Recently, I had the pleasure of participating in a CES-ifo workshop on “The Evolving Role of China in the Global Economy,” co-organized by Yin-Wong Cheung and Jakob de Haan. The conference agenda is here. The paper topics spanned issues ranging from monetary independence and integration into global financial markets, SOE access to credit and SOE efficiency, Chinese saving/consumption behavior, econometric models of China-global interactions, and the determinants of Chinese FDI in the rest-of-the-world.
Figure 1: Chinese reserves ex.-gold (blue, in billions of USD), and annualized Chinese trade balance (red, in billions of USD), and 12 month trailing moving average (maroon). Source: IMF, International Financial Statistics; and ADB.
Figure 2: Log USD/CNY CPI deflated exchange rate (blue), log real trade-weighted value of CNY from IMF (red), log real trade weighted value of CNY from BIS (green), all normalized to 2005=0. Note, USD/CNY and IMF series adjusted to use swap rates pre-1994. Source: IMF, BLS, ADB, BIS, and author’s calculations.
Listed here are the papers and abstracts (for those online):
- Keynote Lecture: The U.S., China and the Rebalancing Debate: The Impact of Academic Research, by MENZIE D. CHINN (University of Wisconsin)
- Chinese Monetary Policy and the Dollar Peg, by ULRICH VOLZ (German Development Institute) and JAMES READE (University of Birmingham). Abstract: In this paper we investigate the impact of China’s dollar peg on the conduct of Chinese monetary policy. In particular, we analyse to what extent Chinese monetary policy is constrained by the dollar peg. To this end, we use a cointegration framework to examine whether the Chinese interest rate is driven by the Fed’s policy. We find that there is indeed some dependence of Chinese interest rate movements on US rates, but that this relationship is not very strong, suggesting that China has been able to isolate its monetary policy to a certain extent from the US policy. In a second step, we estimate a monetary model for China, in which we include also other monetary policy tools besides the central bank interest rate, namely reserve requirement ratios and open market operations. Although modelling proves difficult (which is not surprising given the complexities of the Chinese monetary and financial system), our results suggest that the interest rate tool has not been effectively made use of, a further indication that monetary dependence on the US is indeed limited. Rather, monetary policy has relied upon open market operations for sterilising foreign exchange intervention and changes in the reserve requirement ratio to affect monetary growth. We therefore conclude that by employing capital controls and relying on other monetary instruments than the interest rate China has been able to exert relatively autonomous monetary policy. Nonetheless, we argue that the People’s Bank of China would be able to develop and pursue a more efficient monetary policy mix if it could make effective use of the interest rate tool, which at present is sidelined by the exchange rate peg.
Discussant: Iikka Korhonen (Bank of Finland)
- Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues by ROBERT N. McCAULEY (Bank for International Settlements) and Dong He (Hong Kong Monetary Authority). Abstract: We show in this paper that offshore markets intermediate a large chunk of financial
transactions in major reserve currencies such as the US dollar. We argue that, for
emerging market economies that are interested to see some international use of their
currencies, offshore markets can help to increase the recognition and acceptance of the
currency, while still allowing the authorities to retain a measure of control on the pace of
capital account liberalisation. The development of offshore markets could pose risks to
monetary and financial stability in the home economy, which need to be prudently
managed. Experience in dealing with the Euromarkets by the Federal Reserve and other
authorities of the major reserve currency economies show that policy options are available
for managing such risks.
Discussant: Lukas Vogel (European Commission).
- China’s Economic Transition, Integration and External Position, by LUKAS VOGEL. Abstract: This paper analyses the link between China’s economic transition and global integration and the country’s
external surplus and large international creditor position. It uses an extended multi-country version of the
QUEST III model (Ratto et al., 2009). The extensions are (1) a portfolio model that distinguishes gross/net
and private/government foreign asset holdings and (2) the modelling of exchange rate management in the
form of (sterilised) foreign exchange interventions. The paper selects a set of shocks that characterise
China’s recent economic development (TFP, labour supply, labour reallocation, investment incentives,
household savings, trade integration, foreign savings demand) and analyses their individual and combined
ability to match key stylised facts: (1) High GDP growth; (2) declining consumption and increasing investment
shares in GDP; (3) large current account surpluses; (4) the build-up of a large aggregate NFA
position, combining even larger foreign reserves of the central bank and negative net foreign asset holdings
of the private sector. None of the shocks is sufficient to individually match the domestic and external
dynamics, but the combination of domestic and “globalisation” shocks replicates them at least in qualitative
terms. Domestic supply shocks replicate high GDP growth and the shift in demand composition, while
“globalisation” shocks are essential to generate persistent external surpluses. The simulation results suggest
foreign savings demand to be an important driver of the external surplus and NFA accumulation.
