Rebalancing Growth in China: A Three-Handed Approach

Transcription

1 Rebalancing Growth in China: A Three-Handed Approach Olivier Blanchard and Francesco Giavazzi February 2006 (First draft August 1, 2005) Nr. 1

2 The effects of Chinese GDP revisions National saving rate (% GDP) r China 47 40,2 Low-income countries 20 Lower-middle income countries 30 Upper-middle income countries 24 The revised saving rate is S/(revised GDP ) Nr. 6

3 Four imbalances, all linked to the strategy Uneven growth: across provinces across skill levels across sectors Safety nets have substantially weakened Some investment may have been misallocated Growing macroeconomic imbalances Nr. 8

4 1.1 Uneven growth across provinces Urban to rural house- Ratio of per capita income and consumption. holds,andtop8tobottom22provinces Income ratio Consumption ratio Income ratio Urban to rural Urban to rural Provinces Nr. 9

5 1.2 Uneven growth across skill levels Skilled-Unskilled wage differential Up from 1.3 to 2.1 in a decade High supply elasticity of unskilled labor in the countryside Returns to skills larger in cities: the wage of a migrant worker is 1.8 times that of a rural worker with similar skills. Migrating is costly (Hukow policy) A 10% fall in the rural wage (holding city wages constant) raises migration flows by 0.5% Nr. 10

6 1.3 Uneven growth across sectors Composition of output (value added, percent of GDP) Agriculture Industry Services China China China 2004r Other countries (2003): Low income countries Lower-middle income countries Upper-middle income countries World r: based on revised GDP Nr. 11

7 2. Safety nets are particularly weak for migrant workers Access to social benefits of temporary and permanent urban residents: Five major cities, 2000 (% of all individuals in the group) Migrants Local residents Health insurance Pension program Unemployment benefits Workplace injury insurance Maternity leave Nr. 13

8 3. Misallocation of investment Banks: inefficient allocation of saving Fall in measured TFP growth (OECD, -3% in 2003) may reflect capital misallocation rather than decrease in technical progress Capital productivity probably still high for investment in social capital (health, education,...) especially in rural areas Nr. 14

9 Total factor productivity growth, various estimates Author Period Annual TFP growth Wang Mengkui Li Shantong Maddison World Bank Zhu Baoliang Zheng Jinghai OECD Nr. 15

10 4. Growing macroeconomic imbalances Saving is running ahead of investment Current account surplus: 2004: US dollars 70 bl (of which trade 32 bl) 2005: US dollars 116 bl(est.) (of which trade 102 bl) Nr. 16

11 3. Directions of reform "It is not just exchange rate adjustment, but broader policy reform that is needed in China." (Rodrigo de Rato, IMF MD, February 2, 2006) Reduce precautionary saving and retained earning by improving ability of households to insure against risk private firms to access financial market Allow RMB to appreciate to reallocate investment Use budget to offset effects of appreciation on inequality Nr. 17

12 1. Better insurance and households saving Sectoral saving (percent of GDP) China Japan Korea Mexico Households Enterprises Government National saving Estimates for China are based on GDP before revision Nr. 18

13 Why the high household saving? Answers to a household poll on key motivations for savings: kids education, 35% retirement, 32% medical care, 10% home purchase, 7% children s wedding expenditures, 6% Nr. 19

14 Risk borne by households is particularly severe in rural areas Household saving rates in urban and rural areas (% of disposable income) Urban households Rural households Nr. 20

15 Saving and financial markets Saving for housing Saving and retirement (effects of one-child policy) Saving to start a business Enterprise saving corporate saving almost 1/2 of national saving private firms retain earnings to self-finance investment Nr. 21

16 Saving for health care: Is private insurance enough? No: People are not identical ex-ante, and some cannot afford the insurance Need for some state intervention in the provision of health services, e.g. to introduce default options, especially important for prevention Nr. 22

17 Can China afford increasing public dissaving? Chinese debt dynamics d t+1 d t =(r g)d t + x t+1 r =2.5%,g = 10% (2004), x = 1,7% (2004) If r<gfor the next 10 years, x = 2% for 10 years will translate today s debt level (80% of gdp allowing for bank recapitalization equal to 25% of gdp) into a 55% debt to gdp ratio Nr. 23

18 2. RMB appreciation Reserve accumulation: 200 US dollar bl in 2004: 100 (trade+fdi) (speculative inflows) Assume RMB is floated: to close (trade+fdi) imbalance the required appreciation could be around 30% Risks of an appreciation? inequality learning-by-doing banks Nr. 24

19 Implications An appreciation leads to a shift from agriculture to the other sectors a decrease in the real wage a decrease in real farm income thus an appreciation worsens income distribution: across regions, agriculture, non agriculture across individuals, the wages of the unskilled workers, who are the relevant group thinking about moving out of agriculture, are likely to decrease After proper use of expenditure and appreciation to decrease the trade surplus while maintaining internal balance, both the non tradable sector and the home tradable sectors may actually be larger at the expense of the agricultural sector Nr. 32

20 RMB appreciation and learning-by-doing Appreciation needed to balance ca: x%. Consider costs and benefits of delaying appreciation by 1 year reserves grow by z% of GDP in the year (in 2005: 200 US dollar billion equal to 12% of GDP) expected capital loss on accumulated reserves: (x% * z%): 30% * 12% =3.6%ofGDP larger exports, higher learning by doing, imply higher growth for a year of y% a 1% undervaluation is associated with a 0.015% increase in growth (Hausmann and Rodrik) loss on accumulated reserve equal to 3.6% of GDP for a year buys a level of output 0.45% higher forever. A high social internal rate of return. Nr. 33

21 RMB appreciation and the banks Removing controls on capital outflows would limit the appreciation. Is this potentially dangerous for banks? What if Chinese investors wanted more dollar assets than the PBC holds? PBC reserves = 40% of GDP Financial wealth (M3) = 180% of GDP If 25% of wealth in the form of US assets, 45% of GDP, more than PBC holds Banks could be forced liquidation of loans Nr. 34

22 4. A tentative macro package Reduce reasons for high precautionary saving, high retained earnings: S falls As domestic demand rises, let RMB appreciate to reallocate demand. To limit appreciation: announce gradual removal of capital controls use alternative tools to reallocate demand, e.g. pollution tax Increase public provision of health and other public services especially targeted to the countryside Nr. 35