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The 12th CCER & BiMBA “Chinese Economy Observation” Seminar

Apr 18-2013   



 

By MA Xin

 

On February 24th, 2008, the 12th Chinese Economy Observation Seminar, jointly sponsored by China Center for Economic Research (CCER) and BiMBA, was held at Wanzhong Building in Langrunyuan of Peking University.

 

The seminar, with Professor LU Feng from CCER as its host, announced the “Langrun Forecast” for the first quarter of 2008, and had as its speakers Professor Justin Yifu Lin, freshly appointed Vice President and Chief Economist of World Bank and Director of CCER, Professor YI Gang, CCER professor and PBC’s Vice President, Mr. JIA Kang, Director of Research Institute for Fiscal Science of the Ministry of Finance, Deputy Director ZHU Baoliang of Department of Economic Forecast of State Information Center, and CCER Professors SONG Guoqing and ZHOU Qiren. The audience of the seminar consisted of nearly 1000 people from the academic, business, and media communities as well as schools.

 

LIN Yifu: Three Questions Repeated during the European Tour

Under the title of “Three Questions Repeated during the European Tour”, Professor Lin elaborated on three questions that have concerned the business community the most, namely, “What is the possible impact that the recession and stagflation of U.S. economy resulting from the subprime mortgage crisis may cause upon Chinese economy”, “Will Chinese economy experience post-Olympic Games recession”, and “What are the challenges and possibilities for the mid- and long-term economic development of China”.

 

Profession Lin first analyzed the causes of the subprime mortgage crisis in the United States. Citing that the financial industry of China is only moderately involved in subprime mortgage business, that Chinese exports are largely cheap consumer goods, and other related facts, he stated that this crisis and the resulting recession of U.S. economy would only have limited effect on the economy of China. As for the concern over Chinese economy after the Olympic Games, he regarded it as unnecessary because Chinese economy is characterized by a huge volume, large room for infrastructure investment, abundant opportunities provided by industrial upgrade, high levels of FDI, and further integration with world economy after the Olympic Games, and can thus avoid a post-Olympic Games recession like that experienced by Sydney and Athens.

 

Then, Professor Lin pronounced his judgment of the challenges and possibilities of the economic development of China. Firstly, as long as the banks can avoid a crisis, there won’t be an overall financial and economic crisis. Secondly, China will unavoidably encounter some social conflicts in this period of rapid economic development and social transformation, but will remain a stable, healthy, and harmonious society because such conflicts and their social influences are negligible. Thirdly, the ever expanding volume of Chinese exports and China’s ever rising trade surplus with the United States will probably lead to tense Sino-U.S. relations, but will not cause severe deterioration of their bilateral relationship or China’s relationship with any other developed country. Finally, due to a combination of factors such as the particular situation of China, the abilities of Chinese leaders and entrepreneurs, and the yearning of Chinese people for a better life, so went his belief, Chinese economy will sustain growth in upcoming years.

 

YI Gang: Market Mechanism Is Gaining Ground, While Economic Imbalance Is Losing Its Force

Inflation has become an engaging topic for people from entrepreneurs to the masses. Professor YI Gang, a high-rank PBC official and decision maker of China’s monetary policy, analyzed this issue from three aspects.

 

First of all, Professor YI Gang did not think that there is any conflict between RMB’s overseas appreciation and its domestic depreciation, but held that the two are headed for adjustment of the same direction. For RMB to be stabilized basically on a reasonable and balanced level will be beneficial both in promoting the prices of Chinese products and channeling resources to meet domestic demands. Besides, RMB appreciation and the fluctuation of its exchange rates do not change the weighted average purchasing power of Chinese people, affecting only the proportion between domestic and overseas purchases. To be sure, the market and price are stronger than man.

 

Therefore, Professor YI Gang pointed out that China should establish a regulated floating exchange rate system on the basis of market demands and with reference to a package of currencies, bring into greater play the basic role of the market demand in formation of RMB’s exchange rates, increase the flexibility of RMB, and keep RMB basically stable on a reasonable and balanced level under the principles of initiativeness, controllability, and gradualism.

Then, Professor YI analyzed the issue from the perspective of the market-driven adjustment of the collocation of financial assets in Mainland China. He stated that statistics indicated that the amount of deposits and tradable shares as well as that of fund, insurance, trust and wealth management assets owned by the real economic sector drastically increased in 2007, and especially the direct investment assets more than doubled. As for the change of the components of the real economy sector, that is, the financial assets of residents, their absolute amount is increasing despite a smaller proportion of interest-oriented deposits. Besides, the market capitalization value of the A share market and other assets such as funds also increased. Similarly, enterprises reacted to market rationally. As a result, the financial assets of China obviously improved during the 2006 to 2007, which agreed with the government policy of greatly promoting direct financing.