Discussant: Andreas Steiner (University of Osnabrueck)
- Crisis, Capital Controls and Covered Interest Parity: Evidence from China in Transformation, by JINZHAO CHEN (EconomiX). Abstract: This paper aims to investigate the effectiveness of capital controls in China for both short-term and long-term, with a special attention to the period of financial turbulence bursted in the summer of 2007. On one side, we employ a two regime threshold autoregressive model to study the Renminbi yield differential between the onshore interest rate and the offshore Non Deliverable Forward-implied one for the period of 2006-2009; on the other side, we distinguish (and measure) the short-term cross-border capital flows from the long-term flows for a long horizon. Based on obtained evidence, we found the capital controls in China less effective, nevertheless, still working for some goals of Chinese government under a more opened capital accounts.
Discussant: Alessandro Rebucci (Inter-American Development Bank).
- If You Try You’ll Get By: Chinese Private Firms’ Efficiency Gains from Overcoming Financial Constraints, GALINA HALE (Federal Reserve Bank of San Francisco) and Cheryl Long (Colgate University). Abstract: It appears to be common knowledge that external financing in China is mostly limited to state-owned firms and is hard to obtain for smaller private firms. In this paper we first confirm that this is true in our data and then investigate ways in which private firms overcome their financing constraints. We find that private firms reduce their need for external funds through more efficient management of inventory and accounts receivable. We further show that low levels of inventory and account receivable in Chinese private firms are not below efficient levels and are unlikely to be a hindrance to their efficient operations. Instead, these low levels of working capital seem to be correlated with higher financial returns as well as higher productivity. We conclude that while limited access to external financing may limit the growth of private sector in the medium and long run, in the short run the lean operating budget may be contributing to private firms’ efficiency.
Discussant: Gunther Schnabl (Leipzig University).
- China’s High Saving Rate: Myth and Reality, GUONAN MA (Bank for International Settlements) and Wang Yi (People´s Bank of China). Abstract: The saving rate of China is high from many perspectives -historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors – corporate, household and government. Moreover, adjusting for inflation alters interpretations of the time path of the propensity to save in the three sectors. Our evidence casts doubt on the proposition that distortions and subsidies account for China’s rising corporate profits and high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewis-model transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.
Discussant: Juann H. Hung (Congressional Budget Office)
- Why Is China’s Saving Rate so High? A Comparative Study of Cross-Country Panel Data, JUANN HUNG (Congressional Budget Office) and Rong Qian (University of Maryland). Abstract: This paper use a large cross-country panel data to estimates models of national saving rates in order to address two related issues. First, to what extent does China’s saving rate exceed the projections of credibly estimated models of saving rates? Second, what are the factors primarily responsible for China’s extraordinarily high saving rates? We find that China’s national saving rate is higher than the predictions of our benchmark models by about 10 to 12 percentage points on average from 1990-2007, depending on whether China is included in the dataset. The predominant drivers of China’s high saving rates are its relatively low old dependency ratio. To a lesser extent, low urbanization, strong economic growth, and weak social safety net are also important factors responsible for China’s high saving rates. In comparison, high degree of currency undervaluation is a lesser contributor to China’s high saving. Some factors shared by East Asian economies – those underlying their high-saving-high-growth strategy – also appear to have contributed to China’s growth rate.
Discussant: Galina Hale (Federal Reserve Bank of San Francisco)
- Chinese Household Consumption Potential and Its Pulling Effect Evaluation, XIULI LIU (Academy of Mathematics and System Science, China Academy of Sciences), Shouyang Wang (Chinese Academy of Sciences) and Xikang Chen (Chinese Academy of Sciences). Abstract: An expansion of household consumption has been considered as a key role of China for responding to the recent world economic and financial crisis since 2008. In this paper, a model framework based on China 1992 and 2007 input-output tables is introduced, which initially forecasts household consumption value to evaluate the household consumption potential and its export substitute capacity of each sector. Secondly, the pulling effect of household consumption potential on the GDP and its consumption multiplier are estimated. Finally, it is addressed that an expansion of household consumption from the industrial level may be an appropriate policy remedy to respond the recent world economic and financial crisis.
Discussant: Ulrich Volz (German Development Institute)
- On the Transmission of Global Shocks to Latin America before and After China’s Emergence in the World Economy, ALESSANDRO REBUCCI (Inter-Amercan Development Bank), Ambrogio Cesa-Bianchi (Inter-American Development Bank), M. Hashem Pesaran (University of Cambridge), Cesar E. Tamayo (Inter-American Development Bank) and Teng Teng Xu (University of Cambridge). Abstract: External shocks are very important for Latin America’s economic performance as the recent global crisis vividly illustrated. At the same time, the global economy has undergone profound structural changes over the past three decades. This paper investigates how changed trade linkages between China, Latin America, and the rest of the world may be affecting the transmission of global shocks to Latin America. Preliminary evidence based on a GVAR model estimated with quarterly data from 1979(1) to 2008(2) for all major advanced and emerging economies of the world show that the impact of a global GDP shock on the typical Latin American economy may have halved between 1995-97 and 2005-07, due to the increased weight of China international trade in total trade for Latin America, the United States, and the euro area. Over the same period, we do not find evidence of increased impact of regional GDP shocks in Latin America or emerging Asia excluding China as the popular decoupling hypothesis would imply. These results suggest that one reason why these regions are doing so well in the aftermath of the global crisis is sheer “good luck”.
