Current Issues in in China Macro-financial Current Issues in China Macro-financial view Dr. CS Chu 朱朱朱 CCER, Peking University [email protected] May, 2008
Dec 14, 2015
Current Issues in in China Macro-financialCurrent Issues in ChinaMacro-financial view
Dr. CS Chu 朱家祥CCER, Peking [email protected]
May, 2008
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1. Exogenous Impact
• US sub-prime crisis- little direct impact.
PBC’s rarely invest in sub-prime security. China’s exports: mostly non-luxury necessities.
• Oil price hike: cost-push inflation.
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2. Domestic problem: CPI• Inflation regime has arrived!
Monthl y CPI (1990=100)
95
100
105
110
115
120
125
2000
1年
月
2000
7年
月
2001
1年
月
2001
7年
月
2002
1年
月
2002
7年
月
2003
1年
月
2003
7年
月
2004
1年
月
2004
7年
月
2005
1年
月
2005
7年
月
2006
1年
月
2006
7年
月
2007
1年
月
2007
7年
月
2008
1年
月
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How serious is the problem?
• Last quarter: 8.7%. Target: 5% in 2008 (almost impossible!)
• Food price is escalating, is this just sector inflation (change in relative price)? Wrong!
• Cost-push inflation alone is NOT a problem.
• Key: management of inflation expectation to avoid demand-pull.
• Price control never works.
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MoneyKey: M2
In 2007, M2 Q to Q growth rates are:
21.3%, 22.6%, 25%, 23.8%.
M2
0100020003000400050006000
Q1 1
987
Q2 1
988
Q3 1
989
Q4 1
990
Q1 1
992
Q2 1
993
Q3 1
994
Q4 1
995
Q1 1
997
Q2 1
998
Q3 1
999
Q4 2
000
Q1 2
002
Q2 2
003
Q3 2
004
Q4 2
005
Q1 2
007
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M2 really LeadsStatistical results show that M2 clearly leads two
components: fixed investment and retail sales.
Vicious cycle:
M2↑ →Investment↑ →export↑ →reserve↑ →M2↑
export↑ due to over capacity
M2↑ due to RMB FX rate.
Inflation is a monetary matter!
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Remedy?
• Currently, it appears that China focuses more on price control.
• Correct remedy: loose price, tight money.
Tight price, loose money will never work.
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How to tighten money?
• Raise interest rate• Increase reserve ratio• Open market operation
(government bonds)What has China government done
so far?
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4 Rx rateTwo important rates that are keys to M2: interest rate and exchange rate.
Difficult situations: negative real + hot moneyClear strategy:Raise both rates- Easy to say, too much to pay!
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Covered interest parity
• S=spot FX rate, F=forward FX rate.
Dilemma
• (economic downturn), (Inflation),
• , while S is controlled within .
*1
1
rS F
r
*r r *1
1
r
r
F 0.5%
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Implied Spot rate When CIP holds
Assuming no arbitrage, what would the spot rate looks like?
Actual and NDF-implied spot exchange rate between CNYand USD, 1999.1-2008.1
6.507.007.508.008.509.009.50
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
implied spot exchange rate Spot exchange rate
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Consequence 1: Hot money
To do what? Interest rate spread, RMB appreciation, stock and housing market.
- 50
- 40
- 30
- 20
- 10
0
10
20
30
40
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Consequence 2:
• Puzzle: M2/Y=1.6~1.8. Velocity is decreasing! In the US? About 0.6
• Consequence 3: PBC raised reserve ratio 12 times since 2007, up to the current 15.5%, all time high in 22 years.
2M
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How tough is the challenge?
• FX rate : (1) Slowly appreciating: encourages speculation. (2) One-time appreciation: by how much? Concern: Exports ↓→Idle capacity ↑ .
• Tighten by (1) ↑ Interest rate or (2) ↑ reserve ratio?
Currently, China chose the direction of
Slow appreciation +tighten by reserve ratio.
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5 Where does the money go?
• Negative real interest rate, money has to somewhere; hot money flows in, cannot park in saving deposits.
• Money goes to assets markets, obviously.
.
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Stock Market
• Stock market, 50% down.
Crazy market…..i.e. CPC H share and A share are priced very differently.
• Non-floating shares will hit the market eventually. (大小非 )
• QDII suffer international financial turmoil.
• QFII: minding their own problem.
• HK express: temporarily terminated.
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Let’s go bottom fishing?
• Maybe some other time!
• Long term factor in China’s stock market: “financial stability”.
Macro assessment to current China’s financial stability: Instable!
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Housing Market• Very thin bonds market. 50b Treasury bonds sold
out in 2 hours!
• If stock market is not a good place to go, housing market is the only option.
• Simple logic: housing price will continue to rise.
• Negative impact: Government intervention, not affordable, too much speculation, Olympics?
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Correlation
• Returns on stock and housing markets are positively correlated in financially instable period.
• On the other hand, they are more or less substitutes.
Guess: Financial crisis symptom: escalating housing price.
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NPLHigh reserve ratio indeed tightens the money. Slow
down the credit expansion. Who gets the loans?
Never small and medium enterprises!
Large SOE, and backdoor loans are more likely. What will trigger “financial crisis” ? When macro economics gets really bad.
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6 Financial Stability• Hard to define.
• No bona-fide financial crisis in China. There are hidden!
• IMF initiates FSAP, asking all central bankers to issue financial stability review (FSR).
• PBC started FSR cover in 2005. Basically lip-service nonsense.
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Macro Financial Stability Index• Two dimensions: level and volatility • Constructed based on 24 macro financial variables. Most
important ones: M2, domestic credit, real exchange rate, and real deposit rate.
0
0.5
1
1.5
2
2.5
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-100
-50
0
50
100
150
vol l evel
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Warning~• Both level and volatility index reached all time
high at the end of 2007.
• Deteriorating macro financial will trigger turmoil in banking sector via NPL.
• Inflation alone will not cause financial crisis, it causes social unease, and compound the financial trouble.