That was the title of a conference in Beijing (October 21st), organized by the Central University of Finance and Economics (CUFE), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), and the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) . I had the privileged of delivering a keynote speech. The conference agenda is here, and encompassed three sessions: Global Liquidity — Consequences and Policy Options; Dealing with International Capital Flows; and a panel forum on International Capital Flows and the International Monetary System.
Figure 1: Current account to GDP ratios for BRICs. Gray shading denotes forecasts. Source: IMF, WEO, September 2011.
The eminent Chinese macroeconomist Yu Yongding gave the first keynote speech. The main points, regarding the current macroeconomic outlook (with particular reference to inflation), were highlighted in news accounts [People’s Daily]. From my perspective, the most important points were elsewhere in the speech.
It can be seen that rebalancing the Chinese economy is not just a simple matter of exchange rate policy. Instead, it involves comprehensive adjustment of a policy regime consolidated over the past 30 years. More importantly, the adjustment inevitably will encounter fierce resistance from various interest groups that have established themselves during the long-drawn process of gradualist reforms over the past 30 years. But China must make the necessary adjustment and shift its growth paradigm from investment and export-driven to a balanced and innovation and creation-based growth.
It is clear that China should have brought to an end to the endless piling up of foreign exchange reserves long time ago. There have been two basic approaches for achieving this objective. The first approach is to reduce current account surplus indirectly via narrowing the saving-investment gap. The second one is to reduce current account surplus directly by dismantling trade promotion policy, such as abolishing tax rebate and allowing renminbi to appreciate. China has tried the two approaches at the same time with a very cautious fashion. …
Hence, China is faced with a stark choice between bearing increasingly large capital losses in its foreign exchange reserves and tolerating immediate losses in terms of significant drop in current account surplus and large revaluation losses. Certainly, neither choice is pleasant. However, this is the bitter fruit of China’s past hesitating and dithering and it has to swallow now.
I found these views of great interest; like those of Yi Gang (October 2010 IMF Seminar), there is a clear recognition that adjustment to a new growth model is required. But it is also clear that recognition and understanding of the solution to a problem by the technocrats is not sufficient to induce effective action (of course, such outcomes are not restricted to China; after all, we know in the United States we need short term fiscal and monetary stimulus combined with long term fiscal consolidation, but certain groups wield veto power over implementation.)
My presentation was fairly conventional, citing the medium term outlook for global rebalancing, based on work with Barry Eichengreen and Hiro Ito, and focusing on how the accentuation of the two speed recovery has increased the strains on rebalancing. I also warned about the new infatuation with capital controls as a means of stemming capital inflows, given our lack of knowledge of precisely what does and doesn’t work (see e.g., ).
In the first panel, Ulrich Volz (DIE) presented preliminary work on how global liquidity, essentially measured as weighted monetary aggregates, affected commodity prices, using cointegration techniques. Zhang Liqing (Dean of CUFE School of Finance) and Huang Zhigang reported results (Granger causality tests) indicating that there was little evidence that “hot capital” inflows (using their preferred measure of hot capital) were responsible for the housing price boom (the credit surge of 2009 was tagged as the critical variable). Krishna Srinivasan of the IMF presented the perspective from the IMF’s Mutual Assessment Process (MAP) regarding global imbalances.
In the second panel, details about how the Chinese monetary and regulatory authorities managed their respective spheres were covered; Bu Yongxiang (PBoC) and Zhang Xiaopu (China Banking and Regulatory Commission), respectively, presented. Bernd Braasch from the Deutsche Bundesbank surveyed the state of the art in the monitoring of global capital flows. Among other points, he advocated the German position in opposition against capital controls. He also noted the hazards of measures that lessen the disciplining effects of the markets, with special reference to the development of a “financial safety net”. Finally, Yung Chul Park argued that the liberalization efforts in the post-East Asian crisis period had done little make the Korean economy more resilient in the face of the 2009 global recession, citing the massive won depreciation that took place.
In his comment, Gunther Schnabl (University of Leipzig) argued, based on a saving-investment model of current account imbalances, for the US to raise policy rates (rather than the CNY to be appreciated). In his view, this would eliminate malinvestment. Given the low likelihood of such a policy outcome, he proposed that Europe and China cooperate to effect global adjustment.
Overall, this was a great opportunity for me to see a variety of alternative perspectives on the topics of dealing with capital inflows, the efficacy of capital controls, the need (or non-need) for structural reforms/market liberalization, and (of course) the efficacy of exchange rate changes in effecting global and national rebalancing. Those interested in these issues should take a look at the presentations and papers.
Update, 10/30, 6PM Pacific: Link to article on the conference here (in Chinese).