1. China’s Macroeconomy and Monetary Policy
Dr. Yi Gang
Deputy Governor, the People’s Bank of China
July

2. Main economic and financial indicators

3. GDP growth rate since 1978
Source: China Statistical Yearbook

4. Investment ratio and consumption ratio
Source: China Statistical Yearbook

5. Composition of GDP by the three strata of industry
Source: China Statistical Yearbook

6. Contribution shares of three industries to growth in real GDP
Source: China Statistical Yearbook

7. Contribution shares of three components of GDP by expenditure approach to growth in real GDP
Source: China Statistical Yearbook

8. Trade surplus
Source: Ministry of Commerce of the People’s Republic of China
The trade surplus for the period was fairly stable, reflecting that the exchange rate was close to equilibrium level. The appreciation pressure afterwards was partly driven from the productivity gains and the institutional reasons , and partly explained by the weakening of USD, especially since

9. FDI
According to the UNCTAD’s 2007 Global Investment Report published in January 2008, China was the world’s NO. 4 recipient of foreign direct investment (FDI) in 2007.
Source: China Statistical Yearbook

10. Foreign reserves
Source: the People’s Bank of China

11. Population and aging of population
Source: China Statistical Yearbook
According to the international standards, when the percentage of people in a country or region who age 65 or above has reached 7%, it can be classified as an ageing society.

12. Employment
Source: China Statistical Yearbook

13. Productivity and wage Growth:
Average growth rate in real term
GDP ↗ 9.8%
Wage ↗ 6.9%
TFP ↗ 1.9%
Labor productivity (total outputs / number of labors) ↗ 7.4%
Source: China Statistical Yearbook , PBoC

14. Government revenue
Source: China Statistical Yearbook

15. Energy, resource and environment
In 2007
Energy consumption for producing 10 thousand yuan worth of GDP: ↘ 3.27 percent over the previous year.
The total emission of chemical oxygen demand (COD) of the whole country : ↘ 3.14 percent over the previous year.
The total emission of the sulphur dioxide (SO2): ↘ 4.66 percent.

16. Institutional Factors for RMB Appreciation
Reform and opening-up policies over the past three decades
Socialist market economy
Scientific development principle and harmonious society
Rule by laws, property right law, and intellectual property rights
Energy conservancy and environmental protection

17. Change of CPI Inflation: 1980 1984 — 1985 1988 — 1989 1993 — 1994
2003 —
Deflation:
1998—2002
Source: China Statistical Yearbook

18. The Ratio of M2 to GDP
Source: The People’s Bank of China Quarterly Statistic Bulletin

19. Money Supply and RMB Loans
Source: The People’s Bank of China

20. Interest Rates
Source: The People’s Bank of China

21. Interest Rate Parity %
Source: The People’s Bank of China

22. Evolution of China’s Exchange Regime

23. RMB NEER and REER (Jan. 1994-Apr. 2008)
(2000=100, monthly average)
Jan Feb RMB NEER ↗ 40.9%
RMB REER ↗ 58.1%
Feb Jun. 2005
RMB NEER ↘ 14.7%
RMB REER ↘ 18%
Jun Apr. 2008
RMB NEER ↗ 6.5%
RMB REER ↗ 12.2%
Jan Apr. 2008
RMB NEER ↗ 28.0%
RMB REER ↗ 45.5%
Source:

24. RMB REER and the Linear Trend
Jan – Apr. 2008
RMB REER ↗ 45.5%; or ↗ 2.66% per annum.
Source:

25. rising CPI, PPI and asset price
Price Adjustments ( )
rising CPI, PPI and asset price
Source: PBoC

26. Financial market developed rapidly, financial assets expended markedly in 2007
Money Market：turnover on the inter-bank market 71 tn yuan，daily turnover averaged 285 bn yuan， ↗83.6%.
Bond Market： custody 12 tn yuan， ↗ 33.4%；accounted for 50% of GDP，+ 6.2 pp, at the end of 2007
Stock Market：the total turnover 46 tn yuan; the market value of A-shares 32 tn yuan at the end of 2007，accounted for 131.6% of GDP， ↗89.8%；in which, the market value in circulation 9 tn，accounted for 36.7% of GDP，+25.4pp. Opened new investment accounts 60 mn， ↗10.5 times.
Mutual Fund Market：the total fund units reached 2.2 tn yuan, +1.6 tn yuan, ↗ 2.7 times. The net value 3.3 tn, ↗3 times.
Insurance Market： In 2007, the total premium income 704 bn yuan， ↗24.7%. At the end of 2007, total asset 2.9 tn yuan， ↗ 47%.
At the end of 2007, the main financial assts held by households and firms reached 56 tn yuan, ↗ 34%; accounted for 229% of GDP, +29 pp.

27. Development of capital market and direct financing
Due to the soared stock prices, and low interest rates, households and firms had a remarkably strong willingness to invest in the stock and mutual fund market, and decreased deposits and bonds.

28. Adjustment Process – A Comprehensive Approach
Encourage imports
Open service markets
Slow down imports substitution
More flexible Exchange Rate Regime
It is possible to have a large trade volume and more or less balanced current account
Adjustment of our major trade partners
Increase Saving rate
Reduce current account deficit

29. Macroeconomic Policy – Encouraging Consumption
Domestic Demand vs External Demand
Consumption vs Investment
Goods Consumption vs Service Consumption
Rural Consumption vs Urban Consumption
Restaurant, Entertainment, Modern Service
Construction of New Countryside
Infrastructure: Electricity,Water,Road etc.
Rural education: 9-year compulsive education
Medical service
Urbanization
Rural Labor Migration:130 million rural labor force working in urban area for more than 6 months a year
Equal Treatment: Increasing wages, Social security and medical insurance, Kids’ education

30. Other Economic and Social Policies
Environmental protection – law enforcement
Enhancement of labor standard
- minimum wage
- weekend
- medical insurance
3. Social Security
- retirement
- minimum living standard
- unemployment

31. Decrease of trade surplus
In the first 5 months of 2008,
Export growth decelerated by 4.9% to 22.9%.
Import growth accelerated by 11.5% to 30.4%.
Trade surplus was $78 billion, $7.8 billion lower than that of the same period of last year, against the backup of growing trade volume.

32. Challenges and Concerns:
External:
Weakening external demand
Widening interest rates spread
Surging global inflation
Internal:
Rising labor cost
Stricter environmental protection regulations
Weakening tolerance of enterprises towards appreciation

33. Conclusion RMB Exchange rate is an economic issue.
The best way to facilitate it to converge to the equilibrium level is reform.
It takes time to establish an efficient market.
Besides the exchange rate adjustment, structural adjustments are more important to correct the global imbalance.