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The 11th CCER China’s Economy Observation Seminar

Apr 18-2013   



By NING Jing

 

 

On October 28th, 2007, the 11th CCER Chinese Economy Observation Seminar was held in Langrunyuan at Peking University. The speakers of the seminar included YI Gang, PBC Assistant President, WANG Tongsan, Director of CASS Institute of Quantitative & Technical Economics, XIAO Geng, Director of Brookings Institution-Tsinghua University, and CCER Professors ZHOU Qiren, SONG Guoqing, and LU Feng. More than 300 people, including the BiMBA students, attended this meeting.

 

Macroeconomic Insights

The seminar began with Professor LU Feng’s brief introduction of the “Langrun Forecast” for the third quarter. Compared with the official statistics, this forecast has an error of less than 1% in many indexes such as GDP growth, industrial growth, investment of fixed assets and total retail sales. However, it deviates much from the statistics in CPI, and needs improvement in this concern. Besides, the forecast has underestimated the scales of export and import as well as the central bank’s determination for interfering with interest rates, while somewhat overestimates the foreign exchange rates. The forecast for next quarter sounds optimistic about the macroeconomic trend of China, and predicts a GDP growth rate of 11.3% and a much higher CPI than that of the previous quarter. The macroeconomists maintain that we are at a stage of inflation, and both interest rate and foreign exchange rate may thus continue to rise.

 

In SONG Guoqing’s opinion, Chinese economy does not present a tendency of turning overheated, as indicated by the GDP growth of September, which is faster than that of last December but slower than that of last March. Following the fluctuating food prices, the price indexes have fallen, portending no sign of rebounding of the basic prices. As for monthly statistics, production experienced violent vacillations, rising sharply in June and abruptly plummeting in July and August. Trade surplus also fluctuated, but to a lesser degree. By contrast, the index for consumer products only varied moderately, while that for investment remained quite stable.

 

Next, Professor SONG Guoqing explored the issue of residents’ income, believing that all of the changes of the following price ratios would present impact on the residents’ income.

 

From early 2002 to July 2006, the price ratio between production materials and living materials had risen sharply all along before it finally began to fall. The price of production materials rose very slowly, while CPI already exceeded the level of 2004. By contrast, the price of living materials grew very fast. In 1992, personal incomes accounted for 70% of national income. The percentage had since declined unceasingly until it touched 58% in 2004. And the decline continued. That is to say, half of the national income did not go to individuals. The result was that companies harvested soaring profits and the government also garnered larger amounts of disposable income. Having declined for 10 years, the proportion of personal incomes to disposable national income may take a different direction this year. The corporate profit is subject to both upper stream and lower stream factors, and influences the ratio between personal incomes and corporate incomes. Generally speaking, against today’s backdrop of peasant migration, the lower the grain prices are, the more migrant workers there will be, and the slower the salaries will grow. Corporate profit is determined by upper stream prices, and rise of the upper stream price ratio will drive down the share of salaries in the total cost.

 

From a global perspective, if oil is not considered, the price ratio between upper stream and lower stream sectors will take a reversed trend, that is, to come down to a lower level. Due to RMB appreciation, the price of production materials will only rise moderately in China. If the domestic inflation rate can be maintained close to the international level and foreign exchange rate is employed to play a balancing role, the pressure concerning upper stream resources can be alleviated. There will not be much room for increase of lower stream profit, but there might be opportunities for salary increase due to upper stream changes. Suppose both the price of production materials and that of grain can be stabilized, the ratio between personal income and corporate income is expected to show some changes.

 

 

LU Feng: The Trend of Grain Price inChina

The CPI rise in China this year is largely contributed to the rise of pork and grain prices. Now that the pork price has come down a bit in response to the regulating measures, what is the trend of the grain price? Will it continue to push CPI to a higher level? Does the rise of grain price indicate that China faces trouble for long-term grain supply?