 

The last perspective lies in the fluidity of the financial market and the adjustments made by the emerging markets. Professor YI Gang believed that capital flowing into the emerging markets has greatly increased. Consequently, foreign exchange reserve and FDI have achieved one after another record highs, non-FDI investments rapidly grew, the currency has substantially appreciated, and asset prices have risen remarkably. The above two conclusions can also be applied to the whole world: The market works, and the capital flow agrees with market rules. The measures that the emerging markets have taken to deal with capital inflow and their experiences in such exertions are as follows: 1. Increase flexibility of the foreign exchange; 2. Pursue fixed inflation targets, actively employ fiscal policies, strengthen financial supervision, and encourage capital outflow. About this issue, one point of view holds that regulation works. However, judging from the dysfunction of a series of regulatory measures adopted by emerging markets, including the measures of tax-reduction and the zero-interest deposit reserves in Columbia, coexistence of direct regulation and indirect regulation in Brazil, and the zero-interest deposit reserves in Chile, demonstrating that capital regulation cannot fundamentally prevent the capital inflow in large scale. 

 

JIA Kang: The Fiscal and Tax Systems, Policies and Reform of China

 

Director JIA Kang stated that Chinese state finance has experienced three stages: the supply type, the production and construction type, and the operation and management type. Now, it is shifting to the public finance type. Director JIA made a detailed introduction of the conceived framework for the public finance as well as its current progress. The current reform of China’s state finance emphasizes improvement of its “quality of being public”. He expounded this point from the basic aim and means, the decision-making and supervising mechanisms, and the specific operational methods of wealth management by government. What’s more, he believed that wealth management by the government under the framework of public finance will lead to a compound budget system coordinating the public budget for public incomes and expenditures, the budget for management of state-owned operation-oriented assets, and the budget for social security.

 

As for tax, he believed that China went through a transition from a very simple tax system to multi-layer compound tax system, and now should have “simpler tax system, more generous taxable basis, lower tax rates, and stricter tax collection”. The reform of the fiscal and tax systems shall also have to deal with system innovation, management innovation, technological innovation, and a series of matching reforms. So this reform demands joint efforts of all sides.

 

ZHU Baoliang: Major Trends of China’s Economic Development in 2008

 

Based on the statistics about the development of Chinese economy in recent years, Deputy Director ZHU Baoliang pointed out that the potential growth rate has become higher while the actual growth rate has been slightly higher than the potential growth rate, but the difference is just a small one. Against the backdrop of continuous expansion of Chinese potential capacity for economic growth, this difference can be understood as the influence from the macroeconomic adjustment and external shocks upon the economy of China. Meanwhile, in his opinion, the slowdown of world economy will not have significant impact on China, and the recent extreme and disastrous weather will cause only temporary fluctuations with just limited influence upon the economy as a whole.

 

Speculating on the economy in 2008, Deputy Director ZHU Baoliang believed that in the coming year, consumption will play a bigger role in economic growth while investment will remain stable and foreign trade surplus will grow at a lower rate. In the mean time, the total demand of China, which has been forcefully expanding, will begin to lose steam, and as a result the national economy will turn off the track of accelerated growth seen in the past 5 years onto a new path of stable high-rate growth followed by moderate retrenchment. Through empirical analysis of the price situation in China, he believed that in 2008 the pressure for higher prices will build up due to higher costs, and the CPI will first reach high but later decline through the year. At last, as for the basic direction of macroeconomic policies, he mentioned that the steady fiscal policies and tight monetary policy should be changed.

 

Professor SONG Guoqing: Weak Resonation for Production, Forced Divorce of Demands

 

Drawing on the latest statistics already published by January 2008, Professor SONG Guoqing concentrated his research on the possible factors causing the inflation and the impact of international economic situation upon Chinese export and economy.

 

His findings indicate that in a case of insufficient total demand, that is, low growth rate of money supply (deflation or semi-deflation), dysfunction of the monetary policy will cause change of external demand, which, in turn, will not only lead to change of export itself but also influence money supply and consequently internal demand. The change of external demand will be amplified through financial accelerator and will cause strong resonation. Without deflation, monetary policy can adjust internal demand so that there won’t be necessary connection between internal demand and external demand. When external demand changes, internal demand can be made to change in the opposite direction via monetary policy so as to maintain stability of total demand. However, in case of violent changes of external demand, the supply structure cannot fully adapt to the changes of demand structure, and structural problems ensue. Hence, weak resonation can still occur for production.

