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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!