 

Rarely observed in the past 30 years, China’s grain yield has so far expanded drastically for consecutively 3 years, rebounding from its long history of declining. The accumulative growth has reached 15%, and it is safe to believe that the yield will continue to swell this year. However, different grain types have recorded varied rates of increase. The output of soybeans grew impressively, but that of other grains experienced only a moderate expansion. The yield of fodder grains has increased noticeably, while that of mainstay grains has not increased much. As for grain trade, the net imported, for the first time in history, surpassed 25 million tons and accounted for 5% of the total consumption last year. Again, difference exists between different grain types in terms of grain trade. Since the Chinese accession to the WTO, the grain import of China has had this feature: noticeably increasing import of soybeans but decreasing imports of other grains. This feature is contributed to the excessive grain prices in the international market and the low foreign exchange rate in China.

 

Grain yield and net grain import constitute apparent consumption. Inventory aside, correlation exists between incomes and the change of apparent consumption, and serves as useful reference to the long-term grain need in China. From 1980 to 2006, the per capita income of Chinese increased for 8 to 9 times, but the apparent grain consumption increased only 13.8%. In general, the link between per capita income and apparent consumption of grain was weak. However, other factors, such as alteration of the production and sales structures, had impressive influence upon apparent consumption. For example, now that people has a larger demand for soybean, more effective fodder grains, and animal products involving low consumption of grains, the total demand for grains has dropped. Besides, high efficiency of fodder utilization as well as demand for fruits will also influence grain demand. Based on this presumption, the increase of grain demand in China will mainly arise from population increase.

 

Chinese statistics and reports related to inventory have long been inadequate. There exists a correlation between the inventory and the purchase and sales by the state-owned enterprises in China. In accordance with the domestic statistics and those provided by the Ministry of Agriculture of the United States, the current grain inventory in China is estimated to be 380 million tons. Due to its pertinence to a variety of factors, this estimate may be higher than the real amount. In China, the grain producers all have their own grain inventory. Based on the “November surveys” in all these years, the grain inventory for each peasant household was 128 kilograms in 1978, and 662 kilograms in 1998. The figure gradually dropped and began to stabilize around 535 kilograms. The current figure is estimated to be 520 kilograms per household. The grain price peaked in 1995, and began to fall due to grain excess. It rebounded in 2003, but declined in 2005. After that, the price has seen obvious rise. In the past several decades, three grain price cycles have appeared: the price declined at the beginning of the reform and opening-up campaign; it rose after the adjustment of agriculture policies; and it peaked in 1995. Judging from the current situation in China, with appropriate macro adjustment and control, it is hardly possible for grain price to return to the level in 1995.

 

China has achieved an ever higher level of long-term grain security, which is very significant to the policies of China. More realistic assessment of this issue may be enlightening on certain issues. The exorbitant prices of wheat of the major wheat producers of the world will influence China’s grain import and export; and oil price will influence the freight level and thus influence grain trade. Nonetheless, in general, so far the money supply can be stabilized, the possibility of continuous rise of grain price will be very slight.

 

YI Gang: The Subprime Mortgage Crisis in the U.S.A. Had Only Moderate Influence onChina, but RMB Still Faces Pressure

In the United States, subprime mortgage loans mainly refer to the loans lent to the borrowers who have lower credit ratings or incomplete credit ratings, or whose monthly salary can not meet the standards for borrowing a loan. The total of subprime mortgage loans in the United States reached over 100 billion dollars in 2001, and it peaked at 600 billion dollars in 2005. However, the figure radically declined in 2007. The subprime mortgage loans in the United States had grown fast thanks to its unique transmission mechanism: The house owner/borrower obtains the loan; the lender transfers the loan to a special vehicle company (SPV); the SPV commissioned the undertaker to package and securitize the loan, and sell it on the market; the buyers were usually the fund companies and individual investors. Under the subprime mortgage system, a person disqualified for buying a house could own a house, but the risks were dispersed throughout the world, with the United States itself bearing only part of the losses caused by these risks.

