Download China Article IV Consultation

Carnegie Endowment for International Peace
September 16, 2011
Nigel Chalk
International Monetary Fund
1
Motivating Financial Reform
At a time when China faces fundamental
changes in the economic environment
There is a risk that macroeconomic
control may be increasingly diluted
Social Financing
(In trillion RMB)
16
16
Other
Equity
12
Corporate bonds
12
Bankers' acceptances
Trust loans
Bank loans
8
8
4
4
0
0
2006
2007
2008
2009
2010
2011Q1
 Demographic changes
and potential for rise in
labor costs
 Continued inflationary
pressures from food
 Property price inflation
 Growing non-bank
channels of
intermediation
 A waning influence of
credit controls
2
Motivating Financial Reform
In part because households are
getting short-changed on their share
of the returns to capital
Catalyzing consumption is
constrained by low household
income
Average Consumption Expenditure, 2004-10
Distribution of the Returns to Bank-Intermediated Capital
(real returns, in percent)
(Industrial countries and emerging markets)
8
Private consumption (% of GDP)
100
8
Corporate Sector
Banks
Depositors
Total Return to Capital
100
6
80
80
60
6
4
4
2
2
40
0
0
20
-2
60
40
China
20
0
10
20
30
40
50
GDP per capita (US$ thousands)
60
70
-2
China
India
Japan
Korea
UK
US
3
Motivating Financial Reform
But unsuccessful cases elsewhere
have resulted in an unintended
loosening of credit conditions…
…a fall in real interest rates,
overheating, and sometimes
financial crisis
Real Interest Rates
Private Credit (percent of GDP)
(In percent; 3 year average, post-interest rate liberalization)
(T = time of interest rate liberalization, normalized to equal 100)
235
10
Date of banking crisis
10
235
Argentina (1977)
5
195
Thailand (1990)
Norway (1985)
195
0
Finland (1986)
155
155
Sweden (1983)
115
115
75
75
T
T+1
T+2
T+3
T+4
T+5
T+6
T+7
5
Argentina
(1977)
Chile
(1974)
Mexico
(1994)
Australia Belgium
(1981)
(1986)
Canada
(1980)
0
-5
-5
-10
-10
-15
-15
4
Sequencing Matters
Strategy should remain flexible—there will be unanticipated
events—but with a roadmap :
1. A stronger exchange rate
2. Rethinking the monetary framework
3. Improved regulation and supervision
4. Market development
5. Liberalizing interest rates
6. Opening up the capital account
5
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
6
2. Rethinking The Monetary Framework
 First, absorb excess liquidity in
the financial system and move
to a point where interest rates
clear the credit market, not
quantity controls
 With greater exchange rate
flexibility and likely instability in
monetary aggregates, China
will need an alternate monetary
policy approach
 Shift to a framework that
establishes clear objectives on
growth, inflation, and financial
stability and deploys a
combination of monetary and
macro-prudential tools
7
3. Improved Regulation and Supervision
Regulation and Supervision
 Establish a coordinating
regulatory body (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
Crisis Management Framework
 Procedures for intervention
and orderly exit of 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
8
liquidity support to all
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
9
5. Liberalizing Interest Rates
 Once liquidity has been
absorbed and monetary policy
is conducted by indirect
instruments, can move to
liberalize interest rates
 Raise deposit rate ceiling first,
making loan rate floor more
binding
 Need to ensure banks do not
“over-compete”, eroding their
margins and creating financial
stability risks
 Adapt monetary policy as
interest rate regulations
become less binding to prevent
7-day Repo rate
1-year deposit rate
1-year lending rate
1-year PBC paper rate
8
8
6
6
4
4
2
2
0
2005
0
2006
2007
2008
2009
2010
2011
10