Rethinking Fast Growth in China＇s Foreign Exchange Reserves

I. Introduction Since 2000, China’s foreign exchange reserves have been growing fast. By the end of 2001, China’s foreign exchange reserves had exceeded US$200bn and by the end of 2002 had reached US$286.4bn. By the end of 2003, it had reached US$403.3bn and in 2004 it reached US$609.9bn. In 1999, China’s foreign exchange reserves accounted for 15.6 percent of its GDP. The ratio has been growing continually and was 36.88 percent of GDP by 2004 (see Table 1), making China the second…     

The Choice of Exchange Rate Regime： The Relevance of International Experience to China＇s Decision

The Chinese exchange rate has been the focus of discussion for many months, with both internal and external considerations seemingly pointing to the desirability of a currency revaluation. This paper draws from the lessons of international experience with exchangerate regimes in the period since Worm War Two. It lays out the conditions necessary to validate a fixed exchange rate and some intermediate regimes that might work when a fixed rate is inappropriate. It then discusses what the analysis implies for contemporary China.     

Exchange Rate Instability： Japan＇s Micro-Macro Experiences and Implications for China

Since 1985, the yen‐dollar exchange rates repeatedly fluctuated and climbed to a level that could not be justified by economic fundamentals. The impacts on the Japanese economy were serious and far‐reaching. Since 21 July 2005, China has been moving toward a more flexible exchange rate regime. Keeping RMB exchange rates basically stable and providing Chinese industries with means to hedge exchange rate risks are essential for China's sound economic development. Edited by Zhinan Zhang     

China＇s Exchange Rate and Financial Repression： The Conflicted Emergence of the RMB as an International Currency

Instability in the worm dollar standard, as most recently manifested in the US Federal Reserve＇s near-zero interest rate policy, has caused consternation in emerging markets with naturally higher interest rates. China has been provoked into speeding RMB ＂internationalization ＂; that is, opening up domestic financial markets to reduce its dependence on the US dollar for invoicing trade and making international payments. However, despite rapid percentage growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls （reinforced by financial repression in domestic interest rates） to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating （appreciating） exchange rate could attract even more hot money inflows, the People＇s Bank of China should focus on keeping the yuan/dollar rate stable so as to encourage naturally high wage increases to help balance China ＂s international competitiveness. However, further internationalization of the RMB, as with the proposed Shanghai pilot free trade zone, is best deferred until world interest rates rise to more normal levels.     

What＇s So Special about China＇s Exports？

I. Introduction The phenomenal performance of China constitutes the great economic miracle of the last quarter century. China’s economy has expanded by leaps and bounds, at historically unprecedented rates that few economists would have found plausible or feasible ex ante. More importantly, this growth has lifted hundreds of millions of people from deep poverty and has helped improve health, education and other social standards. China has accomplished all this using its own brand of experime…     

Japan＇s Bubble,the USA＇s Bubble and China＇s Bubble

This paper compares the three recent episodes of boom and bust cycles in asset prices: Japan in the late 1980s to the 1990s; the USA since the mid‐1990s; and China during the past decade. Although we have not yet seen a collapse of Chinese property prices, their increases so far are comparable to those in the other two episodes and a careful comparative study is warranted. The present paper first examines the behavior of asset prices, of property prices in particular, in the three cases, and highlights some similarities. The paper emphasizes the role played by extremely easy monetary policy in generating bubble‐like asset price behavior in the three cases. The reason for easy monetary policies is investigated. In the US case, the monetary authority was concerned about the risk of deflation in the early to mid‐2000s. The experiences of Japan and China are quite similar in that the monetary authorities of both countries were seriously concerned about the possible deflationary effects of exchange rate appreciation on the economy. The implications of such a finding for the future of Chinese macroeconomic policy are discussed.     

Anomaly in China＇s Dollar-RMB

Newly-established data on onshore deliverable US dollar-RMB forwards and the Shanghai lnterbank Offered Rate from Oetober 2006 to April 2009 reveal significant violations of covered interest rate parity. This paper explains the cause of this anomaly. Deviations in the forward market are caused by an increase in US dollar-to-RMB conversion restrictions. Given that Chinese monetary authorities want to prevent market participants from taking advantage of the predictable appreciation of the RMB, China＇s State Administration of Foreign Exchange has to tighten up the control on US dollar-to-RMB conversions. Under the tightened conversion restrictions, similar deviations will resurface in the forward market whenever hot money inflow increases. One way to avoid covered interest rate parity violations in the forward market is to decrease hot money inflow into China by maintaining a stable and credible exchange rate policy.     

Putting the Cart before the Horse？ Capital Account Liberalization and Exchange Rate Flexibility in China

I. Introduction and OverviewLike their counterparts in many other emerging market economies, Chinese policymakersare facing a complex set of questions related to the desirability and appropriate mode ofimplementing exchange rate flexibility and capital account liberalization. The Chineseauthorities have stated publicly that both exchange rate flexibility and capital accountconvertibility are their medium-term objectives, but they have resisted recent calls from theinternational community for …     

What＇s So Special about China＇s Exports？ A Comment

Dani Rodrik argues that China's exports are unusually sophisticated for a country at its income level. He also claims that China's export sophistication reflects the government's successful industrial policy and has been instrumental in the recent acceleration of its economic growth. Although Rodrik's interpretation of China's economic growth is broadly correct, the accuracy of his empirical analysis is questionable. This note identifies several problems regarding the “export sophistication” index used in his empirical work and casts doubt on his analysis.     