 

On the other hand, this financial innovation has a negative impact. For the very reason that its risks are widely dispersed, it has extensive influences and poses strong effect on world finance. When the house price came down, the situation of subprime mortgage took a different direction. The defaulting rate of such loans rose to 15%, of which the influence was soon channeled into the banking and stock markets. The fuse was the downward adjustment of the credit ratings. The rating companies issued the ratings only according to historical data. Along the changes of house price and interest rate, the rating companies reduced the ratings of over 1000 subprime loans, and the regulatory authority also issued early warnings. This finally caused the crisis of subprime mortgage loans. The subprime mortgage crisis first caused widespread panic among the hedging funds, and then also caused short-term panic on the stock market. 

 

According to incomplete statistics, the loss on U.S. subprime mortgage market is 200 billion dollars, which is to be shouldered by many countries. Besides, the crisis is now penetrating into the real economy, mainly through house price. When the house price falls, the borrower cannot sell his house and cannot repay the debt. The bank then collects the house for auction, which causes the house price to fall even lower. Thus the negative asset of the borrower in relation to the house price keeps increasing. Against this backdrop, the central banks of various countries have extended their help by providing fluidity, which, however, is only for short term.

 

China has only a limited scale of investment on this market, and its investment is for long terms. What’s more, it has adopted a conservative strategy and only invests in loans with a considerably high credit rating. Therefore, China faces only a slight impact. However, since China is now in the cycle of increasing interest rates while the subprime mortgage crisis may induce FED to enter a cycle of reducing interest rates, the dollar is bound to depreciate and the capital market in China is poised to become more magnetic to foreign capital. As a result, China confronts bigger obstacles for macro adjustment and control. Theoretically, the subprime mortgage crisis brings global fluidity scarcity, which is good news to China, which is beset with excessive fluidity. Nevertheless, when a financial crisis occurs in a given market in the world, some free capitals from that market may choose China as their haven. That is why China has felt no obvious reduction of fluidity caused by the crisis. 

 

The series of tight monetary policies adopted in the past have produced initial effects, and the fluidity arising from the RMB counterpart of foreign exchange reserves has been set off. However, he said, adequately tight monetary policies should be maintained, and further measures, such as raising bank reserve ratios and employing price levers, should be implemented to guard the “credit gate”.

 

The 11th CCER China’s Economy Observation Seminar

Apr 18-2013   



By NING Jing

 

 

On October 28th, 2007, the 11th CCER Chinese Economy Observation Seminar was held in Langrunyuan at Peking University. The speakers of the seminar included YI Gang, PBC Assistant President, WANG Tongsan, Director of CASS Institute of Quantitative & Technical Economics, XIAO Geng, Director of Brookings Institution-Tsinghua University, and CCER Professors ZHOU Qiren, SONG Guoqing, and LU Feng. More than 300 people, including the BiMBA students, attended this meeting.

 

Macroeconomic Insights

The seminar began with Professor LU Feng’s brief introduction of the “Langrun Forecast” for the third quarter. Compared with the official statistics, this forecast has an error of less than 1% in many indexes such as GDP growth, industrial growth, investment of fixed assets and total retail sales. However, it deviates much from the statistics in CPI, and needs improvement in this concern. Besides, the forecast has underestimated the scales of export and import as well as the central bank’s determination for interfering with interest rates, while somewhat overestimates the foreign exchange rates. The forecast for next quarter sounds optimistic about the macroeconomic trend of China, and predicts a GDP growth rate of 11.3% and a much higher CPI than that of the previous quarter. The macroeconomists maintain that we are at a stage of inflation, and both interest rate and foreign exchange rate may thus continue to rise.

 

In SONG Guoqing’s opinion, Chinese economy does not present a tendency of turning overheated, as indicated by the GDP growth of September, which is faster than that of last December but slower than that of last March. Following the fluctuating food prices, the price indexes have fallen, portending no sign of rebounding of the basic prices. As for monthly statistics, production experienced violent vacillations, rising sharply in June and abruptly plummeting in July and August. Trade surplus also fluctuated, but to a lesser degree. By contrast, the index for consumer products only varied moderately, while that for investment remained quite stable.

 

Next, Professor SONG Guoqing explored the issue of residents’ income, believing that all of the changes of the following price ratios would present impact on the residents’ income.

