Transcript 走在十字路口的中国经济 - United Nations Economic and Social

Global financial crisis, China’s
macroeconomic situation and policy
responses
Institute of World Economics and
Politics, CASS
Yu Yongding
6 May Damascus
China’s growth since reform and opening up
in 1979
China's Real GDP Growth
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
16
14
12
10
8
6
4
2
0
19
86

19
84

19
82

China’s average annual growth rate since 1979 is 9.8 %
China’s average annual growth rate from 2002 to 2007 was 10.5%
In 2008, China has become the 3rd largest economy, the 2nd largest
trading nation, and the largest foreign exchange reserve holding country in
the world.
However, due to the global financial crisis, the annualized growth rate of the
third quarter of 2008, China’s growth rate fell into 6.8%
19
80

The impact on the economy is mainly through
the trade channel
F
R
E
E
F
A
L
L
54% reduction in steel production in Sep. 2009 was caused directly
by reduction in exports
Why impact on trade is so important
for the Chinese economy

China’s growth was characterized by investment- driven
and export- driven





China’s trade/GDP=70%
China’s export/GDP=40%
China’s current account surplus/GDP=8% (2007)
When the growth rate of China’s exports dropped dramatically,
from 29% on average to -25.7% in February 2009, how great is
the impact on the growth is not difficult to imagine.
The fall of foreign demand not only impacted on China’s
growth directly but also via its impact on investment and
consumption
China’s main policy responses to the
global slowdown


The government acted promptly, in Nov. a stimulus plan was
announced
Expansionary fiscal policy
 The government acted promptly, in Nov. A 4 trillion Yuan ($580
billion) stimulus plan was announced




Why the government can adopt such strong stimulus package



The stimulus package, will be used over 2 years
The package accounted for 14% of GDP in 2008
Budget deficit will raise to 3% of GDP in 2009
Low budget deficit over the years, less than 1 %
Debt/GDP is less than 20 %
Accommodating monetary policy
 Until the third quarter of 2009, China’s monetary policy was aimed
at controlling inflation and fighting asset bubbles. However the
direction of the policy changed dramatically
 The policy is aimed at accommodating the expansionary fiscal
policy
The Allocation of RMB 4 trillion
Earthquak
e
rebuilding
1%
7%
9%
housing for low income population
25%
rural infrastructure
infrastructure(rail way etc.)
ecology
tech innovation and economic
restructuring
post earthquake reconstruction
4%
medical services, culture and
education
9%
45%
Infrastructure
investment
Most of money will be spent on building railway, high way and so on, followed
by earthquake rebuilding
China’s financing for investment
(2007)
2007
Accommodating monetary policy

China’s financial condition

is not suffering from lack of liquidity, credit crunch
 China’s banking system is safe and sound so far


Assets bubbles are not that serious or have been corrected
Changes in monetary policy since the last quarter of 2008
 Abolishment of credit rationing
 Lowering reserve requirement
 Lowering interest rates on banks’ loans and deposits
 Lowering the thresholds of down payments of mortgages
 Less sterilization
 M2=20%


NPL less than 5%
CA more than 8%
signs of recovery:
-- Changes in steel production and its
decomposition
Production
of steel
Contribution
of investment
inventory
Net exports
Most indicators show that the Chinese economy may have bottom out since the last quarter of
2008. I have no doubt whatsoever that China will be able to achieve a growth rate above 8% for
Most serious challenge: balance between
growth and structure adjustment









To achieve a sustainable growth and improve the welfare of the
nation. Growth should not be achieved at the expenses of
structure adjustment
Structure problems include
High external dependency
High investment rate
Pollution
Energy efficiency
Income distribution gap between different social group and
between rural and urban areas
In sufficiency of provision of social goods (social safety net,
medic-care, education, etc.)
If China fails to tackle these structural problems, growth is
likely to have a W shape prospect
The Another Important Impact:
Worry about the Safety of China’s Fx Reserves



Two trillion USD foreign exchange reserves
One trillion in USD assets mainly in US treasuries
Threats come from

Default of GEBs (400billion dollar Fanni and Freddi Bonds)

Extremely expansionary monetary policy by the Fed
Extremely expansionary fiscal policy by the Treasury

Rogoff : “Why would a government refuse to pay its domestic
public debt in full when it can simply inflate the problem away?“

America’s track record is not impeccable
In the short-run






The dollar is still strong
Prices of US treasuries are still high
This is temporary, is against fundamental
In the long-run



If the Fed fails to withdraw the liquidity which may be come excess in the
future in a timely fashion, devaluation of Dollar in purchasing power will be
inevitable
If the US fails to cut its budget deficit, the fall of the Gbond prices is
inevitable
The debasing of dollar may have already lead to the devaluation of China’s
treasury holdings, if China still holds the current US assets and even
increases the holdings
What China can do? With regard to
flows

Reducing trade surplus by increasing
domestic demand, consumption
demand in particular






Social safety network (pension, Medicare,
unemployment insurance and minimum income
guarantee)
Education (12 year free education)
Rural infrastructure
Narrowing gap in income distribution
Infrastructure investment
Facilitating Out- bound FDI

Overcapacity is huge (steel). If trade surplus cannot be
eliminated, increase outbound FDI

construction of infrastructures in Asia, Africa and Latin
America
What China can do? With regard to stocks

Diversification



Currencies (besides the dollar)
Types of assets (besides the Treasuries)
Buying precious metals and natural resources (besides financial assets)
Easily said than done! China has already fallen into a dollar trap

Creating claims denominated by RMB rather than the US dollar






Engage in currency swap with central banks
Encourage the use of RMB as settlement currency
Increase contributions to the establishment of regional financial architecture
(Asian Monetary Fund?)
Encourage foreign borrowers to issue Panda bonds
Extend RMB Loans to foreign borrowers
Increase contributions to international key stone organizations


Buy IMF bonds denominated in SDR
Road map



Reform of international monetary and financial system
Promotion of regional financial cooperation
Speed-up Renminbi internationalization, while maintain effective
management of cross-border capital flows
Thank you!