Research Institute of Economy, Trade and Industry (RIETI)
BBL Seminar
Handout
December 6, 2011
"China: Economic Developments and Outlook"
Steven Barnett
http://www.rieti.go.jp/jp/index.html
Steve Barnett
Assistant Director, Office for Asia and the Pacific
December 2011
These are the views of the presenter and not those of the IMF, its Executive Board, or its Management.
Outline
I.
Historical and global perspective
II. Developments and outlook
III. Rebalancing
IV. Spillovers
V. Financial sector reform
I. Historical and global perspective
…boosting income per capita, which however is still much less than in US
China has enjoyed rapid economic growth…
15
15
GDP Growth (In %)
10
10
10
8
6
5
5
0
0
World
‐5
1996
2001
2006
2011
2
0
China
‐5
1991
4
2016
China: Per Capita GDP Relative to US
(In %of US per capita GDP)
Substantial reduction in poverty
70
Poverty rate (% of population) 70
Number Living in Poverty (millions) 1/
60
60
50
50
World
1818
1374
‐444
40
40
China
683
208
‐475
India
436
456
20
Rest of Asia
333
248
‐85
Sub‐Saharan Africa
297
388
91
69
74
5
China
30
20
10
30
India
20
Rest of Asia
World
10
1990
Rest of world
2005
Sub‐Saharan Africa
0
0
1990
2005
1/ Less than $1.25 a day at 2005 purchasing power parity
Source: APD REO, Sep. 2011 (Data from World Bank, PovcalNet database)
Change
China accounted for ¼ of global growth
Contributions to GDP Growth (In percentage points)
Average 2003‐7 = 24%
Rising Share of Global Output (GDP on PPP Basis)
1991 2010 China
4%
China
14%
United States
24%
Rest of world
40%
United States
19%
Rest of world
46%
Japan
10%
Euro area
22%
Euro area
15%
Japan
6%
Same trend but less dramatic when measured at market exchange rates
1991 2010 China
2%
China
9%
Rest of world
32%
United States
26%
Rest of world
40%
United States
23%
Japan
15%
Euro area
25%
Japan
9%
Euro area
19%
50,000
46,860
45,000
GDP Per Capita, 2010 (US$)
42,783
40,000
36,716
36,164
35,000
30,000
25,000
20,000
15,000
10,816
9,239
10,000
5,000
10,356
9,522
8,423
4,992
4,382
2,974
1,371
2,123
1,174
0
United Kingdom
Mexico
Philippines
Malaysia
Indonesia
Vietnam
Thailand
India
Russia
Brazil
World
Euro area
Japan
United States
China
10,000
5,000
0
2,123
2,974
1,174
9,522
8,423
4,992
1,371
10,356
36,164
36,716
40,000
46,860
42,783
45,000
10,816
9,239
11,115
11,096
15,000
6,536
4,382
50,000
GDP Per Capita, 2010 (US$)
35,000
30,000
25,000
20,000
Global Outlook
2012
(Proj.)
(Year-over-year; in percent)
2011
(Proj.)
(In percentage points)
World GDP Growth
2010
Downward Revisions in Growth Forecasts
since April 2011 WEO
World
5.1
4.0
4.0
Advanced
economies
3.1
1.6
1.9
USA
3.0
1.5
1.8
Euro area
1.8
1.6
1.1
United
Kingdom
1.4
1.1
1.6
Japan
4.0
-0.5
2.3
0
-0.2
-0.4
-0.6
-0.8
-1
-1.2
2011
2012
Euro Area
United States
Advanced
economies
World
-1.4
10
The baseline forecast is for more uneven recovery:
> 6 percent growth in EM, < 2 percent growth in AE
= 4 percent global growth.