 

From early 2002 to July 2006, the price ratio between production materials and living materials had risen sharply all along before it finally began to fall. The price of production materials rose very slowly, while CPI already exceeded the level of 2004. By contrast, the price of living materials grew very fast. In 1992, personal incomes accounted for 70% of national income. The percentage had since declined unceasingly until it touched 58% in 2004. And the decline continued. That is to say, half of the national income did not go to individuals. The result was that companies harvested soaring profits and the government also garnered larger amounts of disposable income. Having declined for 10 years, the proportion of personal incomes to disposable national income may take a different direction this year. The corporate profit is subject to both upper stream and lower stream factors, and influences the ratio between personal incomes and corporate incomes. Generally speaking, against today’s backdrop of peasant migration, the lower the grain prices are, the more migrant workers there will be, and the slower the salaries will grow. Corporate profit is determined by upper stream prices, and rise of the upper stream price ratio will drive down the share of salaries in the total cost.

 

From a global perspective, if oil is not considered, the price ratio between upper stream and lower stream sectors will take a reversed trend, that is, to come down to a lower level. Due to RMB appreciation, the price of production materials will only rise moderately in China. If the domestic inflation rate can be maintained close to the international level and foreign exchange rate is employed to play a balancing role, the pressure concerning upper stream resources can be alleviated. There will not be much room for increase of lower stream profit, but there might be opportunities for salary increase due to upper stream changes. Suppose both the price of production materials and that of grain can be stabilized, the ratio between personal income and corporate income is expected to show some changes.

 

 

LU Feng: The Trend of Grain Price inChina

The CPI rise in China this year is largely contributed to the rise of pork and grain prices. Now that the pork price has come down a bit in response to the regulating measures, what is the trend of the grain price? Will it continue to push CPI to a higher level? Does the rise of grain price indicate that China faces trouble for long-term grain supply?

 

Rarely observed in the past 30 years, China’s grain yield has so far expanded drastically for consecutively 3 years, rebounding from its long history of declining. The accumulative growth has reached 15%, and it is safe to believe that the yield will continue to swell this year. However, different grain types have recorded varied rates of increase. The output of soybeans grew impressively, but that of other grains experienced only a moderate expansion. The yield of fodder grains has increased noticeably, while that of mainstay grains has not increased much. As for grain trade, the net imported, for the first time in history, surpassed 25 million tons and accounted for 5% of the total consumption last year. Again, difference exists between different grain types in terms of grain trade. Since the Chinese accession to the WTO, the grain import of China has had this feature: noticeably increasing import of soybeans but decreasing imports of other grains. This feature is contributed to the excessive grain prices in the international market and the low foreign exchange rate in China.

 

Grain yield and net grain import constitute apparent consumption. Inventory aside, correlation exists between incomes and the change of apparent consumption, and serves as useful reference to the long-term grain need in China. From 1980 to 2006, the per capita income of Chinese increased for 8 to 9 times, but the apparent grain consumption increased only 13.8%. In general, the link between per capita income and apparent consumption of grain was weak. However, other factors, such as alteration of the production and sales structures, had impressive influence upon apparent consumption. For example, now that people has a larger demand for soybean, more effective fodder grains, and animal products involving low consumption of grains, the total demand for grains has dropped. Besides, high efficiency of fodder utilization as well as demand for fruits will also influence grain demand. Based on this presumption, the increase of grain demand in China will mainly arise from population increase.

 

Chinese statistics and reports related to inventory have long been inadequate. There exists a correlation between the inventory and the purchase and sales by the state-owned enterprises in China. In accordance with the domestic statistics and those provided by the Ministry of Agriculture of the United States, the current grain inventory in China is estimated to be 380 million tons. Due to its pertinence to a variety of factors, this estimate may be higher than the real amount. In China, the grain producers all have their own grain inventory. Based on the “November surveys” in all these years, the grain inventory for each peasant household was 128 kilograms in 1978, and 662 kilograms in 1998. The figure gradually dropped and began to stabilize around 535 kilograms. The current figure is estimated to be 520 kilograms per household. The grain price peaked in 1995, and began to fall due to grain excess. It rebounded in 2003, but declined in 2005. After that, the price has seen obvious rise. In the past several decades, three grain price cycles have appeared: the price declined at the beginning of the reform and opening-up campaign; it rose after the adjustment of agriculture policies; and it peaked in 1995. Judging from the current situation in China, with appropriate macro adjustment and control, it is hardly possible for grain price to return to the level in 1995.

