The Chinese Economy and the Renminbi

Transcription

1 The Chinese Economy and the Renminbi Lawrence J. Lau Ralph and Claire Landau Professor of Economics, The Chinese University of Hong Kong and Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University BOCI Securities Limited Hong Kong, 25 October 2016 Tel: ; Fax: WebPages: *All opinions expressed herein are the author s own and do not necessarily reflect the views of any of the

2 Outline The World Economic Situation The Chinese Transition to a New Normal The Renminbi Concluding Remarks 2

3 The World Economic Situation Slowing growth of real GDP and trade The ineffectiveness of monetary policy Insufficient aggregate demand The rise of protectionism Geopolitical uncertainties 3

4 US$ trillions, in 2014 prices Percent Real World GDP and Trade in Goods and Services and Their Growth Rates (2014 US$) World Real GDP and Real Total Trade in Goods and Services and Their Growth Rates ( in 2014 US$) Rates of Growth of Real World GDP Rates of Growth of Real Total World Trade in Goods and Services World Real GDP, in2014 US$ World Real Total Trade in Goods and Services, in 2014 prices

5 Percent Total World Trade in Goods and Services as a Percentage of World GDP since Total World Trade in Goods and Services as a Percentage of World GDP since

6 The Chinese Transition to a New Normal Historically unprecedented rates of growth Slowdown is inevitable L-shaped recovery should be viewed positively China as a surplus economy Potential sources of growth of aggregate demand 6

7 Historically Unprecedented Rates of Growth 7

8 1983q1 1983q3 1984q1 1984q3 1985q1 1985q3 1986q1 1986q3 1987q1 1987q3 1988q1 1988q3 1989q1 1989q3 1990q1 1990q3 1991q1 1991q3 1992q1 1992q3 1993q1 1993q3 1994q1 1994q3 1995q1 1995q3 1996q1 1996q3 1997q1 1997q3 1998q1 1998q3 1999q1 1999q3 2000q1 2000q3 2001q1 2001q3 2002q1 2002q3 2003q1 2003q3 2004q1 2004q3 2005q1 2005q3 2006q1 2006q3 2007q1 2007q3 2008q1 2008q3 2009q1 2009q3 2010q1 2010q3 2011q1 2011q3 2012q1 2012q3 2013q1 2013q3 2014q1 2014q3 2015q1 2015q3 2016q1 2016q3 Percent per annum Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y 25% Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y 20% GDPQ1 GDPQ3 GDPQ2 GDPQ4 15% 10% 5% 0% -5% 8

9 Slowdown is Inevitable Elasticity of output with respect to an input = Percentage change in output/percentage change in input Rate of growth of output = Output elasticity of labor x Rate of growth of labor + Output elasticity of capital x Rate of growth of capital + Technical progress (Rate of growth of total factor productivity (TFP)) The rate of growth of labor (hours) eventually becomes negligible (or even negative) as the surplus labor runs out and the population takes more leisure. The rate of growth of capital eventually slows down as the capital stock becomes bigger and bigger through accumulation over time. Technical progress over the long term depends on cumulative investment in human capital and R&D and is unlikely to average more than 2 percent per annum. Moreover, many significant improvements in economic welfare are not reflected in the GDP as conventionally measured, for example, more leisure, cleaner environment, better health and longer life expectancy. 9

10 L-shaped Recovery Should be Viewed Positively L-shaped recovery is not necessarily negative. It all depends on where the horizontal part of the L is located. What the authoritative figure in the People s Daily article meant to convey is that there would be steady growth at around 6.5 percent per annum going forward, but no plan to pump up the economy back to a higher rate of growth through fiscal stimuli. There would be no V-shaped recovery, or for that matter not even a U-shaped recovery. 10

11 China as a Surplus Economy The Chinese economy today has so much excess capacity that supply is not a constraint. The constraint on output is aggregate demand. If there is demand, there will be supply. The Chinese economy has no difficulty whatsoever in generating a 6.5% growth of real output as long as there is demand. 11

12 The Composition of Chinese GDP by Expenditure 100% The Composition of Chinese GDP by Expenditure 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Net Exports Change in Stocks Gross Fixed Investment Government Consumption Household Consumption 12

13 Potential Sources of Aggregate Demand The rate of growth of exports (and in particular that of the export surplus) has also been falling. The rate of growth of fixed investment has been falling, and rightly so, in view of the excess production capacity in many manufacturing sectors and in residential housing in other than first-tier cities (part of the supply side reform). Even though the rate of growth of real household consumption has been growing at approximately one and a half times the rate of growth of real GDP, it alone is not enough because of the low base. Public infrastructural investment such as high-speed railroads, urban mass transit systems and other urban public works, public Wi-Fi towers, affordable housing and clean energy will continue 13 to provide a steady aggregate demand.