Real GDP Growth
(percent change from a year earlier)
Advanced Economies
Emerging Economies
12
12
Emerging Asia
10
10
8
8
MENA
6
6
4
4
Latin America
2
2
0
0
‐2
‐2
‐4
‐4
Current WEO
2011 2012
United States 1.5 1.8
1.6 1.1
Euro area
‐0.5 2.3
Japan
‐6
‐8
Current WEO
MENA
Dev. Asia
LAC
‐10
‐12
2000
02
04
06
08
10
12
2000
02
04
2011 2012
4.0 3.6
8.2 8.0
4.5 4.0
‐6
‐8
‐10
06
08
10
12
‐12
Advanced economy GDP not yet recovered
12
EM Asia Outlook and Risks
Asia: Projected GDP Growth
Asia: GDP Growth
(in percent; year over year)
2010
2011
2012
Difference
from April
2011
2011 2012
9.5
10.3
7.0
6.2
7.9
9.5
6.0
4.0
7.7
9.0
4.3
4.4
-0.2 -0.3
-0.1 -0.5
0.6 0.1
-0.5 0.2
10.9
5.2
5.0
-0.2 -0.2
10.1
7.8
7.5
-0.4 -0.3
Actual data and
latest projections
Emerging Asia
China
Hong Kong SAR
Korea
Taiwan Province
of China
India
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
(Central forecast and selected confidence
intervals; in percent)
6.1
7.2
7.6
14.5
7.8
6.8
6.4
5.2
4.7
5.3
3.5
5.8
6.3
5.1
4.9
4.3
4.8
6.3
0.2
-0.3
-0.3
0.1
-0.4
-0.5
-0.2
-0.1
-0.1
-0.1
0.3
-0.5
10
9
Central forecast
8
7
6
5
4
3
90 percent confidence interval
2
70 percent confidence interval
1
50 percent confidence interval
0
2007
2008
2009
2010
2011
2012
13
II. Developments and outlook
Consumption has moderated but is still healthy
The economy is doing just fine
Retail Sales
Contribution to GDP Growth
(In percent, year-on-year growth)
(In percent, annual average)
20
20
100
10
50
0
0
10
10
0
0
-10
20
Net exports
Private consumption
GDP growth
2007Q1
2008Q1
Private investment & stocks
Public
Total (LHS)
-10
2009Q1
2010Q1
2011Q1
-10
Jan-07
Dec-07
Automobiles
Nov-08
Oct-09
Durable goods
Sep-10
-50
Aug-11
14
There’s an ongoing hand‐off from public to private drivers
Fixed Asset Investment
(In percent, year-on-year growth)
60
Total investment
60
Private
40
Public
40
20
20
0
0
-20
Jan-07
Dec-07
Nov-08
Oct-09
Sep-10
-20
Aug-11
15
Overheating?
Input costs, particularly for Wages are rising quickly but remain in line with productivity commodities, are adding to price pressures
Producer Price Index
China Unit Labor Cost and Industrial Profit Margin
(In percent, year-on-year)
8
20
PPI
PPI: raw material (RMI)
PPI: manufacturing
15
15
5
5
-5
-5
6
10
0
Unit labor cost (4Qma, yoy growth )
4
Nominal wages (4Qma, yoy growth)
Total profit margin (percent 4Qma, RHS)
-10
2000
2004
2009
2011
2000
2004
2009
2011
2
-15
Jan-05 Nov-05 Sep-06
-15
Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11
16
Overheating?
Unused capacity has increased as Rising China costs are not a result of the surge in leading to China exporting investment
inflation to the rest of the world
China Output Gap
(Hodrick Prescott Filter vs. More Model Based)
6
4
6
4
Hodrick Prescott Filter
2
2
0
0
-2
-2
-4
-4
-6
-6
Model-Based
-8
-8
1993
1995
1997
1999
2001
2003
2005
2007
2009
17
Inflation
 Inflation seems to have peaked  And sequential momentum is in a year‐on‐year basis
also slowing
12
12
Inflation
Inflation
(3m-on-3m, 3mma, saar)
(percent yoy)
8
8
4
8
8
4
4
0
0
4
0
0
Headline
Nonfood (old weight = 67%, new weight =70%)
-4
Headline
-4
Nonfood (old weight = 67%, new weight =70%)
Nonfood excl. Residence (old weight=54%)
Nonfood excl. Residence_2 (new weight = 52%)
-4
-4
Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11
Nonfood excl. Residence (weight=54%)
-8
-8
Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11
Inflation
 However, nonfood inflation has  With inflation driven instead essentially been absent for a decade
entirely by food supply shocks
Consumer Price Inflation
Consumer Price Inflation
(In percent)
15
Food
15
Nonfood
(In percent)
25
Food
Nonfood
20
10
25
20
10
5
5
0
15
15
10
10
5
5
0
0
0
-5
-5
1996
1998
2000
2002
2004
2006
2008
2010
-5
-5
2002
2003
2005
2006
2008
2009
2011
Inflation
And there is no obvious correlation with money supply
Food prices drive the CPI
(Contribution to Inflation)
8
8
35
In percent, y/y
(Quarterly)
30
6
Food
Residence
6
Others
20
Change in Percent, year-on-year
25
M2 (LHS)
15
Headline Inflation (RHS)
Underlying Inflation (weight=45%) (RHS)
4
4
10
20
15
2
5
2
10
0
0
-2
0
Jan-08
Oct-08
Jul-09
Apr-10
Jan-11
Oct-11
-2
5
0
2001Q1
‐5
2004Q3
2008Q1
2011Q3
Inflation
The food cycle is starting up again with recent return of pork inflation
Nevertheless, we think inflation has peaked and should now start to recede
Pork Price
(In percent, year-on-year )
10
80
Pork price (LHS)
Headline Inflation
5
40
0
0
-40
-5
2005
2005
2006
2007
2008
2009
2010
2011
21
Credit growth
Headline credit growth is falling
Especially from the peaks reached during the stimulus
Credit growth
Monetary policy has been tightened
And borrowers are paying higher interest for bank loans
Credit growth: Social financing
Other forms of financing also have grown
But have slowed in the most recent data
Credit growth: real estate
Real estate lending grew but has stabilized
With most financing going to mortgages
A Property Bubble?
