Policy Talking Points - China's Economy
In an effort to gain a better understanding of the state of China's economy,the sharp swings in the value of the renminbi and how this might affect foreign exchange policy,China Forex spoke to Mu Zhiqian,a consultant to SAFE's Balance of Payments Department. The following is an interview with Mr. Mu conducted by Debra Lodge,managing director and head of renminbi business development,global markets,at HSBC.
Q: The Chinese economy has become a focus of the world's attention as a result of slowing economic growth,sharp fluctuations on the stock market and the weaker exchange rate for the renminbi. Can you explain what kind of changes took place on the balance of payments?
A: China's balance of payments is witnessing a "structural" adjustment process,which means its former situation of "twin surpluses" has now become one of "one surplus and one deficit." China maintains a steady surplus on the current account,but its capital account has swung from surplus to deficit.
Q: China had massive net capital inflows for a very long time. Does this mean that investment capital is being withdrawn as a result of poor economic circumstances?
A: Compared with the recent past,the economy's current situation is not very good. However,if we look at the bigger picture and compare China with other economies,I prefer to use the term "not good enough" rather than "poor." The Chinese economy is undergoing a structural adjustment. Over the past 30 years,China absorbed massive amounts of foreign capital that helped produce a stunning record of economic growth. China has more recently entered a post-industrialization phase. In the coming years,China's economic growth will shift from a reliance on the consumption of resources -- including capital -- to one that depends on technological innovation. The degree of reliance on foreign investment capital is already decreasing. Other factors have also contributed to the deficit on the capital account. First of all,developed countries have been gradually recovering from the financial crisis and they have been repairing their bruised financial systems. Moreover,China is grappling with overcapacity in many industrial sectors and the way to resolve this problem is to encourage companies in these areas to invest overseas. There also are cases of disinvestment and these are predominantly in areas where production causes environmental problems or it is in a labor-intensive sector,which is no longer suitable to China. Admittedly,there are investors who are pessimistic about the Chinese economy and these will also withdraw from the market.
Q: If we drill down a bit further,imports and exports are witnessing a "double decline." Is the surplus on the current account actually just a matter of the decline in imports surpassing the decline in exports? China speaks of making progress while maintaining stability. How do you get "stability" in the midst of a "double decline" and how do you "make progress" in this kind of environment?
A: That is a tough question and your grasp of the data is accurate. I would like to reply from a macroeconomic perspective. Obviously,it is difficult to restore confidence based on the data from balance of payments or other economic areas alone. However,the term "stability" refers to employment and the financial system. China is a country with a large population,and an economic slowdown puts pressure on employment. In maintaining a high rate of economic growth,our first