Session 4: The China Problem

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Presentation transcript:

Session 4: The China Problem Chinese surpluses & currency valuation, 2004-2017 Jeffrey Frankel, Harpel Professor of Capital Formation & Growth Harvard Kennedy School 2017 NJIT Economic/Bubble Conference; Leir Retreat Center, Fri., 11/3-Sat. 11/4 Session 4: The China Problem

China adjusts The RMB was undervalued in 2004-08 by all three kinds of measures (very rare!): prices were low, even adjusted for income/cap; the trade and CA surpluses reached high levels; FX reserves were rising, reaching world-record levels. China had adjusted by 2014: RMB, wages & prices rose => undervaluation ended. The trade surplus peaked in 2007 at 7% of GDP, then came down to 2% of GDP. Reserves peaked in 2014, then fell.

1. China’s RMB undervalued ≈ 25-36% in 2000-05 estimated by PPP adjusted for Balassa-Samuelson Cross-section of 118 countries Log of real exchange value of country’s currency Log of real income Frankel (2006): “On the Yuan: The Choice Between Adjustment Under a Fixed Exchange Rate and Adjustment under a Flexible Rate,” Understanding the Chinese Economy, G.Illing, ed. (OUP).

Real appreciation of Chinese RMB 2005-2014 Dooley, Folkerts-Landau, Garber (2014)

RMB undervaluation disappeared by 2011-14 estimated by PPP adjusted for Balassa-Samuelson M.Kessler & A.Subramanian, PIIE, May 2014 “Is the Renminbi Still Undervalued? Not According to New PPP Estimates” Benchmark years GDP per capita (in PPP dollars) RMB undervaluation (percent) 2005 4,802 -34.5 2011 10,057 -9.7

2. China’s trade & CA surpluses peaked in 2007, and then fell to 2% of GDP. Source: Reserve Bank of Australia (June 2013) China runs a deficit in primary products, offset by a surplus in manufactures.

3. China’s forex reserves peaked in June 2014, then fell by $ 1 tr. through Jan. 2017. through Sept. 2017 PBoC stopped intervening to push down the RMB. The opposite. Frankel, "Chinese currency manipulation not a problem," East Asia Forum, March 9, 2015.

"Assessing China's Exchange Rate Regime," with Shang-Jin Wei, Economic Policy, 2007. "The Renminbi Since 2005," in The US-Sino Currency Dispute: New Insights from Economics, Politics and Law, edited by S. Evenett (CEPR: London) 2010, 51-60. "China Adjusts," Project Syndicate, March 23, 2012. "Congress, China, and Currency Manipulation," China-US Focus, vol. 6, April 2015, 36-38.

China’s Current Account peaked in 2007 at 10% of GDP and then fell to 2% of GDP.

Slowdown, 2012-2017 China’s growth averaged 10% over 1980-2010, then declined below 7%. 30 years of growth in Chinese GDP