Property remains very But the gap between owning expensive
and renting is narrowing
Deviation of Mass-market House Price from Benchmark
Housing Affordability
(Price-to-income ratio)
0
(Percent of benchmark price)
5
10
15
20
25
China
2010H1
30
2010H2
2011Q1
30
Beijing
Shanghai
2010
Hangzhou
2009
Nanjing
15
15
0
0
Singapore
Tokyo
Hong Kong SAR
US
UK
0
5
10
15
Note: Price of a 70 sq.m. home as a multiple of annual household disposable income.
20
25
-15
-15
China
Tianjin
Guangzhou
Beijing
Shanghai
Shenzhen
26
A Property Bubble?
Government measures have cooled down the property market
Bank Exposure to Real Estate Sector
Residential Housing
(Quarterly)
(Dec 2006 = 100, sa)
200
And moderated the pace of growth in credit to real estate
25
Price
Floor space sold
Investment (RHS)
25
As percent of nominal GDP
300
165
As percent of total credit
20
20
15
15
220
130
140
95
60
Dec-06
Aug-07
Apr-08
Dec-08
Aug-09
Apr-10
Dec-10
60
Aug-11
10
2005Q1
2006Q2
2007Q3
2008Q4
2010Q1
10
2011Q2
27
A Property Bubble?
Nevertheless, with a low cost of financing and a lack of investment alternatives, …
…the propensity for property bubbles remains an important domestic risk
China Property Prices
(In percent, year-on-year)
70
70
Total
Shanghai
Beijing
50
50
30
30
10
10
-10
Jan-08
Nov-08
Sep-09
Jul-10
Jun-11
-10
28
Latest trade data
Exports to EU slowing
Imports remain strong
More trade data
EU is the largest export destination outside of Asia
Imports are mainly commodities and machinery
External Outlook
The post‐crisis fall in the current But private analysts predict a account surplus has moved into continued fall in the current reverse
account surplus
Current Account Balance
(12 month cumulative, US$ billions)
500
400
500
Estimated non-trade flows
Trade balance
400
300
300
200
200
100
100
0
Jan-05
0
Dec-05
Nov-06
Oct-07
Sep-08
Aug-09
Jul-10
Jun-11
Note: Projected non-traded flows for 2011Q3.
