after the
war until 1960.
Shanghai: surpassed HK in 1925 and 1947.
Tokyo: from 1960.
The Most Important Feature of An
International Financial Center:
Providing services to other countries.
1.Free Flow of Information (broader than
Transparency): news media;
communication.
1.1 Floating Exchange Rate
1.2 Open both Capital and Current
Accounts.
Four Regions with Most Chinese
Hong Kong: Can do any things unless the
law forbids.
Singapore: Cannot do any things unless the
law permits.
Taiwan: May do even if the law forbids (not
any more).
Mainland China: May not do even if the law
permits.