 

China has achieved an ever higher level of long-term grain security, which is very significant to the policies of China. More realistic assessment of this issue may be enlightening on certain issues. The exorbitant prices of wheat of the major wheat producers of the world will influence China’s grain import and export; and oil price will influence the freight level and thus influence grain trade. Nonetheless, in general, so far the money supply can be stabilized, the possibility of continuous rise of grain price will be very slight.

 

YI Gang: The Subprime Mortgage Crisis in the U.S.A. Had Only Moderate Influence onChina, but RMB Still Faces Pressure

In the United States, subprime mortgage loans mainly refer to the loans lent to the borrowers who have lower credit ratings or incomplete credit ratings, or whose monthly salary can not meet the standards for borrowing a loan. The total of subprime mortgage loans in the United States reached over 100 billion dollars in 2001, and it peaked at 600 billion dollars in 2005. However, the figure radically declined in 2007. The subprime mortgage loans in the United States had grown fast thanks to its unique transmission mechanism: The house owner/borrower obtains the loan; the lender transfers the loan to a special vehicle company (SPV); the SPV commissioned the undertaker to package and securitize the loan, and sell it on the market; the buyers were usually the fund companies and individual investors. Under the subprime mortgage system, a person disqualified for buying a house could own a house, but the risks were dispersed throughout the world, with the United States itself bearing only part of the losses caused by these risks.

 

On the other hand, this financial innovation has a negative impact. For the very reason that its risks are widely dispersed, it has extensive influences and poses strong effect on world finance. When the house price came down, the situation of subprime mortgage took a different direction. The defaulting rate of such loans rose to 15%, of which the influence was soon channeled into the banking and stock markets. The fuse was the downward adjustment of the credit ratings. The rating companies issued the ratings only according to historical data. Along the changes of house price and interest rate, the rating companies reduced the ratings of over 1000 subprime loans, and the regulatory authority also issued early warnings. This finally caused the crisis of subprime mortgage loans. The subprime mortgage crisis first caused widespread panic among the hedging funds, and then also caused short-term panic on the stock market. 

 

According to incomplete statistics, the loss on U.S. subprime mortgage market is 200 billion dollars, which is to be shouldered by many countries. Besides, the crisis is now penetrating into the real economy, mainly through house price. When the house price falls, the borrower cannot sell his house and cannot repay the debt. The bank then collects the house for auction, which causes the house price to fall even lower. Thus the negative asset of the borrower in relation to the house price keeps increasing. Against this backdrop, the central banks of various countries have extended their help by providing fluidity, which, however, is only for short term.

 

China has only a limited scale of investment on this market, and its investment is for long terms. What’s more, it has adopted a conservative strategy and only invests in loans with a considerably high credit rating. Therefore, China faces only a slight impact. However, since China is now in the cycle of increasing interest rates while the subprime mortgage crisis may induce FED to enter a cycle of reducing interest rates, the dollar is bound to depreciate and the capital market in China is poised to become more magnetic to foreign capital. As a result, China confronts bigger obstacles for macro adjustment and control. Theoretically, the subprime mortgage crisis brings global fluidity scarcity, which is good news to China, which is beset with excessive fluidity. Nevertheless, when a financial crisis occurs in a given market in the world, some free capitals from that market may choose China as their haven. That is why China has felt no obvious reduction of fluidity caused by the crisis. 

 

The series of tight monetary policies adopted in the past have produced initial effects, and the fluidity arising from the RMB counterpart of foreign exchange reserves has been set off. However, he said, adequately tight monetary policies should be maintained, and further measures, such as raising bank reserve ratios and employing price levers, should be implemented to guard the “credit gate”.