 

Therefore, following the logic that inflation is money-driven, he believed that the only and simple choice to cope with inflation should be to tighten money supply. Inflation can be used to stimulate economic growth, but with a very serious disadvantage: Degrade the credit of the currency and that of the monetary policy. This result will do more serious harm in the future. For this reason, policy considerations which compromise inflation with economic growth target tend to bring a situation of continuously higher inflation rates and the final turmoil.

 

Professor SONG Guoqing thought that the biggest risk today lies not in inflation itself but the multi-goal of monetary policy. Judging from the current situation, although the strong and decisive demand to control inflation has been adopted as the policy suggestion, it is estimable that the policy choice will turn out to be “delayed deflation”, allowing inflation to last for a long and even a very long time.

 

ZHOU Qiren: Inflation and Price Regulation

 

Starting from some trivial matters, Professor ZHOU Qiren made a thorough discussion of the potential hazards of the policy of being “Lenient about money supply but rigorous about price interference”.

 

Recently, a series of policies have been introduced to set a price ceiling for products (such as electricity and food), with an aim to realize social fairness. However, the prices of most basic raw materials are being decided by the market, so the costs of the producers have been climbing ever higher. The power companies, surprisingly, suffer almost an industry-wide loss. Besides, price ceilings are also set for productive factors such as labor and land. Consequently, the prices of raw materials are high while those for products are low, so people’s will to produce is obviously declining, leading to a vicious circle. The market has less supply, the supply-demand conflict gets worse, and inflation climbs ever higher. Under such condition, resources cannot be distributed in a reasonable and optimized manner.

 

On the contrary, the policy of tightening money supply would be more effective in coping with current inflation. However, in the process of solving this problem in this way, the government may encounter potential pressure, that is, certain deterioration of employment situation. This may cause the government to falter on the tight monetary policy and turn to expand and enhance price regulation. In this way, inflation will be reinforced and develop into a mid-term chronic problem. In conclusion, the reasonable method to solve the inflation problem should be “to take a drastic measure of tightening money supply while loosening price regulation to encourage production”.

 

The 12th CCER & BiMBA “Chinese Economy Observation” Seminar

Apr 18-2013   



 

By MA Xin

 

On February 24th, 2008, the 12th Chinese Economy Observation Seminar, jointly sponsored by China Center for Economic Research (CCER) and BiMBA, was held at Wanzhong Building in Langrunyuan of Peking University.

 

The seminar, with Professor LU Feng from CCER as its host, announced the “Langrun Forecast” for the first quarter of 2008, and had as its speakers Professor Justin Yifu Lin, freshly appointed Vice President and Chief Economist of World Bank and Director of CCER, Professor YI Gang, CCER professor and PBC’s Vice President, Mr. JIA Kang, Director of Research Institute for Fiscal Science of the Ministry of Finance, Deputy Director ZHU Baoliang of Department of Economic Forecast of State Information Center, and CCER Professors SONG Guoqing and ZHOU Qiren. The audience of the seminar consisted of nearly 1000 people from the academic, business, and media communities as well as schools.

 

LIN Yifu: Three Questions Repeated during the European Tour

Under the title of “Three Questions Repeated during the European Tour”, Professor Lin elaborated on three questions that have concerned the business community the most, namely, “What is the possible impact that the recession and stagflation of U.S. economy resulting from the subprime mortgage crisis may cause upon Chinese economy”, “Will Chinese economy experience post-Olympic Games recession”, and “What are the challenges and possibilities for the mid- and long-term economic development of China”.

 

Profession Lin first analyzed the causes of the subprime mortgage crisis in the United States. Citing that the financial industry of China is only moderately involved in subprime mortgage business, that Chinese exports are largely cheap consumer goods, and other related facts, he stated that this crisis and the resulting recession of U.S. economy would only have limited effect on the economy of China. As for the concern over Chinese economy after the Olympic Games, he regarded it as unnecessary because Chinese economy is characterized by a huge volume, large room for infrastructure investment, abundant opportunities provided by industrial upgrade, high levels of FDI, and further integration with world economy after the Olympic Games, and can thus avoid a post-Olympic Games recession like that experienced by Sydney and Athens.

