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--- Chinese Capital Account and Current Account
Financial Market of China
Introduction
Concept and Relationships between current account, capital account and official reserves
Present Capital Account and Current Account
Reasons, Advantages and Disadvantages from the data
Forecasted Capital Account and Current Account
Reasons, Advantages and Disadvantages
from the Forecasted Results
Conclusion: Good Expectations for the Development of China
Part IPart ICurrent Account: It is the sum of net sales from trade in goods and
services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad.
Capital Account: (Financial account) It is the net change in foreign ownership of
domestic assets.
Current Account: It is the sum of net sales from trade in goods and
services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad.
Capital Account: (Financial account) It is the net change in foreign ownership of
domestic assets.
KA account deficit:
domestic ownership of foreign assets has increased more quickly than foreign ownership of domestic assets
KA account surplus:
foreign ownership of domestic assets has increased more quickly than domestic ownership of foreign assets
Official reserve:
It records the government's current stock of reserves. Reserves include official gold reserves, foreign exchange reserves, and IMF Special Drawing Rights (SDRS).
Official reserve:
It records the government's current stock of reserves. Reserves include official gold reserves, foreign exchange reserves, and IMF Special Drawing Rights (SDRS).
Relationships between: current account, capital account and official reserve
Current Account + Capital Account = Change in Official Reserve Account
(Total) Figure 1 Factors that affect Capital Flows
Capital Inflows Capital Outflows
Export and
Import
Export
Import
Labor
Supply Labor to foreign
Foreign supply Labor to domestic
Return of
Investment
Obtain
Offer
Investment
Get foreign capital
Foreign get domestic capital
Loans Foreign in debt Domestic in debt
Official Reserve Decreasing Increasing
Part IIPart II
Present Current account and capital account prevailing in China
Present Current account and capital account prevailing in China
China’s Balance of Payments Components,1994-2004 (USD billion)
1. Current Account Surplus
2005.07.21
Bank of China declared 2% appreciation of RMB
Exchange rate US dollar/ China RMB decreased from 8.27 to 8.10
2001.11.10
China's accession to the World Trade Organization (WTO)
Export is booming faster
2001~2007
The increase rate of current account = (160.6-17.4)/17.4 = 824.1%
Capi tal fl ows (1996-2002)
-600
-400
-200
0
200
400
600
1996 1997 1998 1999 2000 2001 2002
Year
capi
tal
flow
amo
unt
($10
0 mi
llio
n) Capi tali nfl owsCapi taloutfl owsNetdi ff erences
2. Capital Account Surplus
• Figure 2 :
• China’s International Direct investment of capital inflows and outflows (1997-2003) Unit: $100million
Year 1996 1997 1998 1999 2000 2001 2002
Capital Inflows
Capital Outflows
Net Differences
417.3
21.1
-396.1
452.6
2.7
-449.9
454.6
28.2
-426.4
403.2
23.8
-379.4
407.2
22.4
-384.8
468.8
70.9
-397.9
535.05
20.87
-514.18
•Source from: According to 2003 Chinese foreign economical trade yearbook
2004 Chinese commerce yearbook computation
3. Official Reserve
Why this “Double surplus” ?
Why this “Double surplus” ?
1. Increasing in FDI:1. Increasing in FDI:(1)FDI need to balance the resources settles around the globe.
(2) Chinese economic characters strengthen the capability to absorb capital in : Cheap- Labour => Low Cost
1980 1980 1990 1990 2000 2000 2003 2003In Out In Out In Out In Out
China 1.1 0 20.7 2.5 348.3 25.8 501.5 37Japan 3.3 19.6 9.9 201.4 50.3 278 89.7 336UK 63 80.4 204 229.3 438.6 898 627 1129US 83 215 395 430.5 1214 1293 1554 2069
Cumulative FDICumulative FDI
2. Less domestic invest abroad:2. Less domestic invest abroad:
1. China’s stage of development:
2. China’s macro policy: (1) Aim to enlarge the export, lack of independency.
(2) The examination and approval system is too complex.
3. The enterprises in China have problems themselves.
4. China has a relative higher return of interest on saving.
Figure 3: International Direct Investment flows and its growth rate (1997-2002)
