China in the World: External and Internal Imbalances. Yan Wang World Bank

Transcription

1 China in the World: External and Internal Imbalances Yan Wang World Bank

2 Outline Rapid growth - attributable to global integration, marketization, structural change and embracing of new ideas Serious challenges related to internal and external imbalances, due to unfinished reforms Become a big trader and investor --Overseas investment rising, especially in Africa Composition of overseas investment Opening its financial sector slowly Food for thought 2

3 Accounting for Growth: China and India

4 Productivity rose, but fell after Average annual growth rate Output Physical capital stock Labor Labor reallocation/mobility Human capital stock Total-factor productivity (TFP) Contribution to GDP growth (%) Physical capital stock /a Labor /a Labor reallocation Human capital stock /a Total factor productivity /b Source: Yan Wang 2007: Sources of Growth updated based on Wang and Yao 2003 and new data.

5 Rapid growth attributable to gradual marketization Market price (percent of all goods subject to market price) Retail Producer Goods Farm Commodities Ownership of Industrial Production (percent of output) SOEs a 22b Collectives a 6.4 b Foreign, Private, Others a 72 b Sources: Naughton (2006), OECD (2005), China Statistical Yearbook Notes: a=1996; b=2004 5

6 global integration: trade & investment 70 Percent of GDP Percent of GDP Merchandise trade FDI Source: WB, CEM

7 .better macroeconomic management (Change, in percent) Potential GDP GDP Source: WB, CEM

8 China s s Key Challenges China is one of the most open economies, except in services. Key challenges How to achieve more balanced and high quality growth? How to keep growth environmentally sustainable? How to distribute growth more evenly? 8

9 Structural Imbalances Current pattern of growth is not sustainable: the growth pattern is capital intensive it requires more investment to maintain growth Inequality has been rising, with income gini reaching 0.45, higher than that of the US, due mainly to under-investment in human capital, inadequate provision of social services, and irrational tax /exp systems that are regressive. Over-exploitation of natural capital and the environment 9

10 10 Global Imbalances Current account balances, percent of GDP China Euro area Japan United States Source: IMF and World Bank Staff Estimates 10

11 Trade / fin sector issues Opened trade early on and relied on export-driven growth to create jobs. Subsidized foreign investors /MNCs, much of the trade were processing trade or re-export. Prolonged subsidies to exporters / FIEs even after WTO accession - a matter of trade tension Financial reforms lagged /were blocked by vested interest After Asian crises, too cautious on fin reforms and exchange rate reforms for fear of losing control political econ reasons. Five years after joining WTO, started to open the financial sector, and gradually opening the capital account - encouraged firms to invest overseas. Committed to poverty reduction in Africa, provided debt relief, official aid ($2bn/yr, which is higher than that of Australia, Belgium, Switzland); and overseas investment by firms 11

12 China s s imports from Africa and Latin America US$ bn Africa LatAM

13 China s s Overseas Investment by firms (a part of S-S, S S, S-N S N flows) (US$ bn) 14,000 12,000 10,000 8,000 6,000 4,000 2, Source: Ministry of Commerce. 13

14 Composition of China s s Outward investment Airlines 2% Financial 3% Auto Manufacturers 1% Transportation 4% Technology 4% Consumer Cylical Other Industrials Consumer, Noncyclical 2% 1% 1% Consumer Electronics 5% Telecommunicati ons 9% Others 3% Basic Materials 12% Utilities 1% Energy 52% Sources: Bloomberg, Deutsche Bank estimates 14

15 Location of China s s Outward investment Africa & Middle East 7% Australia & NZ 8% Latin America 3% Asia ex HK 42% North America 12% Russia 12% Europe 16% Sources: CEIC, Deutsche Bank estimates 15

16 Rapid growth of FX reserves US$ bn 1, FX reserves (lhs) Reserve grow th (rhs) Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 %yoy

17 Cost of holding Forex Reserves Carrying cost of Forex reserve was low for China as sovereign spread is positive gov t bond rate lower than US T-bill rates, but the economic cost is high Determined by the ex rate regime and capital controls that are currently in place and to be reformed. Having been too cautious in reforms /crisis prevention Now China CB is in a state of dilemma: -- big enough to influence ex rates. Diversifying holding would lead to further downward pressure on USD causing more asset value loss by the Central Bank Current approach is to loosen capital control and gradually allow more flexibility in exchange rate Financial sector becomes more open to int l competition but still facing challenges of inefficiency, see below 17

18 Foreign Ownership in China s s Local Banks: Local Banks Industrial and Commercial Bank of China Bank of China China Construction Bank Bank of Communications Guangdong Development Bank Bohai Bank (Pivate- Tianjin) Jinan City Commercial Bank Shenzhen Development Bank Shanghai Pudong Development Bank China Minsheng Banking Corp. Industrial Bank Co.(Fujian) China Everbright Bank Bank of Shanghai Nanjing City Commercial Bank Fujian Asia Bank(a joint venture bank) Xi An City Commercial Bank Investing Foreign Banks Goldman Sachs, Allianz and American Express RBS China Investment S.A.R.L./ Asia Financial Holding Pte. Ltd/UBS/ ADB Bank of America/Asia Financial Holding/ Temasek Holding HSBC (Shanghai) Citigroup/IBM Standard Chartered Bank Commonwealth Bank of Australia New Bridge Capital Citi Bank Temasek Holding/IFC Hang-Seng Bank/ Tetrad Ventures/IFC China Everbright Group (Hong Kong) /ADB HSBC/IFC/Shanghai Commercial Bank IFC HSBC/Ping An Insurance Group IFC/ Scotia Bank % of Shares Dalian City Commercial Bank SHK Financial Group 10 Source: Bayraktar and Wang Updated April Notes: BOA holds an option to acquire CCB s H shares representing a 18 total of 19.9% of issued and floating share capital (less any shares already held by BOA as at that date of exercise of the option; 2.Indirect holding /4.64/1.33/ /6.04/ / (to be increase to 19.9) 5 / / 5 / / 3 8 / 7 / / / 12.4

19 Challenges to China s inefficient banking sector Banks Tier-1 capital $mn Returns on assets % Citi-Group 79, HSBC 74, ICBC 31, AgriBC 9, Bank of China 31, ChinaConB 35, Profit/ employee ($1000) Source: Adapted from The Banker, no. 7 and 8,

20 Food for thought China has grown to be a large trading nation, a big market, a donor ($2bn/yr), and a significant global investor How to make it an opportunity rather than a threat? A source of global imbalances due mainly to incomplete reforms / policy distortions? Opening its financial sector & capital account, and reforming fx regime, results yet to be seen What advice can you give to China? Roundtable discussion 20