Adjusting Global Imbalances
China’s Role & Implications for
Asian Countries
By Ichiro Otani
Economic Policy Consultant
Former Head of IMF Office in
China
• Global Imbalances
What are they?
• China—Performance and Policies
• Implications for Asian countries
Trade and FDIs?
Structural reforms?
19
90
Q
19 1
90
Q
19 3
91
Q
19 1
91
Q
19 3
92
Q
19 1
92
Q
19 3
93
Q
19 1
93
Q
19 3
94
Q
19 1
94
Q
19 3
95
Q
19 1
95
Q
19 3
96
Q
19 1
96
Q
19 3
97
Q
19 1
97
Q
19 3
98
Q
19 1
98
Q
19 3
99
Q
19 1
99
Q
20 3
00
Q
20 1
00
Q
20 3
01
Q
20 1
01
Q
20 3
02
Q
20 1
02
Q
20 3
03
Q
20 1
03
Q
3
1. Abnormal Interest Rates
Germany, Japan, U.S. & U.K.
Char 1: Short-Term Interest Rate in Major Countries, 1990-2003
Germany
Japan
United States
United Kingdom
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2. Current Account Imbalances
1996-2005
U.S.; EU; Japan; & China
Current Account Balances, 1996-2005
U.S.
EU
Japan
China
4
3
2
percent of GDP
1
0
1996-2000
2001
2002
2003
-1
-2
-3
-4
-5
-6
year
2004
2005
3. China: FDI Flow Imbalances
1999-2003
FDI Flows
FDI Outflows
FDI Inflows
60
50
$bn
40
30
20
10
0
1999
2000
2001
year
2002
2003
4. Fiscal Imbalances, 2001-05
U.S.; EU; Japan; & China
Fiscal Imbalances
0
2001
2002
2003
2004
-2
Percent of GDP
-4
-6
-8
-10
-12
Year
US
EU
Japan
India
2005
China Problems
• Massive Unemployment in 2003
Labor Force—760 mn people
Rural: 490 people
Under-employment: 150-250 mn
• Inflationary Pressures
Raw materials
Grains
Fiscal Policy
• Gradual tightening in early 2000’s
--key—M-T sustainability
• Expenditure Priority
--Education, Health, Infrastructure
--Social safety nets
--Infrastructure
• Tax reform
China: Fiscal balance, 2001-2005
M-T Fiscal Sustainability
State Budget
0
2001
2002
2003
-0.5
percent of GDP
-1
-1.5
-2
-2.5
-3
-3.5
year
State Budget
2004
2005
Monetary Policy
• Tightening of policy stance in late 2003
• Difficulty in controlling monetary
aggregates
--Increases in NFA
--Sterilization
China: Changes in Monetary
Aggregates and Prices, 1990-2003
M2 & DC Grwoth and Inflation percent, 1990-2003
Inflation
M2 growth
DC growth
60
50
40
30
20
10
0
1990Q1
-10
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
Figure 1: Impact of Speculative Capital Flows
i
LM
BP = 0
S
T
BP' = 0
M
IS
Y or P
Assumptions: Fixed ER & Partially Effective Capital Controls
S: 2001-2
T: 2002-4
M:
?
Rough Equilibrium BP = 0
Transition to New Equilibrium (Y expanding and P rising)
(with speculative capital inflows) BP' = 0
Exchange Rate Policy
• ER level
--”Stable rate”
• ER system
--De Facto Peg now
--Flexible system in future
0.000
Year
M12
M10
M5 2003
M12
M7 2002
M2 2002
M9 2001
M4 2001
M11
M6 2000
M1 2000
M8 1999
M3 1999
M10
M5 1998
NEER
M7 1997
M2 1997
M9 1996
M4 1996
M11
M6 1995
M1 1995
M8 1994
M3 1994
M10
M5 1993
M12
M7 1992
M2 1992
M9 1991
M4 1991
M11
M6 1990
M1 1990
Index 1995=100
China: REER & NEER
1990-2004
Chart 5: China REER and NEER, 1990-2004
REER
200.000
180.000
160.000
140.000
120.000
100.000
80.000
60.000
40.000
20.000
China: As a Good Citizen of the
World
• Contribute to a better global balance?
• Domestic and External balance?
• Expand domestic demand?
--exchange rate and macro policies?
--structural reform policies ?
ER: Suggestions from Others
• Level
•
Appreciation
No change
Depreciation
System
a basket peg
a wider band
a managed float
a free float
Structural Reforms
• Financial Sector Reform
• Fiscal Sector Reform
• State-owned Enterprise (SOE) Reform
• Labor Market Reform
Implications for Emerging Asia
• Soft Landing
•
•
•
--Macroeconomic Stability
--Trade flows
FDI
--Challenges and opportunities
Exchange Rate
--Toward a more flexible system
Structural reforms
--Financial, Fiscal, Corporate, …