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The Chinese Economy

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					       The Chinese
        Economy




                     ECON 522
                     Ahmed Alabbadi
                     Pei Yu Shih (Jennifer)
                     Salah Alsayaary
04/26/2007                                    1
                         Chinese
                         Economy




      Overview           Monetary Policy                 Other
• Growth in GDP        • Monetary Instruments   • Exchange Rate Policy
• Foreign Investment   • Inflation              • Asian Financial Crisis
• WTO Impact                                    • Capital Control
• Fiscal Reforms
• Current Account


04/26/2007                                                                 2
               Miraculous Growth:
             Asian Paradigm for Development

Competitive (Cheap) Unemployed Labor
 Absorbed into Manufactured Sector




04/26/2007                             3
                           Growth in GDP
                                    USD (Billions)

             85-05 (14%)
              06-10 (8%)




04/26/2007                                      4
                                         Why,…
 China’s economy grew at 10.2% in the 1st Q in 2006
  (highest record since 2003)
 Investment-led growth (easy lending from Chinese
  banks)
 Export-led growth (undervalued Chinese currency),
 →↑demand for Chinese goods & export
 →↓demand for US’s goods & export
 →↑US trade deficit with China


04/26/2007                                             5
                                       Also, Why,….
 More rapid output and productivity growth in agriculture
 Higher rate of growth of manufactured exports
 Creation of a business-friendly environment : legal and
  regulatory structure that was generally hospitable to private
  investment
 The building and growing of human capital
 Increasing of savings and investments
 Higher growth rate in physical capital with higher rates of
  domestic savings
 Declining income inequality
 The openness to foreign technology
 Promoting specific industries
04/26/2007                                                        6
                Foreign Investment
 Rapidly increasing foreign investment since entry to WTO

 China experienced an increase of 22.55% in foreign direct

    investment one year after WTO entry

 The largest foreign investment destination in the world

 Low cost labor and vast market created more profits




04/26/2007                                                  7
                      Foreign Direct Investment in Mainland China 1984 - 2004 (in billion US$)

$65

$60

$55

$50

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
      1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004



      04/26/2007                                                                                          8
     WTO Impact on Economy
 GDP grew by 7.9% the following year after entering WTO
 Increase of 18.4% in trade volume with the United States
  after one year
 China’s exports increased by 19.7% after one year
 China became the 4th largest trade body in the world
  behind only the United States, EU and Japan




04/26/2007                                                   9
                                     Fiscal Reforms
     No market price, no market economy
     Price policy reform
         First phase (1978 -1984)
                No market pricing mechanism
                Government raised prices of good in shortage and decreases
                 prices of good in surplus
                Decrease the differences between planed prices and market
                 prices
         Second phase (1985-)
                Gradually allow market pricing
                Dual-track price system;Prices of goods within the state plan
                 were controlled while prices outside the state plan are decided by
                 the market
                By 1996, 93% of retail goods, 79% of agricultural goods, 81% of
                 production factors were priced by markets
04/26/2007                                                                       10
      Fiscal Reforms and Work
 Replacement of appropriating profits with taxing profits
   -- 1983 – 1984
 Fiscal contracting with the provinces
   -- mid-1980s
 Division of the tax-collection system
   -- two-tier tax collection system
   -- 1994
Chinese government:
 Address its trade surplus by ↑imports and domestic
  demand ,↓export tax rebates.
 Integrate corporate taxes paid by F and D firms
 ↑Interest rates

04/26/2007                                                   11
           The Current Account
 Chinese accession to the WTO is likely to increase imports more than exports in the
  short and intermediate runs, thus resulting in an eventual decrease in its net trade surplus.
 Rapid increases in oil imports also foreshadow a significant narrowing of the trade
  surplus in the future.
 China has net inflows of foreign direct investment of approximately US$52.7 billion a
  year.
 Errors & Omissions, normally a large negative item, reflecting capital flight and other
  leakages have been declining in absolute magnitude very rapidly.
 It appeared that China can, at this time, afford to run a current account deficit
   -- avoid an over-accumulation of foreign exchange reserves,
   -- lower domestic money supply
   -- reduce external pressure to appreciate the currency.
 A stable exchange rate also requires stable expectations, which in turn depends on the
  ratio of short-term liquid and liquefiable liabilities to foreign reserves.


04/26/2007                                                                                  12
04/26/2007   13
                            Mainland China's Exports & Imports 1978-2004 (billion US$)

 600




 500




 400




 300




 200




 100




  0
       1978   1980   1982    1984       1986   1988   1990   1992   1994   1996    1998     2000   2002   2004

                              Exports                                             Imports

04/26/2007                                                                                                  14
             China’s Economy

                   Monetary Policy




04/26/2007                      15
         Monetary Policy Instruments

Open Market Operations (OMO)
Reserve Requirements Ratio (RRR)
Interest rates controls
Window guidance



04/26/2007                          16
         Monetary Policy Instruments
Open Market Operations (OMO)
Reserve Requirements Ratio (RRR)
Interest rates controls
Window guidance




04/26/2007                          17
         Monetary Policy Instruments
Open Market Operations (OMO)
Reserve Requirements Ratio (RRR)
Interest rates controls
Window guidance




04/26/2007                          18
                     Required Reserves Ratio
                                                 source : the PBC
             Year            Required Reserves Ratio

             2000                      6

             2001                      6

             2002                      6

             2003                      7

             2004                      7.5

             2005                      7.5

             2006                      9

       2007 (Apr.)                    10.5

04/26/2007                                                    19
   Reserve Requirements Ratio (RRR)

