Comments on Professor Yu’s Paper
The Global Financial Crisis and China’s Policy Responses
C. H. Kwan Consulting Fellow
RIETI
Global imbalance and the RMB issue
How to reduce the current account surplus
Current account as the gap between savings and investment
Raising consumption as the key to reduce current account surplus
China’s transition to a floating rate regime
The need to restore autonomy in monetary policy
Similarity between China now and Japan in the early 1970s
-10 0 10 20 30 40 50 60
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
China’s savings China’s investment
U.S. savings U.S. investment
U.S. current account balance China’s current account balance (Ratio to GDP, %)
(Year)
Changes in current account balances in China and the United States reflecting the savings- investment balance
Note: Current account balance ≒ savings – investment
0 10 20 30 40 50 60 70 80
United States Philippines Indonesia Hong Kong Taiwan Japan South Korea Thailand Malaysia Singapore China
(%)
International comparison of private
consumption in relation to GDP (2007 figures)
Source: Official statistics for China, Japan, and the U.S.; Asian Development Bank (ADB) Key Indicators for Asia and the Pacific, 2008 for other countries and regions
20 25 30 35 40 45 50 55
86 88 90 92 94 96 98 00 02 04 06 08 (%)
Rural-to-urban income ratio (%)*
Private consumption
as a percentage of GDP (%)
Dwindling private consumption amid
widening income disparities
Redressing China’s regional disparities
Domestic FTA
Dismantling barriers impeding the mobility of labor (e.g.
household registration system), goods, and capital to form a unified domestic market
Domestic Flying Geese
Investment flow from high-income to low-income regions
Domestic ODA
Japan’s local allocation tax as a model
11.6% on average 9.1% on
average 8.9% on
avarage
-5 0 5 10 15 20
Shanghai Zhejiang Guangdong Beijing Fujian Hebei Hainan Shandong Jiangsu Liaoning Tianjin Shanxi Henan Heilongjiang Jiangxi Hubei Jilin Anhui Hunan Gansu Xinjiang Ningxia Yunnan Qinghai Guizhou Tibet Shaanxi Chongqing Sichuan Guangxi Inner Mongolia
(Year-on-year, %)
Higher growth rates in Western
China (first half of 2009)
-500 0 500 1000 1500 2000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Net errors and omissions Capital account
Current account
Foreign exchange reserves
Rise in foreign exchange reserves ($ billion)
(year)
China's rising “twin surpluses” and foreign exchange reserves
Note: Increase in foreign exchange reserves = current account balance + capital account balance + errors and omissions.
Source: State Administration of Foreign Exchange http://www.safe.gov.cn/
Need to move to a more flexible exchange rate system
Twin surpluses as the direct result of the
government’s efforts to maintain an undervalued RMB
China moved to a managed floating system in July 2005, but has returned to the dollar peg system as an emergency measure
Moving to a floating rate system needed to restore monetary independence (given rising capital mobility)
Keeping exchange rate fixed to the dollar will
Free Capital Mobility
Independent Monetary Policy
Fixed Exchange
Rate Examples
Capital Controls No Yes Yes (before July 2005)China
Monetary Union Yes No Yes Hong Kong, EU
Free Floating Yes Yes No Japan, Australia
The “impossible trinity" in international finance
Source: Created by author