14 USD trillions Total Mainland Cross-Border Trade in Goods and Services and in Goods Alone, US$ trillions 5 Total Mainalnd Cross-Border Trade in Goods and Services and in Goods Alone, US$ trillions Total Chinese International Trade in Goods and Services Total Chinese International Trade in Goods

15 Jan/92 Jul/92 Jan/93 Jul/93 Jan/94 Jul/94 Jan/95 Jul/95 Jan/96 Jul/96 Jan/97 Jul/97 Jan/98 Jul/98 Jan/99 Jul/99 Jan/00 Jul/00 Jan/01 Jul/01 Jan/02 Jul/02 Jan/03 Jul/03 Jan/04 Jul/04 Jan/05 Jul/05 Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10 Jan/11 Jul/11 Jan/12 Jul/12 Jan/13 Jul/13 Jan/14 Jul/14 Jan/15 Jul/15 Jan/16 Jul/16 USD billions Chinese Monthly Exports, Imports and Trade Balance in Goods, US$ Billions Chinese Monthly Exports, Imports and Trade Balance of Goods, in U.S. Dollars Exports,fob Imports,cif Trade balance

16 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Percent Monthly Rates of Growth of Chinese Fixed Assets Investment, Y-o-Y 55 Monthly Rates of Growth of Chinese Fixed Assets Investment, Year-over-Year

17 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Percent Monthly Rates of Growth of Chinese Real Retail Sales, Y-o-Y 35 Monthly Rates of Growth of Chinese Real Retail Sales since, Year-over-Year

18 Potential Sources of Aggregate Demand Investment in R&D, currently at 2.1% of GDP, is planned to increase to 2.5% in It can be increased at a faster rate, with more emphasis on basic research. Public goods consumption (education, health care, elderly care, and environmental protection, preservation and restoration clean air, water and soil) can provide the additional aggregate demand. Alleviation of poverty and environmental clean-up and restoration are the only two mandatory targets within the Thirteenth Five-Year plan. Universal access to the internet and the improvement of the environment is a de facto redistribution of income because both the rich and the poor will benefit equally from the improvements in the environment. 18

19 The Renminbi The Renminbi as an international medium of exchange The Renminbi as an international store of value (Renminbi in the Special Drawing Rights (SDR) Basket) The evolution of the Renminbi exchange rate The use of own currency for invoicing, clearing and settlement Regional exchange rate co-ordination 19

20 The Renminbi as an International Medium of Exchange Mainland cross-border trade used to be all settled in U.S. Dollars. However, since 2010, it has been increasingly denominated and settled in Renminbi. As of 2016Q3, more than one-fifth (21 percent, or at an annualized rate of more than US$800 billion) of total Mainland trade was settled in Renminbi, compared to almost nothing in 2010Q1. Hong Kong is currently by far the largest and most active offshore center for Renminbi clearing, settlement, trading and financing, with an average daily volume of transactions approaching 1 trillion Yuan. 20

21 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Billion US$ Percent Renminbi Settlement of Chinese Cross-Border Trade, Billion US$ and Percent 350 Renminbi Settlement of Cross-Border Trade, Billion US$ and Percent Absolute Value (left scale) Percent of Total Cross-Border Trade (right scale)

22 The Renminbi as an International Medium of Exchange At present, the Renminbi is used for the settlement of international transactions to a much lesser extent than warranted by the Mainland share in world trade. In the following Charts, the world currencies are ranked from left to right in descending order of the sizes of their respective shares in world payments in selected periods. The U.S. Dollar was the undisputed champion as of July 2016, accounting for 41.3% of world settlement, even though the U.S. itself accounted for only 11.7% of world trade in 2015, followed by the Euro, which accounted for 31.3% of world settlement (with the Euro Area accounting for 25% of world trade). The Chinese Yuan, with not quite 2%, was in the fifth place in terms of world settlement, while the Mainland also accounted for % of world trade.