                           Reserves Required Ratio
       %




    12.5
      10
     7.5
       5
     2.5
       0




                                                                   2007(Apr.)
             2000



                    2001



                              2002



                                     2003



                                            2004



                                                     2005



                                                            2006
      Year




04/26/2007                                                                      20
    Monetary Policy Instruments
Open Market Operations (OMO)
Reserve Requirements Ratio (RRR)
Interest rates controls
Window guidance




04/26/2007                          21
                Interest rate movements
Year         Bank Rate   Deposit Rate   Lending Rate



2000           3.24          2.25           5.85

2001           3.24          2.25           5.85

2002           2.70          1.98           5.31

2003           2.70          1.98           5.31

2004           3.33          2.25           5.58

2005           3.33          2.25           5.58

2006           3.33          2.52           6.12

Mar.07         3.33          2.79           6.39
04/26/2007                                             22
   Monetary Policy Instruments
               %
                                   Interest rates movments

              15

             12.5

              10

              7.5

               5

              2.5

               0
                     2000


                            2001


                                        2002


                                               2003


                                                         2004



                                                                 2005


                                                                              2006



                                                                                       (March)
                                                                                        2007
              Year




                                   Bank Rate      Deposit Rate          Lending Rate


04/26/2007                                                                                       23
    Monetary Policy Instruments
Open Market Operations (OMO)
Reserve Requirements Ratio (RRR)
Interest rates controls
Window guidance




04/26/2007                          24
             China’s Economy

                 Inflation



04/26/2007                     25
                            Inflation
                              Source:IMF(Apr. 07)




                                                           CPI (2000=100)
                                    Inflation

CPI     110



        105



        100



         95
              2000




                     2001




                             2002




                                            2003




                                                    2004




                                                               2005




                                                                            2006
 Year




04/26/2007                                                                         26
                                               Inflation
                                                       Source:IMF(Apr. 07)




                                      Inflation (annual percent change)

    30
    25

    20
    15
    10
     5

     0




                                                                                                                                 2007 (Apr.)
          1990
                 1991
                        1992
                               1993
                                      1994
                                             1995
                                                    1996
                                                           1997
                                                                  1998
                                                                         1999
                                                                                2000
                                                                                       2001
                                                                                              2002
                                                                                                     2003
                                                                                                            2004
                                                                                                                   2005
                                                                                                                          2006
     -5




04/26/2007                                                                                                                                     27
                                                    Exchange Rate (Yuan/USD)

                     Ja




                                  7.4
                                        7.5
                                              7.6
                                                     7.7
                                                           7.8
                                                                 7.9
                                                                               8.1
                                                                                     8.2
                                                                                           8.3
                                                                                                 8.4




                                                                           8
                        n-
                     Fe 05
                        b-




04/26/2007
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                       ar
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                     A 05
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                          -
                     M 05
                      ay
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                     Ju 05
                        n-
                            0
                      Ju 5
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                     A 05
                      ug
                          -
                     S 05
                      ep
                          -
                     O 05
                       ct
                          -
                     N 05
                      ov
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                     D 05
                       ec
                          -
                     Ja 0 5
                        n-
                     Fe 06
                        b-
                     M 06
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                     A 06
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             Month
                     M 06
                      ay
                          -
                     Ju 06
                        n-
                            0
                      Ju 6
                         l-
                     A 06
                      ug
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                     S 06
                                                                                                       Exchange Rate (2005 - 2007)




                      ep
                          -
                     O 06
                       ct
                          -
                     N 06
                      ov
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                     D 06
                       ec
                          -
                     Ja 0 6
                        n-
                     Fe 07
                        b-
                     M 07
                                                                                                                                     Exchange Rate Policy




                       ar
                          -
                     A 07
                       pr
                          -0
                              7
                                                                 Series1




28
             Asian Financial Crisis

 A period of economic unrest that started in July 1997 in
   Thailand and South Korea.

 China, Japan, Taiwan, Singapore, and Vietnam were
   relatively unaffected.

 All nations affected by the crisis saw their currencies dip
   significantly relative to US dollar, though the hardest hit
   nations saw extended currency losses.
04/26/2007                                                       29
  The cause of Asian Financial Crisis

    Inflow of short-term capital like hedge funds

    Long-term high growth of economies

    Imprudent borrowing and lending, especially from
      abroad

    Prevailing optimistic expectation

    Pegged exchange rate

04/26/2007                                              30
 The cause of Asian Financial Crisis

 The deterioration of Japanese economy

 A weak financial sector together with quick
   liberalization of the capital markets

 A slow reflection to the crisis from the US government

 The region and the world as a whole become highly
   integrated and interdependent

04/26/2007                                                 31
      Why China can avoid the crisis
 The early cooling down
     -- Control the banking lending and restructure bad loans
     -- Recognize the soft-landing before the financial crisis

 No debt crisis
     -- A healthy structure of capital inflow
     -- Gradual opening of the financial market
     -- Positive trade balance to pay debts



04/26/2007                                                       32
      Why China can avoid the crisis
 Effective measures
  -- Increase capital-debt ratio of major state banks to 8%
  -- Re-centralize the control of foreign borrowing
  -- Strengthen the evaluation and monitoring of listed
   companies
 Chinese Yuan is stable
 -- Moved to unified market rate after 1994
 -- Healthy fundamentals and positive trade balance
 -- Not fully opened capital market

04/26/2007                                                    33
                Capital Control
   The successful launch of the QFII scheme
   Less exchange rate flexibility
   Less opened capital markets
   Sterilize intervention
   Ease restrictions on selected capital outflows
   Tighten inward portfolio investment




04/26/2007                                           34
             The End


             Thank you



04/26/2007                35

				
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