October 24, 2011
“Financial Stability in Emerging Markets: Dealing with Global Liquidity”
That was the title of a conference in Beijing (October 21st), organized by the Central University of Finance and Economics (CUFE), Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), and the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) . I had the privileged of delivering a keynote speech. The conference agenda is here, and encompassed three sessions: Global Liquidity -- Consequences and Policy Options; Dealing with International Capital Flows; and a panel forum on International Capital Flows and the International Monetary System.
Figure 1: Current account to GDP ratios for BRICs. Gray shading denotes forecasts. Source: IMF, WEO, September 2011.
The eminent Chinese macroeconomist Yu Yongding gave the first keynote speech. The main points, regarding the current macroeconomic outlook (with particular reference to inflation), were highlighted in news accounts [People’s Daily]. From my perspective, the most important points were elsewhere in the speech.
It can be seen that rebalancing the Chinese economy is not just a simple matter of exchange rate policy. Instead, it involves comprehensive adjustment of a policy regime consolidated over the past 30 years. More importantly, the adjustment inevitably will encounter fierce resistance from various interest groups that have established themselves during the long-drawn process of gradualist reforms over the past 30 years. But China must make the necessary adjustment and shift its growth paradigm from investment and export-driven to a balanced and innovation and creation-based growth.
It is clear that China should have brought to an end to the endless piling up of foreign exchange reserves long time ago. There have been two basic approaches for achieving this objective. The first approach is to reduce current account surplus indirectly via narrowing the saving-investment gap. The second one is to reduce current account surplus directly by dismantling trade promotion policy, such as abolishing tax rebate and allowing renminbi to appreciate. China has tried the two approaches at the same time with a very cautious fashion. ...
Hence, China is faced with a stark choice between bearing increasingly large capital losses in its foreign exchange reserves and tolerating immediate losses in terms of significant drop in current account surplus and large revaluation losses. Certainly, neither choice is pleasant. However, this is the bitter fruit of China’s past hesitating and dithering and it has to swallow now.
I found these views of great interest; like those of Yi Gang (October 2010 IMF Seminar), there is a clear recognition that adjustment to a new growth model is required. But it is also clear that recognition and understanding of the solution to a problem by the technocrats is not sufficient to induce effective action (of course, such outcomes are not restricted to China; after all, we know in the United States we need short term fiscal and monetary stimulus combined with long term fiscal consolidation, but certain groups wield veto power over implementation.)
My presentation was fairly conventional, citing the medium term outlook for global rebalancing, based on work with Barry Eichengreen and Hiro Ito, and focusing on how the accentuation of the two speed recovery has increased the strains on rebalancing. I also warned about the new infatuation with capital controls as a means of stemming capital inflows, given our lack of knowledge of precisely what does and doesn’t work (see e.g., ).
In the first panel, Ulrich Volz (DIE) presented preliminary work on how global liquidity, essentially measured as weighted monetary aggregates, affected commodity prices, using cointegration techniques. Zhang Liqing (Dean of CUFE School of Finance) and Huang Zhigang reported results (Granger causality tests) indicating that there was little evidence that “hot capital” inflows (using their preferred measure of hot capital) were responsible for the housing price boom (the credit surge of 2009 was tagged as the critical variable). Krishna Srinivasan of the IMF presented the perspective from the IMF’s Mutual Assessment Process (MAP) regarding global imbalances.
In the second panel, details about how the Chinese monetary and regulatory authorities managed their respective spheres were covered; Bu Yongxiang (PBoC) and Zhang Xiaopu (China Banking and Regulatory Commission), respectively, presented. Bernd Braasch from the Deutsche Bundesbank surveyed the state of the art in the monitoring of global capital flows. Among other points, he advocated the German position in opposition against capital controls. He also noted the hazards of measures that lessen the disciplining effects of the markets, with special reference to the development of a “financial safety net”. Finally, Yung Chul Park argued that the liberalization efforts in the post-East Asian crisis period had done little make the Korean economy more resilient in the face of the 2009 global recession, citing the massive won depreciation that took place.
In his comment, Gunther Schnabl (University of Leipzig) argued, based on a saving-investment model of current account imbalances, for the US to raise policy rates (rather than the CNY to be appreciated). In his view, this would eliminate malinvestment. Given the low likelihood of such a policy outcome, he proposed that Europe and China cooperate to effect global adjustment.
Overall, this was a great opportunity for me to see a variety of alternative perspectives on the topics of dealing with capital inflows, the efficacy of capital controls, the need (or non-need) for structural reforms/market liberalization, and (of course) the efficacy of exchange rate changes in effecting global and national rebalancing. Those interested in these issues should take a look at the presentations and papers.
Update, 10/30, 6PM Pacific: Link to article on the conference here (in Chinese).
Posted by Menzie Chinn at October 24, 2011 10:07 PMdigg this | reddit
Some months ago the Premier of France sponsored a conference of leading trading nations asking how we can achieve a more balanced international trading system.
All he got for his efforts was an agreement to collect data on the size of the trade deficit in various countries. China vigorously opposed any statement that placed balanced trade as the goal of reform of international trade.
The first step toward understanding any of the issues examined above is to place emphasis upon the size of the trade deficit as a causal factor. The summaries provided by Menzie ignore the trade deficit as a causal factor thus spin their wheels with second order issues.
The unbalanced world economy did not just happen. It was supported and to some degree created by governments in Japan, Germany and China who used national resources to aid the creation of conditions that supported domestic manufacturing activities.
The proper U.S. response to current realities is to use the power of the national government to reduce the size of the U.S. trade deficit in goods. This will require steps to reduce the need for oil exports as well as other actions.
Posted by: ReformerRay at October 25, 2011 07:33 AM
The negative impacts of banking crisis are comprehensively described in an IMF paper "What s the damage? Medium term output dynamics after financial crisis" or mind the output gap.In all countries surveyed,only 25% exceeded the ex ante output level after few years.The quantitative are the following:
"At the global level, the picture is broadly similar: major international financial crises during the past 140 years were typically followed by persistent output losses relative to precrisis trend, with gradual recoveries in output growth rates. Medium-term output losses were particularly large for both advanced and non advanced economies following the Great Depression" Further the same paper estimates seven years as an average before reaching the former output level.
The loss of output,loss of employment and decreasing income will not offset the structural current accounts imbalances of many countries that indulged themselves for decades with structural deficits primary and current accounts.Any matrix outlining the deficits by products may not be filled overnight by domestic production or exports in same amount.The alternative is a reduction of import in volume.Deficits matter Reinhart and Rogoff are not only vehemently documenting through empirical data their negative impact but the recoveries that are deemed to occur at debts picks and not before.The same IMF and Reinhart and Rogoff have enough data base evidences documenting the nascent financial crisis through capital inflows, Asia crisis is not far in memory.
The trigger to a financial crisis the structural weakness of a particular financial institution becoming an official and public concern (Peregrine in HK,Lehman and others),prevention is better than cure as we have heard.
Posted by: ppcm at October 25, 2011 09:45 AM
Calculated Risk has a chart that should be famous. It plots the percent loss in employment (commpared with pre-recession) by months since the recession began for all the recessions since WW II.
The more recent the recession the longer the recovery period, regardless of the reason for the recession. The current recession remains much below the reference point.
Another argument for the proposition that this time is different.
Posted by: ReformerRay at October 25, 2011 03:17 PM