China monetary policy (final)
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China's economy is experiencing a significant slowdown, heavily reliant on exports and investments, which has led to imbalances in macroeconomic accounts and a need for structural reforms. The domestic investment is concentrated in limited sectors, causing concerns over debt sustainability and deflation. Recommendations include implementing a more coordinated monetary policy to incentivize consumption, manage real wages, and diversify investments to foster economic rebalancing.
China monetary policy (final)
- 4. China adopts unsustain growth model that heavily relies on export, investment and external demands. INTRODUCTION Global financial crisis decreased global demand toward China’s goods and services. Domestic investment is less diversified, only concentrated on manufactures, properties and real estates sectors.
- 5. INTRODUCTION
- 6. INTRODUCTION China is experiencing economic slowdown and needs to rebalance its economy Monetary policy is required to tackle economic issues in China.
- 8. ECONOMIC SITUATION All China’s macroeconomic accounts exhibit imbalances reflecting its economic slowdown. From real sector, monthly GDP achieved only 1.6% in quarter four 2015, the lowest growth in 25 years.
- 9. ECONOMIC SITUATION From monetary sector, China is haunted by deflation in 2016. Headline inflation shows decreasing trends. Yuan is deeply depreciated.
- 10. ECONOMIC SITUATION From external sector, total trade dropped by 8%. Debt sustainability is a high concern, total debt accounts for 280% of GDP and Public debt achieves 41.06%. From government sector, China’s fiscal deficit is widened by 2.3% of GDP during 2015.
- 12. During 2015, China conducts accommodative monetary policy to stimulate growth: Lower policy rate, higher money supply and hence lower lending rate. Central Bank of China is known as is the highest monetary authority in China Before 1990s, China implemented non-standard monetary policy such as lending restriction (windows guidance).
- 13. MONETARY POLICY Although this policy gives higher inflation in the future, China conducts the policy even in daily basis in 2016.
- 15. INFLATION Headline inflation in period 2015 fluctuated in the range 0.8% - 2% and has been increasing since October-December 2015 at 1.3%, 1.5% and 1.6%, respectively.
- 16. INFLATION Accommodative monetary policy with lower policy rate also contributes to the mild grow of headline inflation.
- 17. INFLATION Although long run forecast indicates inflationary pressure in the first quarter 2016, many analysts predict that prices will continue to fall Recently, China’s monthly inflation rate came in at 1.8% in January 2016, slightly higher than 1.6% in the previous month, but below market expectation. Except the raising of food prices, there were few other signs to hope for a major economic turnaround in 2016 except if the government conducts significant structural reform.
- 19. CURRENCY PERFORMANCE Overall, currency performance in China shows gradual depreciation of Yuan against US dollar. Accommodative monetary policy is one factor causing currency the depreciation. The official currency of China is named Renmimbi (RMB) with the Yuan as its unit of account. In August 2015, China stunned financial world by releasing its peg and let its currency to be determined by forces of global financial markets.
- 20. In managing further depreciation, China erodes it foreign exchange reserves and conduct capital control. Early in December 2015, IMF approved Yuan to include global reserve currency called Special Drawing Rights (SDR) starting on October 1st, 2016 CURRENCY PERFORMANCE
- 22. China’s performance nowadays is not performing well and must be considered as a red alert in modern economy nowadays. ARGUMENT THAT THE ECONOMY IS DOING WELL
- 23. Another structural factor such as demographic also affects permanent impact on China’s economic structure. Although current China’s economic performs slowdown but China will be able to conduct structural reforms in some parts to succeed its economic rebalancing in long run. China’s economic slowdown is not only business cycle volatility but it converges to structural permanence of economy if the country unable to reform its fundamental of economy. One of the challenges in China’s economic rebalancing is overcapacity. ARGUMENT THAT THE ECONOMY IS DOING WELL
- 25. Second, China is subject to economic inefficiency and lack of political structure to support the economy. First, global demand of China’s manufactured products is diminished. China lost its competitiveness to attract global demand due to higher wages demand compared to other emerging market countries. ARGUMENT OF FUTURE CHALLENGES
- 26. ARGUMENT OF FUTURE CHALLENGES Third, demographic and environmental factor threat China’s structure of economy to slowdown in the long run. Fourth, education quality in China is also a future challenge to create better economy. Data reliability also exposes future challenge for China’s economy.
- 28. Monetary policy can be realized through Yuan appreciation, higher policy rate, hence higher yield of government bonds and increased capital inflow, but market for investment must be diversified to accommodate capital inflow. Monetary policy must be formulated to tackle the issue of economic rebalancing. MONETARY POLICY RECOMMENDATION Monetary policy needs to give disincentive to export-based sector while give incentive to consumption sector.
- 29. Monetary policy cannot stand alone, it must be coordinated with other policies to give optimal results such as macroprudential policies, fiscal policies, sound political and strong institutional governance. In managing real wages, China can use inflation as nominal anchor, that is implement the ITF. MONETARY POLICY RECOMMENDATION
- 31. CONCLUSION As the biggest engine of global growth in Asia, China’s economic slowdown spreads spillovers to other emerging market countries All macroeconomic accounts of China now are facing imbalances that converge to challenging situation to rebalance its economy
- 32. Monetary policy must be reformed in order to solve following core problems in China’s economy. Some efforts in monetary policy can be conducted by China’s government including the appreciation of Yuan, increasing interest rate on government bonds, foreign debt restructuring/rescheduling, investment sector diversification, adopting of ITF regime and coordinating monetary policy with macroprudential policy. CONCLUSION