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.