International Monetary FundMay 18, 2016

China’s Rebalancing and External Sector Adjustment

Maurice ObstfeldEconomic Counsellor

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Real consumption Nominal consumptionReal investment Nominal investment

2016

Consumption and investment shares(percent of GDP)

Real GDP growth (percent; year-on-year)

Sources: Haver Analytics, and IMF, World Economic Outlook.

China: Slowing down and rebalancing

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Primary Industry Services

GDP by Production(percent of GDP)

Source: Haver Analytics.

Service sector becoming more important

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Industry (including construction) Services

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Employment by Sectors(percent of total employment)

China: Current account surplus(percent of GDP; four quarter rolling sum)

Source: Haver Analytics.

Strong domestic demand has helped reduce external balance

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Goods balance Travel balance Other Current account

17Q1

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Value of foreign currencies against the yuan(index; 2000 average=100)

Source: Haver Analytics.

Gradual shift toward greater currency flexibility

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Nominal effective exchange rate U.S. dollar per Yuan

5/9

Appreciation of Yuan

Change to paritysetting

4

Announcement of CFETS

basket reference

De facto USD weight in RMB basket vs. NEER 1/

Exchange rate(China renminbi per U.S. dollar)

Sources: Bloomberg, L.P.; Haver Analytics; IMF, Global Data Source ; and IMF staff calculations.1/ Shaded region corresponds to 95 percent confidence bands around basket-weight estimate.

Recent changes in the currency regime

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CNH, offshore CNY, onshore Central parity

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US NEER China NEER USD basket weight (rhs)

Aug. 11,2015

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Foreign Exchange Accumulation and Intervention(billions of U.S. dollars)

Sources: Bloomberg, L.P.; and CEIC.

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Foreign exchange accumulation (BoP) Foreign reserve (monthly; RHS)

17Q1

Reserves have fallen since 2014

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Capital flows also play an important role

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Record capital outflows

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Current account Net FDI Net capital flows (excluding official reserves)

17Q1

Current and capital account(percent of GDP, four quarter rolling sum)

Source: Haver Analytics.

RMB implied 1-year appreciation/depreciation(percent)

Sources: Bloomberg L.P.; and IMF staff calculations.

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1-year onshore 1-year NDF

Appreciation

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Drivers (I): Carry trade inflows stop with depreciation expectations

Corporate credit: High level relative to peers 1/(selected economies; 2014)

Source: CEIC Data Company Ltd.; IMF, World Economic Outlook and IMF staff estimates1/ Luxembourg and Hong Kong SAR not shown; these have corporate credit-to-GDP ratios and GDP per capita of (118.2, 413.6) and (40.1, 216.6), respectively.2/ Calculated as total social financing minus equity, LGFV and household loans.

Drivers (II): Rising concern about the health of financial sector and slowdown in GDP growth

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China: Real GDP Growth(percent, year-on-year)

South Africa

Ireland

Turkey

Sweden

SingaporeSwitzerland

KoreaFinland

Poland

Greece

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Norway

Indonesia

Mexico

Hungary

Japan

Thailand

Euro area

Netherlands

Brazil

Russia

Italy

United States

Germany

Denmark

Argentina

Australia

Spain

United KingdomMalaysia

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GDP per capita (USD thousand)

China ‘07

China ‘16 2/

China ‘14

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Drivers (III): Continued anti-corruption campaign and changes in the enforcement of capital controls

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Court cases oncorruptionconcluded

Officials foundguilty on those

cases

Investigation oncorruption cases

Sources: Supreme People’s Procuratorate; IMF, Balance of Payments database; and IMF, World Economic Outlook.10

Anti-corruption efforts: more court conclusions and less new investigations(number in thousands (lhs) and in percent year-on-year growth (rhs))

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Inward Outward

16Q4

Foreign direct investment(percent of annual GDP)

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Fixed withcap controls

Fixed withoutcap controls

Floating withcap controls

Floating withoutcap controls

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Chinese reserves well above relevant adequacy ratios(U.S. billions)

Net capital inflows to EMs(U.S. billions)

Sources: Haver Analytics, and IMF, World Economic Outlook.

Net inflow reversal and reserves still ample in China

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China EM (Excl. China) Total

Feb-17

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Chinese Reserves at end-March 2017

Process not over – Rebalancing still under way

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Saving

Orange dots are East Asian economies

ChinaPanama

Qatar

Equatorial Guinea

Suriname

China is major outlier in saving and consumption(percent of GDP, 155 countries)

Investment and saving(percent of GDP)

Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff estimates.

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Current account (rhs) National saving Investment

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Excess saving

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Higher saving, particularly at lower income deciles

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Household Income Decile

Slovenia 2010 France 2010 Taiwan POC 2013 Australia 2010 Serbia 2013Israel 2012 Peru 2013 Mexico 2012 South Africa 2012 China 2013

Average household saving rates, per income deciles(In percent)

Sources: Luxemburg Income Study (LIS), and Chinese Household Income Project (CHIP) for China.

Spillovers to EMDEs: Chinese foreign asset appetite, along with trade, resulting in large exposures to China

Chinese banks’ claims, 2016Q2 1/ 2/(percentage of borrower country’s GDP)

Exports to China, 2015 1/(percentage of exporter country’s GDP)

Sources: Bank for International Settlements; and IMF, Direction of Trade Statistics.1/ The 3 countries with largest financial/trade exposures to China in each region are depicted in red.2/Estimates for 2016Q2 based on the differences between two vintages of BIS Locational Banking statistics for the same quarter (one vintage before and the other after China and Russia were included as BIS reporting countries in November 2016).

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China among most closed in OECD(OECD’s product market regulation (PMR) index)

Source: OECD.Note: The PMR index assesses degree to which policies promote competition in the product market. Policies assessed include state control of business enterprises; legal and administrative barriers to entrepreneurship; and barriers to international trade and investment.

Chinese economy is heavily managed

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China, OECD and EMDEs: Import Breakdowns, 2015(percent of GDP)

Source: OECD STAN Bilateral Trade Database in goods.

And has relatively few final consumption imports

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Intermediate Household consumption Capital goods Mixed end-use Miscellaneous

Summary and policy recommendations

Excessive saving is problematic for macroeconomic stability• Allocating a higher share of income to consumption could both increase welfare and support growth

in a less debt-intensive way

• Given home bias and capital account restrictions, high saving translates into excessive domestic investment which is unlikely to be absorbed efficiently

• The fall in inefficient investment, without an increase in consumption, would widen the current account surplus, worsening global imbalances and undermining the multilateral trade system

Better macro-policy mix should play a key role in the transition• The current fiscal stance uses up limited fiscal space to support unsustainable growth

• A modest removal of monetary policy accommodation is justified by the growth and inflation outlook, and financial stability concerns

• Progress toward a more flexible exchange rate should continue17