China＇s Economic Prospects and Sino-US Economic Relations

A better comprehension of the mixed sentiment in the rest of world towards the rapid rise of the Chinese economy will depend on the understanding of some key features of the Chinese economy, such as those associated with its size, structure and institution. To further sustain its high growth, China is facing more challenges than it has encountered in the past 2 decades, including a gamut of material constraints. Although polices and technological progress might alleviate many of these constraints, the ultimate solution will still lie in continued institutional reform. China's recent move towards a more flexible exchange rate regime is in line with its broad reform and in accordance with the progress of its development. However, such a move will have limited immediate effects on the prodigious US trade deficit, which itself is a problem rooted in the flawed international reserve system, far beyond a Sino‐US trade issue. Edited by Xiaoming Feng     

Does the Domestic Value Added Induced by China＇s Exports Really Belong to China？

Since 2001, the exports of foreign‐invested enterprises (FIEs) have accounted for more than 50 percent of China's total exports. As foreign capital occupies a high proportion of the total capital of FIEs, most FIEs' capital gains are foreign factor income. Although these gains are calculated as a part of China's GDP, they do not belong to China's national income. To determine the real contribution of exports to China's welfare, the present paper analyses the impact of exports on China's national income using a non‐competitive input–output model capturing processing trade. The results show that every US$1000 of China's exports generates US$506.8 of national income. The real contribution of exports to China's welfare is much smaller than what we expected. This suggests that China should endeavor to improve the gains from international markets or find another engine to maintain its economic growth.     

China＇s Share of US Imports and Exchange Rate Pass-through to US Import Prices

The present paper investigates the effect of China's share of US imports on the aggregate‐level exchange rate pass‐through to US import prices over the period from January 1999 to December 2008. The paper also focuses on the post‐reform period, after 2005, allowing greater flexibility of the RMB to explore the change in the role of the Chinese import share in determining the trend in the US exchange rate pass‐through. Evidence reveals that China's share of US imports has a negative effect on the exchange rate pass‐through. However, this negative effect has been moderated to a negligible level since China's exchange rate reform. An important implication is that the exchange rate flexibility of the RMB has been raised to a significant level may no longer cause distortion in the US competitive environment and prevent the USA from adjusting current accounts.     

人民币该不该升值

这几年,一直有要求人民币升值的声音.这种声音主要在日本.可今年以来.美国、欧盟及其他国家也有要求人民币升值的说法。9月初,美国     

What＇s So Special about China＇s Producer Services？ An Input-output Analysis

In the present study, five stylized facts about China ＂s producer services are established through international, intersectoral and intertemporal comparisons based on input --output tables. First, the overall service input ratio is the lowest in all the sample economies. Second, most producer services are supplied by the traditional labor-intensive sectors. Third, manufacturing is the biggest user of producer services, and service industry is the second, while the opposite is true for most of the other sample economies. Fourth, unlike other economies, China ＂s ＂R＆D＂ is characterized more by consumer services than producer services. Fifth, China has fairly lower service input ratios in almost all the industries. The backward and forward linkages coefficients are both smaller for ＂real estate activities＂ and ＂finance and insurance. ＂＂ Policy reform should focus not only on specific producer services but also on reducing obstacles that are inhibiting the balanced development of diverse producer services that will help China to optimize its economic structure.     

Effectiveness of China＇s Monetary Policy and Reform of Its Foreign Exchange System

I. Introduction The background of this research is related to continued disputes between China and its trading partners, and to the resulting international pressure on China’s foreign exchange (Forex) system. As the fastest growing economy in the world, China’s foreign trade has expanded at a fantastic pace and its trade surplus with the rest of the world is huge and rising. This remarkable success has encountered increasing criticism, whether correct or not, from the countries that feel t…     

What Prompts the People＇s Bank of China to Change Its Monetary Policy Stance？ Evidence from a Discrete Choice Model

In the present paper, we model the policy stance of the People＇s Bank of China （PBC） as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBC. In a second step, we estimate how much of the variation in the PBC＇ s implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets, but not output gaps, figure significantly in the PBC＇s policy changes.     

China＇s Stock Market： Inefficiencies and Institutional Implications

The dramatic movements of China＇s stock market in the past two and a half years have renewed debate among academics over the efficiency of China＇s stock market. The present paper tests the efficiency of China＇ s stock market. The realization of efficient markets requires the effective operation of a complete set of macro and micro mechanisms. However, such mechanisms are not only incomplete in China＇ s stock market, but are also ineffective because of the prevalence of institutional deficiencies.     

How would Capital Account Liberalization Affect China＇s Capital Flows and the Renminbi Real Exchange Rates？

In this paper we study the determinants of gross capital flows, project the size of China's international investment position in 2020, and analyze the implications for the renminbi real exchange rate if China liberalizes the capital account. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of the current decade, a timetable consistent with recent proposals by the People's Bank of China. Our analysis shows that if the capital account were liberalized, China's gross international investment position would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country's GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment income from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalization as capital flows are expected to be two‐sided. The renminbi real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners.