Friday, 11 April 2014

Image of the day

For some reason I find this figure interesting.

Understanding Chinese Consumption: The Impact of Hukou

Rebalancing hinges on China increasing consumption.  It has long been acknowledged that the Hukou system is an institutional blockage on consumption driven rebalancing.  This new working paper looks at this important issue.

Understanding Chinese Consumption: The Impact of Hukou

BOFIT Discussion Paper No. 7/2014

CHRISTIAN DREGER, German Institute for Economic Research (DIW Berlin), European University Viadrina Frankfurt (Oder), Institute for the Study of Labor (IZA), Chinese Academy of Social Sciences (CASS)

TONGSAN WANG, Chinese Academy of Social Sciences (CASS)

YANQUN ZHANG, Chinese Academy of Social Sciences (CASS)

Capital investment and exports have driven China’s remarkable economic growth for decades, but recent trends have put pressure on the government to move to a more consumption-driven model of growth. Unfortunately, China’s institutional framework does little at the moment to spur household consumption. While the country’s weak social security setup and highly regulated financial markets are routinely cited as disincentives to private consumption, the role of the hukou household registration system in depressing consumption gets less attention. Controlling for income levels on datasets from 2002 and 2007, we show the average propensity to consume is significantly lower for internal migrants to cities. Official figures suggest that China in 2013 had about 260 million internal migrants. These individuals are often separated from their families for long periods and denied access to public services in the cities where they work. The government’s current urbanization strategy calls for increasing migrant populations in cities, which, in the absence of hukou reform, is likely to further dampen consumption.

Wednesday, 9 April 2014

The Conflicted Emergence of the Renminbi as an International Currency

Research paper by McKinnon and Schnabl (CESifo).  I agree with the sentiment expressed in this paper.  Internationalization of the RMB will be a massive challenge with plenty of pitfalls along the way.

CESifo Working Paper Series No. 4649

RONALD MCKINNON, Stanford University - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

University of Leipzig - Institute for Economic Policy, CESifo (Center for Economic Studies and Ifo Institute)

China has been provoked into speeding renmnibi internationalization. But despite rapid growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls — reinforced by financial repression in domestic interest rates — to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating (appreciating) exchange rate could attract even more hot money inflows, the People’s Bank of China should focus on tightly stabilizing the yuan/dollar exchange rate to encourage naturally high wage increases for balancing China’s international competitiveness.

Thursday, 27 March 2014

China: Size matters

Nice little IMF article.

"How big is China?
Big. China is the world’s second largest economy. Based on PPP exchange rates, China increased from 6 percent of global output in 1995, to 15 percent last year (see chart). Or, if you prefer using market exchange rates, the corresponding rise in China’s share of global GDP is from 2 percent in 1995 to 12 percent in 2013.

When will China surpass the US? In 2018, based on PPP exchange rates. Later using market exchange rates—by 2019, the last year of our projections, China’s economy would be equivalent to about 64 percent of US GDP."

Friday, 7 March 2014

Chinese capitalism - first default on bond payments

WSJ reports that Chinese state owned banks have let a company default.  This might be the first company default and whilst seemingly bad news (certainly for investors in Shanghai Chaori) it shows that China is prepared to let companies go under.  In the long run this has to be good news.

As an aside for environmental readers - it is not surprising it is a solar company.  Massive over capacity.

Shanghai Chaori in Default on Bond Interest Payments [Wall Street Journal]

BEIJING—A Chinese solar-equipment maker on Friday failed to meet interest payments on a bond, according to a company official there, becoming China's first domestic corporate bond default.

Liu Tielong, board secretary of Shanghai Chaori Solar Energy Science & Technology Co., said on Friday that it was in default. The heavily indebted company had warned on Tuesday that it wouldn't be able to meet interest payments totaling 89.8 million yuan ($14.7 million), citing a credit squeeze and its inability to raise enough funds to make the interest payments.

The default, though small in size, marks the first time a Chinese company has defaulted on a bond traded in the mainland, according to Moody's Investors Service.

Friday, 28 February 2014

Research Paper: "How Far Can Renminbi Internationalization Go?"

I can only agree that the road ahead will be long and bumpy.  Capital controls are key.  London stands to benefit from internationalisation but there will be increased competition for this business.  George needs to be on the case.

ADBI Working Paper 461

YU YONGDING, Chinese Academy of Social Sciences (CASS)

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 the sheer size of the People’s Republic of China’s (PRC) trade and the convenience of using the renminbi for transaction settlements is one contributing factor, but that exchange rate arbitrage and interest rate arbitrage matter also. As well, 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, most importantly making the renminbi exchange rate flexible. While the renminbi can and will become a major international currency eventually, the road to internationalization is bound to be long and bumpy.

Friday, 21 February 2014

Opium wars, trade and precious metals

China economics blog always keeps an eye on trade.  The Opium wars are a fascinating case study.  A recent article provides an interesting reminder of the issues.

Old Time Farm Crime: The Opium Wars [Modern Farmer]

"It was a major drug bust with more than 1,600 arrests and the confiscation of 11,000 pounds of a highly addictive substance.

No, this wasn’t a DEA raid of a major meth operation, or an Interpol investigation into international drug smuggling. It was the year 1839 and the Chinese government was cracking down on British importation of opium. The drug issue was a powder keg that led to a series of wars between the two countries over the course of more than 20 years and changed both nations for generations.

To the British, the Chinese crackdown was a matter of business. It was a perceived trade imbalance on the British end due to Chinese officials requiring silver in trade for their goods, most notably tea, that led the British to realize that opium could tip the scales in their favor.

The British government, initially through its East India Company, had tried trading everything from woolens to scientific instruments to pottery, but the Chinese only cared about precious metals."

 What is interesting here is that Chinese imports of gold and silver and yet again reaching record levels.

"In a 50 year period prior to 1828, Britain paid out £27m in silver to the Chinese. During the same period they only sold about £9m of British goods to them. That balance shifted dramatically when the British went full bore into opium smuggling.

In the decade of the 1830s, despite an imperial decree outlawing the export of silver, China exported more than seven times more silver than it took in (an estimated $7 million in and $52 million out) a lot of that used to buy opium. And that doesn’t include the gold that was exported in the same decade.

By the eve of war British merchants were exporting about $25 million (about $245 million today) worth of opium to China from their Indian possessions."
Interesting how things change and yet stay the same.