Comments on Professor Yu’s Paper
The Global Financial Crisis
and China’s Policy Responses
C. H. Kwan
Consulting Fellow
RIETI
October 8, 2009
Global imbalance and the RMB
issue
How to reduce the current account surplus
„ Current account as the gap between savings and
investment
„ Raising consumption as the key to reduce current
account surplus
China’s transition to a floating rate regime
„ The need to restore autonomy in monetary policy
„ Similarity between China now and Japan in the early
1970s
1
Changes in current account balances in China
and the United States reflecting the savingsinvestment balance
(Ratio to GDP, %)
60
China’s savings
50
China’s investment
40
30
20
U.S. investment
U.S. savings
10
China’s current
account balance
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-10
U.S. current
account balance
(Year)
Note: Current account balance ≒ savings – investment
Source: China’s statistics based on China Statistics Summary 2009; Statistics
for the U.S. and Japan based on the International Monetary Fund's World
Economic Outlook Database, April 2009
2
International comparison of private
consumption in relation to GDP (2007 figures)
China
Singapore
Malaysia
Thailand
South
Korea
Japan
Taiwan
Hong Kong
Indonesia
Philippines
United
States
(%)
80
70
60
50
40
30
20
10
0
Source: Official statistics for China, Japan, and the U.S.; Asian Development Bank
(ADB) Key Indicators for Asia and the Pacific, 2008 for other countries and regions
3
Dwindling private consumption amid
widening income disparities
(%)
55
50
Private consumption
as a percentage of GDP (%)
45
40
35
30
Rural-to-urban income ratio (%)*
25
20
86 88 90 92 94 96 98 00 02 04 06 08
* Per capita disposable income and per capita net income are used to
measure urban and rural income, respectively.
Source: China Statistical Abstract 2009
4
Redressing China’s regional
disparities
„
Domestic FTA
Dismantling barriers impeding the mobility of labor (e.g.
household registration system), goods, and capital to form a
unified domestic market
„
Domestic Flying Geese
Investment flow from high-income to low-income regions
„
Domestic ODA
Japan’s local allocation tax as a model
5
-5
Gansu
Xinjiang
Ningxia
Yunnan
Qinghai
Guiz hou
Tibet
Shaanxi
Chongqing
Sichu an
Guangxi
Inner Mongolia
10
Shanxi
Henan
Heilongjiang
Jiangxi
Hubei
Jilin
Anhui
Hunan
15
Shanghai
Zheji ang
Guangdong
Beijing
Fujian
Hebei
Hainan
Shandong
Jiangsu
Liaoning
Tianj in
Higher growth rates in Western
China (first half of 2009)
(Year-on-year, %)
20
8.9% on
avarage
9.1% on
average
11.6% on
average
5
0
Eastern China
Central China
Western China
(Source) National Bureau of Statistics of China.
6
China's rising “twin surpluses” and
foreign exchange reserves
($ billion)
2000
Net errors and omissions
Capital account
1500
Current account
Foreign exchange reserves
Rise in foreign exchange reserves
1000
500
0
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
-500
(year)
Note: Increase in foreign exchange reserves = current account balance +
capital account balance + errors and omissions.
Source: State Administration of Foreign Exchange http://www.safe.gov.cn/
7
Need to move to a more flexible
exchange rate system
„
„
„
„
Twin surpluses as the direct result of the
government’s efforts to maintain an undervalued
RMB
China moved to a managed floating system in
July 2005, but has returned to the dollar peg
system as an emergency measure
Moving to a floating rate system needed to
restore monetary independence (given rising
capital mobility)
Keeping exchange rate fixed to the dollar will
give rise to asset bubble and inflation
8
The “impossible trinity" in
international finance
Free Capital
Mobility
Independent
Fixed Exchange
Monetary Policy
Rate
Examples
China
Capital Controls
No
Yes
Yes
(before July 2005)
Monetary Union
Yes
No
Yes
Hong Kong, EU
Free Floating
Yes
Yes
No
Japan, Australia
Source: Created by author
9