 

Then, Professor Lin pronounced his judgment of the challenges and possibilities of the economic development of China. Firstly, as long as the banks can avoid a crisis, there won’t be an overall financial and economic crisis. Secondly, China will unavoidably encounter some social conflicts in this period of rapid economic development and social transformation, but will remain a stable, healthy, and harmonious society because such conflicts and their social influences are negligible. Thirdly, the ever expanding volume of Chinese exports and China’s ever rising trade surplus with the United States will probably lead to tense Sino-U.S. relations, but will not cause severe deterioration of their bilateral relationship or China’s relationship with any other developed country. Finally, due to a combination of factors such as the particular situation of China, the abilities of Chinese leaders and entrepreneurs, and the yearning of Chinese people for a better life, so went his belief, Chinese economy will sustain growth in upcoming years.

 

YI Gang: Market Mechanism Is Gaining Ground, While Economic Imbalance Is Losing Its Force

Inflation has become an engaging topic for people from entrepreneurs to the masses. Professor YI Gang, a high-rank PBC official and decision maker of China’s monetary policy, analyzed this issue from three aspects.

 

First of all, Professor YI Gang did not think that there is any conflict between RMB’s overseas appreciation and its domestic depreciation, but held that the two are headed for adjustment of the same direction. For RMB to be stabilized basically on a reasonable and balanced level will be beneficial both in promoting the prices of Chinese products and channeling resources to meet domestic demands. Besides, RMB appreciation and the fluctuation of its exchange rates do not change the weighted average purchasing power of Chinese people, affecting only the proportion between domestic and overseas purchases. To be sure, the market and price are stronger than man.

 

Therefore, Professor YI Gang pointed out that China should establish a regulated floating exchange rate system on the basis of market demands and with reference to a package of currencies, bring into greater play the basic role of the market demand in formation of RMB’s exchange rates, increase the flexibility of RMB, and keep RMB basically stable on a reasonable and balanced level under the principles of initiativeness, controllability, and gradualism.

Then, Professor YI analyzed the issue from the perspective of the market-driven adjustment of the collocation of financial assets in Mainland China. He stated that statistics indicated that the amount of deposits and tradable shares as well as that of fund, insurance, trust and wealth management assets owned by the real economic sector drastically increased in 2007, and especially the direct investment assets more than doubled. As for the change of the components of the real economy sector, that is, the financial assets of residents, their absolute amount is increasing despite a smaller proportion of interest-oriented deposits. Besides, the market capitalization value of the A share market and other assets such as funds also increased. Similarly, enterprises reacted to market rationally. As a result, the financial assets of China obviously improved during the 2006 to 2007, which agreed with the government policy of greatly promoting direct financing.

 

The last perspective lies in the fluidity of the financial market and the adjustments made by the emerging markets. Professor YI Gang believed that capital flowing into the emerging markets has greatly increased. Consequently, foreign exchange reserve and FDI have achieved one after another record highs, non-FDI investments rapidly grew, the currency has substantially appreciated, and asset prices have risen remarkably. The above two conclusions can also be applied to the whole world: The market works, and the capital flow agrees with market rules. The measures that the emerging markets have taken to deal with capital inflow and their experiences in such exertions are as follows: 1. Increase flexibility of the foreign exchange; 2. Pursue fixed inflation targets, actively employ fiscal policies, strengthen financial supervision, and encourage capital outflow. About this issue, one point of view holds that regulation works. However, judging from the dysfunction of a series of regulatory measures adopted by emerging markets, including the measures of tax-reduction and the zero-interest deposit reserves in Columbia, coexistence of direct regulation and indirect regulation in Brazil, and the zero-interest deposit reserves in Chile, demonstrating that capital regulation cannot fundamentally prevent the capital inflow in large scale. 

 

JIA Kang: The Fiscal and Tax Systems, Policies and Reform of China

 

Director JIA Kang stated that Chinese state finance has experienced three stages: the supply type, the production and construction type, and the operation and management type. Now, it is shifting to the public finance type. Director JIA made a detailed introduction of the conceived framework for the public finance as well as its current progress. The current reform of China’s state finance emphasizes improvement of its “quality of being public”. He expounded this point from the basic aim and means, the decision-making and supervising mechanisms, and the specific operational methods of wealth management by government. What’s more, he believed that wealth management by the government under the framework of public finance will lead to a compound budget system coordinating the public budget for public incomes and expenditures, the budget for management of state-owned operation-oriented assets, and the budget for social security.

 

As for tax, he believed that China went through a transition from a very simple tax system to multi-layer compound tax system, and now should have “simpler tax system, more generous taxable basis, lower tax rates, and stricter tax collection”. The reform of the fiscal and tax systems shall also have to deal with system innovation, management innovation, technological innovation, and a series of matching reforms. So this reform demands joint efforts of all sides.