23 The Renminbi as an International Medium of Exchange In contrast, the Japanese Yen accounted for 3.4% of world payments with Japan accounting for 3.8% of world trade in If the Japanese experience is any guide, it shows that there is still a great deal of room for the Renminbi to grow in terms of its share of world settlement. This would eventually mean even less need for the People s Bank of China to maintain a high level of official foreign exchange reserves for transactions purposes. 23

24 USD EUR GBP JPY CNY CAD CHF AUD HKD SEK THB SGD NOK PLN ZAR MYR DKK NZD MXN TRY Percent Distribution of World Trade Settlement Currencies versus World Trade, July Share of World Settlement Currencies, July Share of World Settlement Currencies, July 2016 Share of World Trade,

25 The Renminbi as an International Medium of Exchange It is useful to examine the changes over time of the use of different currencies in world payments. In the charts that follow, the shares of the top twenty currencies used in world settlement at selected dates between 2010 and 2016 are presented in blue columns in the order of their relative sizes from left to right, starting from the highest (using data from SWIFT), and compared to the shares of the respective country or region in world trade presented in red columns. An economy s share of world trade is an important, but not the only, determinant of whether its currency is widely used as a medium of international exchange. Every economy prefers to use its own currency for the settlement of its international transactions because it minimizes both risks and transactions 25 costs.

26 The Renminbi as an International Medium of Exchange In 2010, even after the European sovereign debt crisis broke out, the Euro was still the most widely used currency for invoicing, clearing and settlement purposes, accounting for almost 40% of the total world payments, but only a little more than 25% of total world trade. The U.S. Dollar was a close second, accounting for a little over 35% of world payments but only around 12% of world trade. The British Pound was third, accounting for not quite 9% of the world payments and 3% of world trade. The Renminbi was in the 21st place in terms of its share of total world payments despite its more than 10 percent share in world trade. 26

27 Distribution of World Trade Settlement Currencies versus World Trade, 2010 % Distribution of World Trade Settlement Currencies versus World Trade, Selected Economies 40 Payments 35 Trade EUR USD GBP JPY AUD CAD CHF HKD SEK SGD THB NOK DKK NZD ZAR HUF MXN TRY PLN RUB CNY 27 Source: SWIFT Value Analyser. Trade (import/export) 2010, in value., WTO working paper, Daiwa

28 The Renminbi as an International Medium of Exchange In January 2012, the Renminbi became the 20 th most used currency for world payments, with 0.3%, despite a world trade share of 9%. The Euro s share of world payments went up to 44%, followed by the U.S. Dollar with almost 30%. (This was a period during which the U.S. Dollar was devaluing with respect to almost all of the other currencies because of the Quantitative Easing in the U.S.) By December 2012, the Renminbi advanced to the 14 th place. The share of the Euro fell to just below 40% and that of the U.S. Dollar rose to more than 33%. By December 2013, the Renminbi advanced to the 8 th place, ahead of the Hong Kong Dollar. The share of the U.S. Dollar rose to almost 40% and the share of the Euro fell to 33.2% even though the shares of world trade of the United States and the Euro Area remained essentially unchanged. 28

29 EUR USD GBP JPY AUD CAD CHF SEK SGD HKD NOK THB DKK RUB ZAR HUF NZD MXN TRY CNY Percent Distribution of World Trade Settlement Currencies versus World Trade, Jan Share of World Settlement Currencies, January Share of World Settlement Currencies, January 2012 Share of World Trade,

30 EUR USD GBP JPY AUD CAD CHF HKD SGD SEK NOK THB RUB CNY DKK ZAR MXN NZD PLN TRY Percent Distribution of World Trade Settlement Currencies versus World Trade, Dec Share of World Settlement Currencies, December Share of World Settlement Currencies, December 2012 Share of World Trade,

31 USD EUR GBP JPY CAD AUD CHF CNY HKD SEK SGD THB NOK PLN RUB DKK MXN ZAR NZD TRY Percent Distribution of World Trade Settlement Currencies versus World Trade, Dec Share of World Settlement Currencies, December Share of World Settlement Currencies, December 2013 Share of World Trade,

