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PRESENTED BY: ADITYA GUPTA ANANT AGARWAL ASHISH CHAUDHARY SAMIR KUMAR MOHIT BIDANI BIBEK SHARMA
China’s Economic Conditions
•Starting from economic reforms 30 years ago, China has become one of the world’s fastest-growing economies. •From 1979 to 2007 China’s real gross domestic product (GDP) grew at an average annual rate of 9.8%. •Real GDP grew 11.4% in 2007 (the fastest annual growth since 1994).
The Challenges China faces in 2008
China’s growth performance has been extremely good
• China has been the fastest growing economy in the world since 1979
– – – – Average growth of 9.7% over 1979-2006. 12% in 2007. Fastest not only in terms of total GDP but also in terms of GDP per worker, GDP per capita Inflation has been below 3% until recently
China in the World Economy by the end of 07
– – –
4th largest economy: US$ 3.6 trillion 3rd largest trading nation: US$ 2.17 trillion The largest foreign reserves holding country: US$1.6 trillion
Three major challenges
– The worsening in inflation – A significant slowdown of the economy – A possible collapse in asset prices
China’s current macroeconomic situation and possible policy
Subprime and slowdown of the Chinese economy
Impacts of the subprime crisis
• First, the write-downs of US securities have already caused direct losses to some Chinese financial institutions. • Second, psychological impact on China’s stock exchanges and led to falls in China’s share prices • Third, the credit crunch and falls in security prices in the US have created uncertainty in the direction of cross-border capital flows.
• Fourth, the growth rate of China’s trade surplus will fall significantly as a result of a US slowdown, which in turn will lead to a fall of China’s growth rate. • Fifth, The widening of Sino-American interest rate spreads and the possible surge of inflation in the U.S. are making China’s fight against inflation more difficult. • Sixth, the defaults of American borrowers, the devaluation of the US dollar and the rise in inflation in the U.S. are eroding the value of China’s foreign exchange reserves rapidly. How to preserve the value of a very big chunk of China’s national wealth is becoming
The nature of inflation
• In July 2007, inflation measured by headline CPI suddenly jumped to 5.6 percent. In the last two month it was 8.7% and 8.3% respectively. • Differences in the diagnoses of the nature of current inflation and hence the policy prescriptions among Chinese economists
– Cost push or demand pull ? Do nothing or economic tightening
Inflation worsened suddenly
But the increase in CPI was attributable mostly by food prices, especially by pork prices Waiting for piglets to grow up
The worsening of inflation is caused mainly by excess demand, which in turn is accommodated by a loose monetary policy
1. Growth rate vis-a-vis potential growth rate
– Individual price hikes vis-à-vis inflation (e.g. links between pork prices and overheating in real estate development) But not just a problem of controlling money supply Labour law Global inflation One-off supply-side shocks
2. Accommodating monetary policy
– – – –
3. Cost push factors
Growth rate vis-à-vis potential growth rate 8% or 12%
A jump from 8% to 12% ? Productivity arguments. Cyclical variation or trend change? The lag in inflation. Wolf
The two most important contributing factors to the surge of excess demand are • High growth rate of FAI
– Strong investment demand for real estate development .
• And rapid increase in exports.
High growth rate of fixed asset investment
1 0 iga te ion p ubl ic fa ci lit y min in g ch emi ca l s No nme tl e pro duc t ctr ic ele y Tr ans .e qui pm en t comm er c e elec tr oni c ser vic e s
Contribution by real estate development to the growth of FAI
4 3 2
7 Unit: %
Extremely large trade surplus
• Trade over GDP ratio: more than >70 % GDP • Trade surplus >8%, can be 10% • Contribution to GDP growth is more than 3 percentage points
Excess demand is not just a matter of domestic demand
• Because of the policy in favor of processing trade implemented for decades, more than 60 percent of China’s exports are aimed at foreign markets • Even in general trade sector ， due to strong global demand, and the competitive exchange rate,increase in exports are strong (e.g.steel) • As for the pressure on production capacity, there is no difference between domestic and foreign demands • More investment in exporting industries
Restoration of price stability will be difficult and time
• The most worrying aspect of current inflation is inflation expectations • among the public. Inflation expectations are changing the behavior The vicious circle of demand-pull—inflation—inflation expectations— cost-push—inflation—inflation expectations— demand pull has more or less established in China • competitive price hikes have become one of the most important ways for different social stratum to protect their incomes from being eroded by inflation
– enterprises raise the prices of their products without any economic justification. They just take preemptive actions to protect their own profit margins or use the opportunity to increase their profit margins
• Worsening international environment • The key is to break the vicious circle
Slowdown of the economy
• Taking into consideration the combined effect of
– monetary tightening – US slowdown – RMB appreciation,
• The slowdown of the Chinese economy should be less than 4 percentage points. In other words, despite unfavorable conditions, the Chinese economy still will be able to maintain a growth rate of more than 8 percent.