 

ZHU Baoliang: Major Trends of China’s Economic Development in 2008

 

Based on the statistics about the development of Chinese economy in recent years, Deputy Director ZHU Baoliang pointed out that the potential growth rate has become higher while the actual growth rate has been slightly higher than the potential growth rate, but the difference is just a small one. Against the backdrop of continuous expansion of Chinese potential capacity for economic growth, this difference can be understood as the influence from the macroeconomic adjustment and external shocks upon the economy of China. Meanwhile, in his opinion, the slowdown of world economy will not have significant impact on China, and the recent extreme and disastrous weather will cause only temporary fluctuations with just limited influence upon the economy as a whole.

 

Speculating on the economy in 2008, Deputy Director ZHU Baoliang believed that in the coming year, consumption will play a bigger role in economic growth while investment will remain stable and foreign trade surplus will grow at a lower rate. In the mean time, the total demand of China, which has been forcefully expanding, will begin to lose steam, and as a result the national economy will turn off the track of accelerated growth seen in the past 5 years onto a new path of stable high-rate growth followed by moderate retrenchment. Through empirical analysis of the price situation in China, he believed that in 2008 the pressure for higher prices will build up due to higher costs, and the CPI will first reach high but later decline through the year. At last, as for the basic direction of macroeconomic policies, he mentioned that the steady fiscal policies and tight monetary policy should be changed.

 

Professor SONG Guoqing: Weak Resonation for Production, Forced Divorce of Demands

 

Drawing on the latest statistics already published by January 2008, Professor SONG Guoqing concentrated his research on the possible factors causing the inflation and the impact of international economic situation upon Chinese export and economy.

 

His findings indicate that in a case of insufficient total demand, that is, low growth rate of money supply (deflation or semi-deflation), dysfunction of the monetary policy will cause change of external demand, which, in turn, will not only lead to change of export itself but also influence money supply and consequently internal demand. The change of external demand will be amplified through financial accelerator and will cause strong resonation. Without deflation, monetary policy can adjust internal demand so that there won’t be necessary connection between internal demand and external demand. When external demand changes, internal demand can be made to change in the opposite direction via monetary policy so as to maintain stability of total demand. However, in case of violent changes of external demand, the supply structure cannot fully adapt to the changes of demand structure, and structural problems ensue. Hence, weak resonation can still occur for production.

 

Therefore, following the logic that inflation is money-driven, he believed that the only and simple choice to cope with inflation should be to tighten money supply. Inflation can be used to stimulate economic growth, but with a very serious disadvantage: Degrade the credit of the currency and that of the monetary policy. This result will do more serious harm in the future. For this reason, policy considerations which compromise inflation with economic growth target tend to bring a situation of continuously higher inflation rates and the final turmoil.

 

Professor SONG Guoqing thought that the biggest risk today lies not in inflation itself but the multi-goal of monetary policy. Judging from the current situation, although the strong and decisive demand to control inflation has been adopted as the policy suggestion, it is estimable that the policy choice will turn out to be “delayed deflation”, allowing inflation to last for a long and even a very long time.

 

ZHOU Qiren: Inflation and Price Regulation

 

Starting from some trivial matters, Professor ZHOU Qiren made a thorough discussion of the potential hazards of the policy of being “Lenient about money supply but rigorous about price interference”.

 

Recently, a series of policies have been introduced to set a price ceiling for products (such as electricity and food), with an aim to realize social fairness. However, the prices of most basic raw materials are being decided by the market, so the costs of the producers have been climbing ever higher. The power companies, surprisingly, suffer almost an industry-wide loss. Besides, price ceilings are also set for productive factors such as labor and land. Consequently, the prices of raw materials are high while those for products are low, so people’s will to produce is obviously declining, leading to a vicious circle. The market has less supply, the supply-demand conflict gets worse, and inflation climbs ever higher. Under such condition, resources cannot be distributed in a reasonable and optimized manner.

 

On the contrary, the policy of tightening money supply would be more effective in coping with current inflation. However, in the process of solving this problem in this way, the government may encounter potential pressure, that is, certain deterioration of employment situation. This may cause the government to falter on the tight monetary policy and turn to expand and enhance price regulation. In this way, inflation will be reinforced and develop into a mid-term chronic problem. In conclusion, the reasonable method to solve the inflation problem should be “to take a drastic measure of tightening money supply while loosening price regulation to encourage production”.