32 The Renminbi as an International Medium of Exchange By December 2014, the Renminbi became the 5 th most used currency for world payments, with 2.2%, despite a world trade share of 10.5%. The U.S. Dollar s share of world payments went up to almost 45%, followed by the Euro with a little more than 28%. By December 2015, the Renminbi remained in the 5 th place for world payments, with 2.3%. The share of the U.S. Dollar was just below 44% and that of the Euro just above 29%. By July 2016, the Renminbi remained in the 5 th place behind the British Pound and the Japanese Yen, with 1.9%. The share of the U.S. Dollar fell to 41% and the share of the Euro rose to 31% even though the shares of world trade of the United States and the Euro Area remained essentially unchanged. Throughout the period , the U.S. Dollar and the Euro combined accounted for more than 70% of world payments. 32

33 USD EUR GBP JPY CNY CAD AUD CHF HKD SGD THB SEK NOK PLN ZAR DKK NZD MXN RUB TRY Percent Distribution of World Trade Settlement Currencies versus World Trade, Dec Share of World Settlement Currencies, December Share of World Settlement Currencies, December 2014 Share of World Trade,

34 USD EUR GBP JPY CNY CAD CHF AUD HKD SEK SGD THB NOK PLN ZAR MXN DKK NZD TRY HUF Percent Distribution of World Trade Settlement Currencies versus World Trade, Dec Share of World Settlement Currencies, December Share of World Settlement Currencies, December 2015 Share of World Trade,

35 Jan-78 Jul-78 Jan-79 Jul-79 Jan-80 Jul-80 Jan-81 Jul-81 Jan-82 Jul-82 Jan-83 Jul-83 Jan-84 Jul-84 Jan-85 Jul-85 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 The Yuan/US$ Nominal Exchange Rate 9 Nominal Exchange Rate of the Renminbi, Yuan/US$, 1978-present

36 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Yuan per U.S. Dollar The Nominal and Real Yuan/US$ Exchange Rates (1994 prices) The Nominal and Real Yuan/US$ Exchange Rates (1994 prices) Real Exchange Rate Nominal Exchange Rate

37 Jul-80 Jan-81 Jul-81 Jan-82 Jul-82 Jan-83 Jul-83 Jan-84 Jul-84 Jan-85 Jul-85 Jan-86 Jul-86 Jan-87 Jul-87 Jan-88 Jul-88 Jan-89 Jul-89 Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 USD billions Chinese Foreign Exchange Reserves and the Yuan/USD Exchange Rates 4,000 Chinese Foreign Exchange Reserves and the Yuan/USD Exchange Rates 9 3, , , , ,500 1, Total Reserves minus gold, USD billions, left scale Yuan/USD, end of period, right scale

38 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Billions US$ Chinese FX Reserves and the Yuan/US$, Yuan/Euro and Yuan/100 Yen Exchange Rates 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Chinese Foreign Exchange Reserves and the Yuan/US$, Yuan/Euro and Yuan/100 Yen Exchange Rate at the End of the Month Foreign Reserves Foreign Exchange Rate Yuan/US$ Foreign Exchange Rate Yuan/Euro Foreign Exchange Rate Yuan/100 Yen

39 CNH/CNY Exchange Rate Differential since 2010, percent 3 CNH/CNY Exchange Rate Differential, percent

40 Comparison of the Central Parity Rate and CFETS Indexes (30 June 2016 = 100) Comparison of the Central Parity Rate and CFETS Indexes CFETS Currency Basket Index of Central Parity Rate 40

41 USD trillions, 2015 prices Actual and Projected Levels and Growth Rates of Chinese and U.S. Real GDP (2015 tril. US$) The Actual and Projected Level and Annual Rate of Growth of Chinese and U.S. Real GDP (trillion 2015 US$) Rates of Growth of U.S. Real GDP (right scale) Rates of Growth of Chinese Real GDP (right scale) U.S. Real GDP, in 2015 prices Chinese Real GDP, in 2015 prices Percent

42 Concluding Remarks The Chinese economy should be able to grow at an average annual rate of between 6 and 7 percent for the next decade or even longer. There is excess productive capacity and as long as there is demand, there will be supply. The Chinese government has many instruments at its disposal and is pragmatic enough to use any or all of them if necessary. The Renminbi will not follow the U.S. Dollar but will move with reference to a basket of currencies. It is likely to devalue with respect to the U.S. Dollar when the U.S. Dollar strengthens relative to the other currencies, but appreciate with respect to the U.S. Dollar when the U.S. Dollar weakens relative to the other currencies. The net effect is a more stable and less volatile Renminbi exchange rate compared to the U.S. Dollar exchange rate. 42