Discussant: Alexander Kadow (University of Glasgow)
- The Chinese Dollar Peg and Macroeconomics Stability in China and the World Economy, GUNTHER SCHNABL (Leipzig University).Abstract: During the 1997/98 Asian crisis and the 2007-2010 world financial and economic crisis, China has proved to be a stabilizer for East Asia and the world. The paper stresses the crucial role of the dollar peg for macroeconomic stability in China. The paper explores the current role of China’s nominal and real exchange rate stabilization as stabilizing factor for China, East Asia and the world economy. Distortions originating in real exchange rate stabilization are identified which may prove to be a risk for global longterm growth perspectives. To prevent further economic and financial turmoil the paper recommends policy coordination. The exit from unconventional low interest rate policies in the US combined with the end of real (but not nominal) exchange rate stabilization in China.
Discussant: Tara Sinclair (George Washington University)
- Permanent and Transitory Macroeconomic Relationships between China and the Developed World, by TARA SINCLAIR (George Washington University) and Yueqing Jia (George Washington University). Abstract: This paper applies a correlated unobserved components model to explore the relationships between the real output fluctuations of China with those of the developed world over the period 1978Q1-2009Q4. We focus on two measures of developed world output: aggregate real GDP for the G7 countries and aggregate real GDP for 30 OECD countries. The model allows us to distinguish correlations driven by permanent movements from those due to transitory movements. Although China has a low real GDP growth rate correlation with both the G7 and the OECD measures, the G7 and the OECD aggregates each provide important information for identifying the cyclical movements in China’s real GDP. In comparison, relatively little information is provided by China for the aggregate developed country fluctuations. This result is the reverse of the finding when examining the relationship between China and the US.
Discussant: James Reade (University of Birmingham).
- China’s Outward Direct Investment and Its Oil Quest, XINGWANG QIAN, (SUNY, Buffalo State College). Abstract: China has rapidly increased its global oil quest in order to meet energy demand that fuels its ongoing rapid economic growth. This exercise investigates the association between China’s outward direct investment (ODI) and its oil quest in oil producing countries. We study China’s foreign energy quest from two perspectives: the short run and the long run. In short run, China’s rapid economic growth and its deficient domestic oil supply push China’s ODI to promote trade and acquire foreign oil for its immediate needs; while in long run, a sustainable economic growth requires sustainable energy supplies. China’s ODI, a long term equity investment, could be a strategic policy to secure China’s energy supply in the long run. We therefore study China’s short term oil quest by examining the relation between China’s ODI and the economic-societal conditions of oil-rich host countries; and for the long term oil quest, we investigate the association between China’s ODI and the proved underground oil reserves in these host countries. In general, China’s inclination to invest in oil producing countries is heavily driven by its oil imports. Our results suggest that China’s ODI adopts a “latecomer” strategy — China tends to invest in, say African and Russia-Central Asian oil exporting countries, where there is a weak present of investment from large developed countries rather than in top oil exporting countries (in terms of the share of oil exports to total merchandise exports), such as the Middle East countries, where the corporations from the developed world have established a stronghold. The political risk factors play an important role in determining where China’s ODI goes; these risk factors include economic risks, internal and external conflicts, corruption, and law and order conditions. China’s ODI prefers safer economic condition and less unstable countries. Nevertheless, it goes to oil producing countries where there are more corruption and bad law and order. Moreover, when we study the long term perspective of China’s ODI in questing oil, we find that the proved oil reserve of oil producing countries affects China’s ODI. The result is quite intuitive — other things being equal, a country with a higher level of proved oil reserve has more oil to be extracted in the future. Investing in such a country provides China a better chance to maintain sustainable oil supply in the long run. Our results, indeed, indicate that China’s ODI is more likely to invest in a country having more proved oil reserves.
Discussant: Yu Shu (University of Groningen).
- China in Africa, by JAKOB DE HAAN (DNB), Yin-Wong Cheung (UCSC), Xingwang Qian (SUNY, Buffalo State College), and Shu Yu (University of Groningen).
Discussant: Bertrand Candelon (Maastricht University).
This last paper is not yet online. The authors use a panel data set on approvals by the Chinese government of outward FDI. They implement a two stage approach allowing accounting for selection bias; they use economic (GDP, per capita GDP, GDP growth), geographic variables, and political variables to model FDI flows, and find that political variables are important. (This is my interpretation of the paper).