International Monetary FundMay 18, 2016
China’s Rebalancing and External Sector Adjustment
Maurice ObstfeldEconomic Counsellor
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65
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Real consumption Nominal consumptionReal investment Nominal investment
2016
Consumption and investment shares(percent of GDP)
Real GDP growth (percent; year-on-year)
Sources: Haver Analytics, and IMF, World Economic Outlook.
China: Slowing down and rebalancing
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2
4
6
8
10
12
14
16
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17P
1
20
25
30
35
40
45
50
55
07 08 09 10 11 12 13 14 15
Primary Industry Services
GDP by Production(percent of GDP)
Source: Haver Analytics.
Service sector becoming more important
35
40
45
50
55
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Industry (including construction) Services
2
Employment by Sectors(percent of total employment)
China: Current account surplus(percent of GDP; four quarter rolling sum)
Source: Haver Analytics.
Strong domestic demand has helped reduce external balance
-4
-2
0
2
4
6
8
10
12
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Goods balance Travel balance Other Current account
17Q1
3
Value of foreign currencies against the yuan(index; 2000 average=100)
Source: Haver Analytics.
Gradual shift toward greater currency flexibility
70
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100
110
120
130
140
150
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Nominal effective exchange rate U.S. dollar per Yuan
5/9
Appreciation of Yuan
Change to paritysetting
4
Announcement of CFETS
basket reference
De facto USD weight in RMB basket vs. NEER 1/
Exchange rate(China renminbi per U.S. dollar)
Sources: Bloomberg, L.P.; Haver Analytics; IMF, Global Data Source ; and IMF staff calculations.1/ Shaded region corresponds to 95 percent confidence bands around basket-weight estimate.
Recent changes in the currency regime
5.95
6.05
6.15
6.25
6.35
6.45
6.55
6.65
6.75
6.85
6.95
7.05
7.15Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-1
CNH, offshore CNY, onshore Central parity
5/12
5
0
1
2
3
60
70
80
90
100
110
120
130
Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17
US NEER China NEER USD basket weight (rhs)
Aug. 11,2015
5/9
Foreign Exchange Accumulation and Intervention(billions of U.S. dollars)
Sources: Bloomberg, L.P.; and CEIC.
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
-200
-150
-100
-50
0
50
100
150
200
250
08 09 10 11 12 13 14 15 16 17
Foreign exchange accumulation (BoP) Foreign reserve (monthly; RHS)
17Q1
Reserves have fallen since 2014
6
Capital flows also play an important role
7
Record capital outflows
-6
-4
-2
0
2
4
6
8
2010 2011 2012 2013 2014 2015 2016 2017
Current account Net FDI Net capital flows (excluding official reserves)
17Q1
Current and capital account(percent of GDP, four quarter rolling sum)
Source: Haver Analytics.
RMB implied 1-year appreciation/depreciation(percent)
Sources: Bloomberg L.P.; and IMF staff calculations.
-6
-4
-2
0
2
Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17
1-year onshore 1-year NDF
Appreciation
5/12
8
Drivers (I): Carry trade inflows stop with depreciation expectations
Corporate credit: High level relative to peers 1/(selected economies; 2014)
Source: CEIC Data Company Ltd.; IMF, World Economic Outlook and IMF staff estimates1/ Luxembourg and Hong Kong SAR not shown; these have corporate credit-to-GDP ratios and GDP per capita of (118.2, 413.6) and (40.1, 216.6), respectively.2/ Calculated as total social financing minus equity, LGFV and household loans.
Drivers (II): Rising concern about the health of financial sector and slowdown in GDP growth
9
China: Real GDP Growth(percent, year-on-year)
South Africa
Ireland
Turkey
Sweden
SingaporeSwitzerland
KoreaFinland
Poland
Greece
India
Norway
Indonesia
Mexico
Hungary
Japan
Thailand
Euro area
Netherlands
Brazil
Russia
Italy
United States
Germany
Denmark
Argentina
Australia
Spain
United KingdomMalaysia
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140
160
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0 20 40 60 80 100
Cre
dit t
o no
n-fin
anci
al c
orpo
rate
s (p
erce
nt o
f GD
P)
GDP per capita (USD thousand)
China ‘07
China ‘16 2/
China ‘14
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3
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5
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7
8
9
13 14 15 16 17P 18P 19P 20P 21P 22P
Drivers (III): Continued anti-corruption campaign and changes in the enforcement of capital controls
-20
-10
0
10
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30
40
50
60
0
10
20
30
40
50
60
70
80
13 14 15 16 13 14 15 16 13 14 15 16
Court cases oncorruptionconcluded
Officials foundguilty on those
cases
Investigation oncorruption cases
Sources: Supreme People’s Procuratorate; IMF, Balance of Payments database; and IMF, World Economic Outlook.10
Anti-corruption efforts: more court conclusions and less new investigations(number in thousands (lhs) and in percent year-on-year growth (rhs))
-0.1
0.1
0.3
0.5
0.7
0.9
1.1
1.3
1.5
13 14 15 16
Inward Outward
16Q4
Foreign direct investment(percent of annual GDP)
0
500
1000
1500
2000
2500
3000
3500
Fixed withcap controls
Fixed withoutcap controls
Floating withcap controls
Floating withoutcap controls
2015 2016 2017
Chinese reserves well above relevant adequacy ratios(U.S. billions)
Net capital inflows to EMs(U.S. billions)
Sources: Haver Analytics, and IMF, World Economic Outlook.
