China'S Current Economic Situation

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					  CHINA’S CURRENT
  ECONOMIC
  SITUATION
China Development Research Foundation
              seminar
           Beijing, July 17, 2008
Current Challenges for
Macroeconomic Policy


            Presentation by Vivek Arora

           IMF Senior Resident Representative1




1 The views expressed in this presentation are those of the author
   and should not be attributed to the IMF, its Executive Board, or
   its management.
Key questions
Against background of global financial
  slowdown/turmoil and domestic challenges:

  How to control inflation and maintain
  economic growth?
  How to maintain reasonable growth by
  expanding domestic demand and imports?
Global economy in a difficult position

 Rising inflation everywhere, especially
 developing countries;
 Slowing demand in many advanced
 economies, with spillover effects on rest of
 world;
 Gradual recovery, but only in 2009;
 Risks from financial markets, inflation.
GDP growth in China slowing because
of net exports, but still strong
                                                           ECONOMIC ACTIVITY


                  35
                  30                                                                                                          FAI
In percent, yoy




                  25
                  20                                                                     Retail sales
                  15
                                                                                                                          GDP
                  10
                   5
                   0
                       2005Q1

                                2005Q2

                                         2005Q3

                                                  2005Q4

                                                           2006Q1

                                                                    2006Q2

                                                                             2006Q3

                                                                                      2006Q4

                                                                                               2007Q1

                                                                                                        2007Q2

                                                                                                                 2007Q3

                                                                                                                          2007Q4

                                                                                                                                    2008Q1
                  Source: CEIC
Trade balance declining, but still high

                                 China: Trade balance

                 300                                                    40.0
                               Export growth (RHS)                      35.0
                 250
                                                                        30.0
                 200                                                    25.0
                       Import growth (RHS)
    $ billions




                 150                                                    20.0
                                                                        15.0
                 100
                                                                        10.0
                  50                                                    5.0
                   0                                                    0.0
                        2004       2005       2006   2007   2008Jan-
                                                               June
                                                             (annual)
Foreign exchange inflows continue to
grow
 Reserves = $1,809 billion as of June 2008
 Increase of $281 billion in Jan.-June. 2008
 True increase larger; e.g. “other foreign
 assets” increased by over $50 billion
 Trade, FDI, other capital, income, valuation,
 “hot money.”
Exchange rate trends
Dec. 31 2007 to July 16, 2008, RMB:
 appreciated vs. U.S. dollar (7.2 percent)
 depreciated vs. euro (-1.3%), yen (-1.4%)
                               In percent, yoy




                       0
                           5
                                 10
                                        15
                                                 20
                                                           25
              200501
              200503




Source:CEIC
              200505
              200507
              200509                         PPI
                                             CPI




              200511
                                             CPI:Food




              200601
                                             CPI:Nonfood




              200603
              200605
              200607
              200609
              200611
              200701
                                                              (percent change, y/y)
                                                                                      Inflation remains high
                                                            INFLATION: CPI and PPI




              200703
              200705
              200707
              200709
              200711
              200801
              200803
              200805
Policy tasks?
 Tight monetary policy (to manage inflation
 risks, and contain investment/credit growth);
 Continue reforms to strengthen domestic
 consumption:
   Financial sector
   Social programs (health, education, pensions)
                   Cost of capital (and other inputs) has been
                   relatively low

                                 Average Cost of Capital平 均 獠   翊鮋

                   10            Average growth 平 均 增                               10
(In percent 百分数)




                    8                                                               8

                    6                                                               6

                    4                                                               4

                    2                                                               2

                    0                                                               0
                       Average  Brazil 巴 西 Russia 俄     孌   India 印 度   China 中 国
                      Advanced
                      Economies
                    棽    莀烒蕓羥豻
Low cost of capital fuels investment,
surplus, and liquidity


1. Low cost of capital (and   2. Investment Capacity
   other inputs)
     investment



                                Liquidity    Exports