31
External Outlook
Or is it predominantly cyclical? Could there be rebalancing through investment? Fixed Asset Investment
(In percent of GDP)
80
80
60
60
40
40
20
20
0
0
2004
2005
2006
2007
2008
2009
2010
32
External Outlook
And the one‐sided nature of renminbi internationalization is adding to that pace
Reserve growth has been accelerating
Exchange Rate & Foreign Reserves
3.5
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
33
External Outlook
This is despite gross FDI outflows…
… and outward lending having picked up
Outward Loans & Trade Finance
Outward FDI
(US$ billions)
(US$ billions)
60
60
50
50
40
40
30
30
20
20
160
Trade Finance
Loans
160
120
120
80
80
40
40
10
10
0
0
2004
2005
2006
2007
2008
2009
2010
0
0
2004
2005
2006
2007
2008
2009
2010
34
External Outlook
Leading us to believe that rapid reserve accumulation will continue
Despite the large gross outflows, the net inflows have accelerated
Reserve Forecasts
Capital Flows
(US$ trillion)
8
(US$ billions)
300
Other
Other short-term investments
Short term loans
FDI
Total net capital flows
300
150
8
7
7
Baseline
6
6
5
5
150
Rebalanced Scenario
0
0
-150
-150
2005
2006
2007
2008
2009
2010
2011Q1
4
4
3
3
2
2
2010
2011
2012
2013
2014
2015
2016
(Annualized)
35
Exchange rate
5
115
115
RMB/Euro
RMB/Yen
5
Implied 1 year appreciation
4
RMB/US$
3
3
2
2
1
1
0
0
-1
-1
-2
-2
105
105
95
95
-3
85
Jun-10
85
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
140
140
-3
Onshore
NDF
CIP
-4
(Jan 2009=100)
4
-5
Jun-10
-4
-5
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
6
5
Real Effective Exchange Rate
Shibor, 1Yr
LIBOR, 1Yr
5
120
120
Treasury, 1Yr
4
Central Bank Bill, 1Yr
4
3
3
100
2
100
2
INS
BIS
(2005=100)
80
Jan-97
1
1
80
Jul-99
Jan-02
Jul-04
Jan-07
Jul-09
0
0
10
10
11
S
11
Policies
Global Current Account Balances
(in percent of world GDP)
3
Rest of the world
Japan and Germany
China
Emerging Asia
Oil exporters
United States
Projections
2
China: Household Consumption and Income
(in percent)
80
Consumption (share
in disposable income)
75
70
65
60
1
Disposable
income (share in
GDP)
55
0
Consumption
(share in GDP)
50
45
-1
40
37
2010
2008
2006
2004
2002
30
2000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-3
35
1998
Global
discrepancy
1996
-2
“We are keenly aware that we still have a serious problem
in that our development is not yet well balanced,
coordinated or sustainable.”
3.5
3.5
3.0
Pattern of Exports of Goods in Selected Countries
Since Their Growth Take Off (Index beginning period=1)
Japan (1955–2009)
China (1979–2009)
2.5
NIEs excl. Korea (1965–2009)
China forecast (2010-15)
China (1979–2008)
2.0
NIEs (1967–1997)
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
3
5
7
12
10
8
6
4
2
1
16
Korea (1961–2009)
14
Korea (1961–1995)
2.0
Market Share in Selected Economies Since Growth Take Off
3.0
Japan (1955–1987)
2.5
18
-2
1
4
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55
9 11 13 15 17 19 21 23 25 27 29 31 33 35
Year During Index Period
Sources: CEIC Data Co. Ltd.; and IMF staff estimates.
From: Guo and N’Diaye, Is China’s Export‐Oriented Growth Sustainable; in “Rebalancing Growth in Asia: Economic Dimensions for China,” (2011).
0
“This manifests itself mainly in…[list]…imbalance between investment and consumption…”
Source: Staff estimates
“We will more quickly improve the social security system, and continue
to raise social security benefits. The basic pension insurance and basic
medical insurance systems will cover all urban and rural residents.”
From: Barnett and Brooks, Does Government Spending on Health and Education Raise Consumption; in “Rebalancing Growth in Asia: Economic Dimensions for China,” (2011).
“We will accelerate the development of the service sector and raise
its value-added contribution to GDP by 4 percentage points.”
Services Share of Employment, Model's Prediction vs. Actual for Selected
Countries
1.0
0.9
United States
0.8
0.8
0.7
0.7
0.6
Japan
0.5
Model's
prediction
0.6
0.5
Korea
0.4
0.4
0.3
0.3
China
0.2
0.2
0.1
0.1
0.0
0.0
0
10
Source: IMF staff estimates.
20
30
40
Per Capita Income (PPP)
50
60
15
15
Percent Deviation from Baseline
0.9
Share of Employment in Service Sector
China: Illustrative Employment Effects From Shift toward Nontradable
Sector and Lower Saving Rate
10
10
Nontradable
5
5
0
0
Total
-5
-5
Tradable
-10
-10
1
2
3
4
5
6
7
Years
From: Guo and N’Diaye, Employment Effects of Growth Rebalancing in China; in “Rebalancing Growth in Asia: Economic Dimensions for China,” (2011).
8
We will...develop a financial system that is comprised of diverse
organizations, provides efficient service, exercises prudent
oversight, and keeps risks within bounds.”