Instability of capital markets
• Share markets • Real estate markets
trebled in two years, p/e >60, the turnover once >all Asian markets put together and larger than London
Millions of millions retail players. To interven or not interven? That is a question.
The real estate bubbles
In big cities, such as Beijing, Shanghai, Shenzhen, prices are rocketing (more than 20 percent in recent years with ups and downs) How to interven? From supply side or demand side?
Consequences of collapse of asset prices
• Share prices crash: hold back reform for many years, social tension. • real estate prices: bank loans account for 70-80% of total finance in the sector—banks will be hit seriously
Sources of excess liquidity
• Excess liquidity: = money supply – money demand
– Sources of excess liquidity
• Supply side • Demand side
Supply side: China’s twin surpluses, intervention in FX market and accumulation of foreign exchange reserves
Demand side: reduction of demand for money
– Deposits are shifting away from banks into capital markets – Game is played mainly in the secondary market – Becauce of
• Negative real interest rate • Higher return in equity market and real estate market
– It seems that the situation has been changing recently.
• Deposits are increasing • Capital markets are cooling, could collapse
– Selling central bank bills – Raising reserve requirements
• Increase interest rates on loans and deposits
0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 央行票据 在商业银行资产中的占比（%）
20 05 . 20 01 05 . 20 02 05 . 20 03 05 . 20 04 05 . 20 05 05 . 20 06 05 . 20 07 05 . 20 08 05 . 20 09 05 . 20 10 05 . 20 11 05 . 20 12 06 . 20 01 06 . 20 02 06 . 20 03 06 . 20 04 06 . 20 05 06 . 20 06 06 . 20 07 06 . 20 08 06 . 20 09 06 . 20 10 06 . 20 11 06 .1 2
Central bank bills/total assets rate is increasing steadily
r ese rve req uire me nts are incr easi ng
The results of China’s sterilization policy: growth of the monetary base is more or less normal
Limitation of sterilization
• Impacts on banks • Losses made by the central bank • others
Interest rate policy and its limits
• Stabilize demand for money
• Avoiding credit rationing • Impacts on pensioners and mortgage borrowers • Impacts on commercial banks • Capital inflows （ carry trade)
– last year, excess liquidity, asset bubbles and inflation all related to the decrease in demand for money
• Freedom of interest rate policy depends on exchange rate regimes
– In the first quarter of 2008, China’s capital inflows were more than 27 billion US dollars, an increase by 61% over the first quarter of 2007.
Exchange rate policy
1. to restore peg to the dollar 2. to appreciate slowly (3%-5% a year) 3. to continue the gradualist appreciation but with faster pace (7%-10%) 4. to appreciate in step-jumps 5. to float the RMB in one go 6. here what I can say is that the choice of a specific way of RMB appreciation should take into consideration its impacts on inflation, inflows of hot money, trade imbalances and employment
• The impact of the international financial and economic turmoil on China’s economy has been manageable so far, but is expected to intensify. • Domestic factors have already made China’s economy slow down in 2008, coming off its high pace in 2007.
• Against this background, the authorities have adopted a more expansionary macroeconomic stance, and higher governmentinfluenced spending is going to play a key role in 2009. • China’s economy has slowed down considerably in the first 10 months of 2008.
• Over the past year, the impact of the international financial turmoil on China’s economy has been manageable.
• The government announced the outlines of a large package to stimulate growth and employment. At the same time, the government formally changed the fiscal stance from “prudent” to “active” and the monetary policy stance from “moderately tight” to “moderately easy”. • As underscored by the package, fiscal policy is set to play an important role in supporting growth. And it can, since, unlike in many other countries, with a strong fiscal position and sustainability, there is less need to worry about the negative
• With the plan, the government identified measures in 10 areas to boost domestic demand and growth in 2009 and 2010. • The package has secured and in many cases speeded up the execution of investment projects.
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