the renminbi unpegged - macroeconomics of china
TRANSCRIPT
THE RENMINBI UNPEGGED
A MACROECONOMIC VIEW OF CHINA
THE RISE OF THE WORLD’S BIGGEST EXPORT ECONOMY
Diverse geography
Four Modernizations
Introduction of capitalist market principles
ECONOMIC INDICATORS AT 2005
GDP growth
11.3%
Inflation
4%
Real interest rates
1.59%
Unemployment
9.8%
FDI
4.61%
Current account
5.87%
PRESSURES PUSHING POLICY CHANGE
EXCESSIVE LIQUIDITY
EXTERNAL
High Foreign Reserves
Artificial Competition
INTERNAL Overheating
Economy
InflationCAUSES
Cheap Exports
Monitored Peg
POLICY CHANGE OBJECTIVES
•Building of reserves in an effort to maintain Yuan peg
•Investments focused away from social policies
EXCESSIVE FOREIGN CURRENCY HOLDINGS
•Huge trade surpluses as a result of competitive exports
•High liquidity, especially in the banking sector
OVERHEATING ECONOMY
•Artificial competitiveness – Undervalued Yuan
•Currency manipulator
INTERNATIONAL TRADE RELATIONS
•Social disparity between rural and urban work force
•Concern about lay-offs in case of export demand decreasesUNEMPLOYMENT
•Concerns regarding the rise of inflation
•Purchase Power Parity and discourage importsPRICE STABILITY
POLICY TOOLSFIS
CA
L Neutral policy
Shift from pro-active policy applied till 2004
Advances in reforms
Curbing of expenditure
MO
NETA
RY Restrictive policy
Stabilize the currency in world markets
Promote healthy domestic economy expansion
TRA
DE Open market
policy
Maintain global competitiveness
Increase domestic market consumption (reduce saving)
LAB
OU
R &
IND
USTR
IAL Manufacturing
oriented
Mediate occupational and geographic mobility
Transfer towards urban employment
OVERHEATING ECONOMY
INTERNATIONAL TRADE RELATIONS
UNEMPLOYMENTPRICE STABILITY
PEG PROGRESSION TIMELINE
PEG PROGRESSION TIMELINE
PEG PROGRESSION TIMELINE
GDP: POTENTIAL VS. REALIZED
PR
ICE
GDP
AD '05 AD short run
AS '05 AS short run
GDP*
THE UNPEGGING
Short term impact
PR
ICE
GDP
AD '05 AD short run AD long run
AS '05 AS short run AS long run
GDP*
THE UNPEGGING
Long term impact
ECONOMIC INDICATORS POST UNPEG
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2005 2006 2007 2008 2009 2010 2011 2012
GDP
Real interest rate
Inflation
Current account
ECONOMIC INDICATORS POST UNPEG
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2005 2006 2007 2008 2009 2010 2011 2012
GDP
Real interest rate
Inflation
Current account
ECONOMIC INDICATORS POST UNPEG
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2005 2006 2007 2008 2009 2010 2011 2012
GDP
Real interest rate
Inflation
Current account
5
10
15
20
2005 2006 2007 2008 2009 2010G
RO
WTH
GDP GROWTH
MANUFACTURING
MANUFACTURING DRIVEN GDP
OverrelianceGrowing over potential:• Unhealthy levels of inflation• Artificial stimulus• Over supply
WAY FORWARD TO A SUSTAINABLE ECONOMY
•Focus on R&D and innovation driven ventures.
•Reform the financial system
•Develop the contribution of services to growth
SHIFT AWAY FROM MANUFACTURING
•Long term structural changes to boost demand
•Policies to shift toward a more open market economy
INCREASE CONSUMPTION
•Aging population demographic reduces the TFP
•Stimulate workforce participation
REALIGN POPULATION
POLICY
QUESTIONS