Unit: $100million All country Developed country Developing country
Year Inflows Outflows Inflows Outflows Inflows Outflows
1997 Flows
Growth rate
4819. 11
24. 80
4769. 34
20. 74
2696. 54
22. 62
3960. 57
9. 15
1932. 24
26. 55
766. 62
25. 04
1998 Flows
Growth rate
6860. 28
42. 36
6832. 11
43. 25
722. 65
75. 14
6308. 91
59. 29
912. 84
-1.O
498. 37
-34. 99
1999 Flows
Growth rate
10790. 83
45. 26
10965. 54
44. 31
8246. 42
80. 72
10213. 07
59. 82
2292. 95
-1. 79
727. 86
-32,81
2000 Flows
Growth rate
13929. 57
29. 09
12007. 83
9. 51
11205. 28
35. 88
10977. 96
7. 49
460. 57
7. 31
990. 52
36. 09
2001 Flows
Growth rate
8238. 25
-40. 86
7114. 45
-40. 75
893. 79
-47. 40
6605. 58
-39. 83
2094. 31
-14. 89
473. 82
-52. 16
2002 Flows
Growth rate
6511. 88
-20.96
6473. 63
-9.1
4603. 34
-21. 90
6000. 63
-9. 16
1621. 45
-22. 58
430. 95
-9.05
Source from: According to 2004 Chinese commerce yearbook reorganization
Advantages for this surplus in capital account
Advantages for this surplus in capital account
1. Balance the international profit.
2. Having more money to boost up domestic economy.
3. Lower unemployment Rate
1. Balance the international profit.
2. Having more money to boost up domestic economy.
3. Lower unemployment Rate
Disadvantages for this surplus in capital account
Disadvantages for this surplus in capital account
1. Means that the domestic market is occupied by foreign investors.
2. Since foreign investor will gain from investment, the profit as a financial capital massive will backflow to developed country.
3. The domestic economical industrial structural adjustment may be affected.
4. Financial foreign exchange crisis : more pressure in appreciation of RMB
1. Means that the domestic market is occupied by foreign investors.
2. Since foreign investor will gain from investment, the profit as a financial capital massive will backflow to developed country.
3. The domestic economical industrial structural adjustment may be affected.
4. Financial foreign exchange crisis : more pressure in appreciation of RMB
Part IIIPart IIIForecast Capital Account
Reasons for Our Forecasts
Advantages of Our Forecasts Results
Disadvantages of Our Forecasts Results
The Volume of International Trade between China with UK, USA and Mongolia (Source: World Trade Organization)
Import and Export in the 10th Five-year Plan Period
(www.stats.gov.cn/.../ t20060302_402308116.htm)
RMB exchange rate to USD
2005/07/21 to 2007/03/12 Source from: The People’s Bank Of China
From the data and Charts above, there is big pressure for RMB to appreciate, and let’s look at what would happen for the capital account.
The appreciation of Chinese Currency will make investment less attractive because of the speculation reasons.
Adding…
Our Theoretical ProveOur Theoretical Prove
Recall: Current Account + Capital Account = Change in Official Reserve Account
From the data above, China is now experiencing a “Double Surplus” in both current account and capital account.
=>If a government runs a current account surplus and has no change in official reserves, then the current account surplus must be balanced by a capital account deficit.
Recall: Current Account + Capital Account = Change in Official Reserve Account
From the data above, China is now experiencing a “Double Surplus” in both current account and capital account.
=>If a government runs a current account surplus and has no change in official reserves, then the current account surplus must be balanced by a capital account deficit.
As there will be a Capital account deficit…
As there will be a Capital account deficit…Advantages:
1. Avoid Repeat Investment
Advantages: 1. Avoid Repeat Investment
2. Balance the Payment of domestic without increasing Official reserve.
3. Increasing the demand of foreign currency, which will less the pressure of evaluated domestic currency.
Advantages:Advantages:
4. Stop borrowing useless capital from foreign countries and lending to foreign countries.
5. Having more influence in global market.
6. Gain good money from investing abroad.
4. Stop borrowing useless capital from foreign countries and lending to foreign countries.
5. Having more influence in global market.
6. Gain good money from investing abroad.
Explanation I : Solow Model
there is a decrease on saving rate
the saving line shifted from L1 to L2
the capital per worker (k) decreases from K1 to K2
the output decreases from y1 to y2
Worse off
Explanation Ⅱ : Disappear of Speculation
Short Run:
There is a difference between actual exchange rate and market exchange rate
Investors have the motivation to get the profit from speculation
If there is an appreciation on Exchange rate, there will be a decrease on capital inflow
Long-Run:
The attractive points on investing foreign assets still exist
There will be a capital outflow
In total: KA will have a negative sign in the long term.
Explanation Ⅲ : Output Function
Y = C + I + G + Export - Import
d Y/Y = d C / C * C / Y + d I / I * I / Y + d G / G * G / Y + d NX / NX * NX / Y
There will be a decrease on economic growth.
Explanation Ⅳ : Labour Market
the cost of labour will increase.
the opportunities provided will decrease.
the unemployment rate will increase due to the above reasons.
Explanation Ⅴ : Aggregate Demand
Foreign investment decreases
Domestic interest rate decreases
Saving rate decreases
Domestic investment decreases
Less motivation for economic growth
IS1
IS2
LMR
Y
R1
R2
Y1Y2
Nowadays, China runs surplus on both Current Account and Capital Account.
Under the pressure of International Trade Partner, Chinese Currency has the tendency to appreciate.
After the adjustment of Chinese Currency, Speculation Investment will be withdrew.
China now is experiencing the specific development period and there will be some problems.
Group Members: Stella, Xu
Tony, Chen
Lucy, Zhang