THE RENMINBI UNPEGGED

A MACROECONOMIC VIEW OF CHINA

THE RISE OF THE WORLD’S BIGGEST EXPORT ECONOMY

Diverse geography

Four Modernizations

Introduction of capitalist market principles

ECONOMIC INDICATORS AT 2005

GDP growth

11.3%

Inflation

4%

Real interest rates

1.59%

Unemployment

9.8%

FDI

4.61%

Current account

5.87%

PRESSURES PUSHING POLICY CHANGE

EXCESSIVE LIQUIDITY

EXTERNAL

High Foreign Reserves

Artificial Competition

INTERNAL Overheating

Economy

InflationCAUSES

Cheap Exports

Monitored Peg

POLICY CHANGE OBJECTIVES

•Building of reserves in an effort to maintain Yuan peg

•Investments focused away from social policies

EXCESSIVE FOREIGN CURRENCY HOLDINGS

•Huge trade surpluses as a result of competitive exports

•High liquidity, especially in the banking sector

OVERHEATING ECONOMY

•Artificial competitiveness – Undervalued Yuan

•Currency manipulator

INTERNATIONAL TRADE RELATIONS

•Social disparity between rural and urban work force

•Concern about lay-offs in case of export demand decreasesUNEMPLOYMENT

•Concerns regarding the rise of inflation

•Purchase Power Parity and discourage importsPRICE STABILITY

POLICY TOOLSFIS

CA

L Neutral policy

Shift from pro-active policy applied till 2004

Advances in reforms

Curbing of expenditure

MO

NETA

RY Restrictive policy

Stabilize the currency in world markets

Promote healthy domestic economy expansion

TRA

DE Open market

policy

Maintain global competitiveness

Increase domestic market consumption (reduce saving)

LAB

OU

R &

IND

USTR

IAL Manufacturing

oriented

Mediate occupational and geographic mobility

Transfer towards urban employment

OVERHEATING ECONOMY

INTERNATIONAL TRADE RELATIONS

UNEMPLOYMENTPRICE STABILITY

PEG PROGRESSION TIMELINE

PEG PROGRESSION TIMELINE

PEG PROGRESSION TIMELINE

GDP: POTENTIAL VS. REALIZED

PR

ICE

GDP

AD '05 AD short run

AS '05 AS short run

GDP*

THE UNPEGGING

Short term impact

PR

ICE

GDP

AD '05 AD short run AD long run

AS '05 AS short run AS long run

GDP*

THE UNPEGGING

Long term impact

ECONOMIC INDICATORS POST UNPEG

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2005 2006 2007 2008 2009 2010 2011 2012

GDP

Real interest rate

Inflation

Current account

ECONOMIC INDICATORS POST UNPEG

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2005 2006 2007 2008 2009 2010 2011 2012

GDP

Real interest rate

Inflation

Current account

ECONOMIC INDICATORS POST UNPEG

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2005 2006 2007 2008 2009 2010 2011 2012

GDP

Real interest rate

Inflation

Current account

5

10

15

20

2005 2006 2007 2008 2009 2010G

RO

WTH

GDP GROWTH

MANUFACTURING

MANUFACTURING DRIVEN GDP

OverrelianceGrowing over potential:• Unhealthy levels of inflation• Artificial stimulus• Over supply

WAY FORWARD TO A SUSTAINABLE ECONOMY

•Focus on R&D and innovation driven ventures.

•Reform the financial system

•Develop the contribution of services to growth

SHIFT AWAY FROM MANUFACTURING

•Long term structural changes to boost demand

•Policies to shift toward a more open market economy

INCREASE CONSUMPTION

•Aging population demographic reduces the TFP

•Stimulate workforce participation

REALIGN POPULATION

POLICY

QUESTIONS