China’s Economic Growth, Global Economic Crisis and China’s Policy Responses (The Quaid-i-Azam Lecture)

As a result of opening and reform, China has maintained an annual average growth rate of 9.8 percent for nearly three decades. China’s growth is based on high savings and high investment. Its export promotion policy has also played a very important role in promoting economic growth. However, as a result of China’s growth pattern characterised by investmentdriven and export promotion, the Chinese economy also has been suffering from serious structural imbalances. Its high and ever-rising investment rate has created overheat and overcapacity in tandem. Its high dependency on external market makes its economy vulnerable to external shocks. The global financial crisis has hit the economy seriously and exposed the structural weakness of the economy. The dramatic fall of external demand led to dramatic slowdown of the economy. The Chinese government responded to the slowdown of the economy swiftly and forcefully. A four trillion Renmibi stimulus package and expansionary monetary policy have successfully stabilised the economy. However, the stimulate policy has worsened structural problems. China’s structure problems include high external dependency, high investment rate, deterioration of environment, widening income gap between different social group and between rural and urban areas, insufficiency in the provision of social goods and so on. Due to its strong fiscal position, there should be no problem with China to achieve a growth rate of 8 percent. At the same time, the Chinese government should be able to tackle its structural problems successfully so as to ensure the sustainability of China’s economic growth.Growth, Global Financial Crisis, Stimulus Package, Structural Adjustment

Managing capital flows: The case of the People's Republic of China

The relatively successful management of cross-border capital flows has enabled the People's Republic of China (PRC) to achieve an extremely high average growth rate of more than 10 percent while keeping inflation under control. The management of cross-border capital flows is an indispensable element of macroeconomic stability. In order to cool down the overheating economy, the PRC government will continue to implement a tight monetary policy. In the face of possible further cuts in US interest rates, the PRC's monetary tightening is becoming increasingly difficult. Hence, the PRC must maintain capital controls whenever possible, and improve its management of cross-border capital flows, to enable the People's Bank of China (PBOC) to implement an independent monetary policy to sustain the economy's growth into the next decade

Revisiting the internationalization of the yuan

As the world's second largest economy, largest trading nation, and the largest foreign holder of United States (US) government bonds, the People's Republic of China (PRC) needs a currency with international status that can match its economic status in the global economy. However, sequencing is important. Before the internationalization of the yuan can make meaningful progress, necessary conditions, such as the existence of deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions must be created. The process of yuan internationalization essentially is a process of capital account liberalization. Due to the unprecedented and complex global financial crisis and the PRC's huge imbalances, capital account liberalization has to be pursued in a cautious way. As a result, the internationalization of the yuan is bound to be a long-drawn process. The PRC's road map for the internationalization of the yuan is flawed with many missing links and wishful thinking. Yuan internationalization guided by the current road map may be proven counterproductive

Reform of the international monetary system: Some concrete steps

Reform of the international monetary system is under discussion after three decades of apathy. Tectonic shifts in the balance of international power have made reform more urgent. However, in the short term, there is little chance of a grand redesign of the international monetary system. Nevertheless, concrete steps should be taken. First, consensus is needed on exchange rates, capital flows and reserves. Second, financial safety nets must be improved so that countries do not have to self-insure by accumulating  reserves or rely on possible bilateral swap lines to access liquidity. Third, a change in the composition of the Special Drawing Right should be planned for, to strengthen the multilateral framework. The most workable short-term deliverables seem to be (i) guidelines on and surveillance of capital controls; (ii) a new regime for deciding on SDR allocations that would facilitate more frequent use of this instrument; and (iii) the inclusion of the renmimbi in the SDR basket. These reforms would be a partial move, preparing the ground for further developments.

Capital account liberalization in China: a cautionary tale

This repository item contains a policy brief from the Boston University Global Economic Governance Initiative. The Global Economic Governance Initiative (GEGI) is a research program of the Center for Finance, Law & Policy, the Frederick S. Pardee Center for the Study of the Longer-Range Future, and the Frederick S. Pardee School of Global Studies. It was founded in 2008 to advance policy-relevant knowledge about governance for financial stability, human development, and the environment.This policy brief synthesizes some of the main themes and policy recommendations discussed at a February 2014 workshop of the Pardee Task Force for Regulating Capital Flows at Boston University, and presented in this report, though the specific recommendations discussed in this brief are our own. The main message is that China would do well to draw lessons from both the economics literature and country experiences with capital account liberalization. Such an approach would guide China to adopt a carefully sequenced and cautionary approach to capital account liberalization

Capital account liberalization in China: the need for a balanced approach

This repository item contains a single issue of the Pardee Center Task Force Reports, a publication series that began publishing in 2009 by the Boston University Frederick S. Pardee Center for the Study of the Longer-Range Future.This is the third report stemming from the Pardee Center Task Force on Regulating Capital Flows for Long-Run Development, a project of the Global Economic Governance Initiative (GEGI) at Boston University. This report is the collective work of experts examining the benefits and risks of accelerated capital account liberalization in China. The contributing authors – all leading scholars and practitioners from around the world (listed below) – met at Boston University in February 2014 to discuss the experiences of other emerging market countries that liberalized the capital account to glean lessons for China as it considers this delicate task. This volume is an outcome from that meeting, presenting the authors’ perspectives on important aspects of capital account liberalization that China should pay special attention to, not only for its own sake, but also in consideration of the potential impacts that China’s actions may have on other emerging markets and the global economy overall

How Far Can Renminbi Internationalization Go?

Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China's offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community. This paper argues that while a contributing factor is the sheer size of the People's Republic of China's (PRC) trade and the convenience of using the renminbi for transaction settlements, exchange rate arbitrage and interest rate arbitrage matter also. Profits from arbitrages are the major driving forces of, but do not constitute a sustainable basis for, internationalization. A fundamental constraint for renminbi internationalization is the PRC's capital controls. Before fully opening up its capital account and making the renminbi freely convertible, however, the PRC needs first to put its own house in order. Macroeconomic stability has to be achieved; the high ratio of financial leverage should be reduced; a rational and flexible interest rate structure must be created; and risk management capacity across industries should be established. Most importantly, the PRC must make the renminbi exchange rate flexible to reflect demand for and supply of foreign exchange in the market. The renminbi can and will become a major international currency eventually, but the road to internationalization is bound to be long and bumpy

Why growth equals power - and why it shouldn't : constructing visions of China

When discussing the success of China's transition from socialism, there is a tendency to focus on growth figures as an indication of performance. Whilst these figures are indeed impressive, we should not confuse growth with development and assume that the former necessarily automatically generates the latter. Much has been done to reduce poverty in China, but the task is not as complete as some observers would suggest; particularly in terms of access to health, education and welfare, and also in dealing with relative (rather than absolute) depravation and poverty. Visions of China have been constructed that exaggerate Chinese development and power in the global system partly to serve political interests, but partly due to the failure to consider the relationship between growth and development, partly due to the failure to disaggregate who gets what in China, and partly due to the persistence of inter-national conceptions of globalised production, trade, and financial flows