10
10
1-year nominal lending rate, %
1-year household deposits rate, %
8
8
1-year forward inflation rate, %
6
6
4
4
2
2
0
0
-2
-2
Jan-00
Jul-01
Jan-03
Jul-04
Jan-06
Jul-07
Jan-09
Jul-10
Sources: CEIC Data Co. Ltd; and staff estimates.
Rebalancing Closing Thoughts
“…Further expanding domestic demand, especially consumer demand.
Expanding domestic demand is a long‐tern strategic principle and basic standpoint of China's economic development as well as a fundamental means and an internal requirement for promoting balanced economic development.
We will actively boost consumer demand…”
This and other quotes in this section from Premier Wen Jiabao’s “Report on the Work of the Government” (March 5, 2011).
IV. Spillovers
Asia not immune from a global shock
Growth in the region would Through a variety of channels
slow sharply
44
China Stimulus Helps the Region
It boosts growth in emerging and advanced Asia
45
More dependent on China final demand = higher growth
Commodities
China share of imports increased sharply
As has its influence on prices.
Real appreciation
Has positive impact on growth, especially if done as package of reforms
And, similarly on current account, but impact is small
V. Financial sector reform
Liberalization often led to credit boom and crisis
And low real interest rates
Progress
Institutions
The Banks
 Splitting out the regulatory functions
into CBRC, CSRC, CIRC
 Strengthening regulatory oversight and
supervisory practices
 Moving toward international standards
in a range of areas
 Stripping out bad loans from the banks
 Strategic foreign investors to improve
internal practices
 Move to international accounting
standards
 Listing on foreign exchanges
49
Progress
Markets
Monetary Operations
 Developing corporate bond markets
 Creating a range of futures, swap, and
options markets
 Establishing interbank corporate bond
market with NAFMII oversight
 Deepening equity markets, increasing
liquidity, tackling nontraded shares
 Building out central bank bond market
 Establishing SHIBOR reference curve
 Creating interbank and repo markets
 Building a well-functioning foreign
currency market
50
But There’s More To Be Done
It is a long list but I want to focus on a subset
1.
2.
3.
4.
5.
6.
A stronger exchange rate
Rethinking the monetary framework
Improved regulation and supervision
Market development
Liberalizing interest rates
Opening up the capital account
51
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
52
2. Rethinking The Monetary Framework
 Absorb the excess liquidity in the financial system and
move to a point where interest rates clear the credit market,
not quantity controls
 Shift to a framework that establishes clear objectives on
growth, inflation, and financial stability and deploys a
combination of monetary and macro-prudential tools to
achieve these objectives
 A greater reliance on indirect instruments as intermediate
targets (perhaps the 7-day repo)
 Operational autonomy for the central bank
53
3. Improving Regulation and Supervision
Regulation and Supervision
Crisis Management Framework
 Establish a coordinating regulatory body
 Procedures for intervention and orderly exit of






(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



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 liquidity
support to all domestically incorporated
institutions
54
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
55
5. Liberalizing Interest Rates
 Once liquidity has been absorbed and monetary
policy is conducted by indirect instruments, then
the PBC can move to liberalize interest rates
 Raise deposit rate ceiling first, making the loan
rate floor more binding
 Need to ensure banks do not “over-compete”,
eroding their margins and creating financial
stability risks
 Will also need to calibrate monetary policy as
interest rate regulations become less binding in
order to prevent a surge in credit
56
6. Opening Up The Capital Account
 It would be extremely risky to begin opening to




international flows before addressing distortions in
the domestic system
Can make some progress along the way in opening
up to outward flows and longer-term inward flows
QDII and QFII are ideal tools for this
Shorter term portfolio flows will have to wait for
progress on currency and liberalizing interest rates
Renminbi internationalization can be a part of this
process but will move on a separate track
Outward Loans & Trade Finance
(US$ billions)
160
Trade Finance
Loans
160
120
120
80
80
40
40
0
0
2004
2005
2006
2007
2008
2009
2010
57
The End
 WWW Information
 http://www.imf.org/external/country/CHN/index.htm
 http://www.imf.org/external/country/chn/rr/index.htm
 Publications
 Article IV Report

http://www.imf.org/external/pubs/cat/longres.aspx?sk=25066.0
 Economic Outlook, Sep‐11 (See second link above)
 Spillover Report

http://www.imf.org/external/pubs/cat/longres.aspx?sk=25068.0
 FSAP

http://www.imf.org/external/pubs/cat/longres.aspx?sk=25350.0