Net inflow reversal and reserves still ample in China
-120
-100
-80
-60
-40
-20
0
20
40
60
14 15 16 17
China EM (Excl. China) Total
Feb-17
11
Chinese Reserves at end-March 2017
Process not over – Rebalancing still under way
25
50
75
100
125
-10 0 10 20 30 40 50 60
Con
sum
ptio
n
Saving
Orange dots are East Asian economies
ChinaPanama
Qatar
Equatorial Guinea
Suriname
China is major outlier in saving and consumption(percent of GDP, 155 countries)
Investment and saving(percent of GDP)
Sources: Haver Analytics; IMF, World Economic Outlook; and IMF staff estimates.
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12
0
10
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50
60
2000 2002 2004 2006 2008 2010 2012 2014 2016 CAnorm2016
Current account (rhs) National saving Investment
12
Excess saving
13
Higher saving, particularly at lower income deciles
-60
-40
-20
0
20
40
60
10 20 30 40 50 60 70 80 90 100
Aver
age
Hou
seho
ld S
avin
g R
ate
Household Income Decile
Slovenia 2010 France 2010 Taiwan POC 2013 Australia 2010 Serbia 2013Israel 2012 Peru 2013 Mexico 2012 South Africa 2012 China 2013
Average household saving rates, per income deciles(In percent)
Sources: Luxemburg Income Study (LIS), and Chinese Household Income Project (CHIP) for China.
Spillovers to EMDEs: Chinese foreign asset appetite, along with trade, resulting in large exposures to China
Chinese banks’ claims, 2016Q2 1/ 2/(percentage of borrower country’s GDP)
Exports to China, 2015 1/(percentage of exporter country’s GDP)
Sources: Bank for International Settlements; and IMF, Direction of Trade Statistics.1/ The 3 countries with largest financial/trade exposures to China in each region are depicted in red.2/Estimates for 2016Q2 based on the differences between two vintages of BIS Locational Banking statistics for the same quarter (one vintage before and the other after China and Russia were included as BIS reporting countries in November 2016).
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Hon
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Reg
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Djib
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Libe
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Reg
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Baha
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Dom
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Ecua
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Reg
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ASIA AFR WHD
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0
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Hon
g Ko
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AR
Sing
apor
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Viet
nam
Reg
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Con
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Ango
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Mau
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Reg
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Chi
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Peru
Uru
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Reg
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l ave
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ASIA AFR WHD
China among most closed in OECD(OECD’s product market regulation (PMR) index)
Source: OECD.Note: The PMR index assesses degree to which policies promote competition in the product market. Policies assessed include state control of business enterprises; legal and administrative barriers to entrepreneurship; and barriers to international trade and investment.
Chinese economy is heavily managed
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2.5
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Indi
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Chi
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Indo
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Turk
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Afric
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Cro
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Mex
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Kore
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Latv
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Bulg
aria
Mal
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Lith
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Switz
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Nor
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Luxe
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Can
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Japa
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Rep
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Belg
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Hun
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Portu
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Finl
and
Esto
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Italy
Slov
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Aust
ralia
New
Zea
land
Den
mar
kAu
stria
Uni
ted
King
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Net
herla
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2008 2013
15
China, OECD and EMDEs: Import Breakdowns, 2015(percent of GDP)
Source: OECD STAN Bilateral Trade Database in goods.
And has relatively few final consumption imports
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0
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China OECD EMDE w/o China
Intermediate Household consumption Capital goods Mixed end-use Miscellaneous
Summary and policy recommendations
Excessive saving is problematic for macroeconomic stability• Allocating a higher share of income to consumption could both increase welfare and support growth
in a less debt-intensive way
• Given home bias and capital account restrictions, high saving translates into excessive domestic investment which is unlikely to be absorbed efficiently
• The fall in inefficient investment, without an increase in consumption, would widen the current account surplus, worsening global imbalances and undermining the multilateral trade system
Better macro-policy mix should play a key role in the transition• The current fiscal stance uses up limited fiscal space to support unsustainable growth
• A modest removal of monetary policy accommodation is justified by the growth and inflation outlook, and financial stability concerns
• Progress toward a more flexible exchange rate should continue17