Current Issues in China’s Economy

王嘉欣

【Abstract】Since the Federal Reserve's first rate hike in 2015， the Fed's monthly benchmark interest rate has risen twice from 0.12 percent in October 2015 to 0.66 percent in February 2017， and from the Fed's monetary policy dynamics ， Interest rates will continue to rise， so the US interest rate cycle has come. Despite of Chinese more stringent capital controls， the United States， as the issuing country， whose monetary policy is bound to cause China to be undiscovered impact. Where should the shock come from and how should China respond to？ We must face these questions. Therefore， this paper is aimed to put forward the response plan through macroeconomic analysis.

【Key words】macroeconomic； Chinese economy； Fed raising interest

Ⅰ. Introduction

Under the improving conditions of employment and inflation， the Fed exiting from the quantitative easing policy and entering into orbit hike is inevitable. United States once again into the rate hike cycle， the Fed rate hike will result in short-term capital outflows which pressed on China， the press of depreciation of the RMB exchange rate rising， increasing financial risks， an increase in the difficulty of macro-control and other negative effects. Combined with historical experience， after a comparative long period of low interest rates， the Fed move to raise rates may lead to drastic changes in the volatility of international capital flows， patterns， and may lead to local financial crisis. For example， the Latin American crisis in the history and the Asian financial crisis are enough to prove. The Federal Reserve to raise interest rates， appreciation of the dollar relative to emerging countries currency devaluation and capital outflows from some emerging economies， led to its debt burden，and then triggered a crisis. This effect will be more apparent in some of the economic development countries which are relatively backward， high dependent on exports， and weak in the solvency. This negative impact will be more severe. Therefore， we should pay more attention to balance the various economies in the global monetary policy coordination from global interests， the spillover effects of the financial management and control policies to avoid interruption of the fragile global economic recovery. How will China meet the challenge？ This article analysis the current situation of Federal Reserve to raise interest rates and status of China to determine whether a controlled Chinese economy. Besides that， according to Chinese issues， the corresponding recommendations for the effective prevention of financial risks is of great significance.

Ⅱ. The status of the Federal Reserve to raise interest rates

Last December，the US Federal Reserve announced that the federal benchmark interest rate raised by 25 basis points. This official US interest rates were the beginning of raising interest rates since 2006， and the end of the zero interest rate policy. At the same time， the federal benchmark interest rate was between 0.25% to 0.50% . From this point ， the Fed decided to continue to raise interest rates this year. In the last year， Fed officials are expected to raise interest rates four times this year， but at March 16 ，2016， Fed kept the federal funds rate by 0.25% to 0.50%， unchanged， although the US economy， employment， price indexes obviously look good this year. But the Fed still said that they were concerned about the global economy and the financial risk， which were the main reason for stopping raising interest rates temporarily. Meanwhile， Fed officials， according to the latest quarterly economic data， predicted that at the end of half year， the federal funds rate will rise to 0.9%， meaning that this year will witness raising interest rates twice. Fed having entered into the rate hike cycle， but from the experience of the past three， the dollar index in the interest rate will rise significantly before the rate hike process. However，during the process，it is not necessarily rising. For A shares， there is no significant correlation between the US dollar interest rates and the Shanghai index. US interest rates， although is bad to A shares， but no need to exaggerate.（Figure 1， Table 1）

Ⅲ. China's current situation and analysis（Figure 5）

With the announcement of minutes the meeting on interest rate in April， plus senior officials and Yellen's position， the market for the Fed to raise interest rates in recent months was expected to heat up rapidly since mid-May， which contributed to a rebound in the dollar index. At the interest rate futures market， the probability of rate hike in June rose 30%， rose to 54% in July. The exchange rate （RMB against the US dollar） going down， median price has fallen down to the level of early lows. It is worth noting that although the exchange rate was lower again， from NDF market as well as overseas Chinese dollar sovereign debt market trend， market sentiment is generally stable. There was no obvious sign of panic and massive short.

1. RMB exchange rate

In June 15， the central bank announced the middle price of RMB against the U.S. dollar was 6.6001， depreciating 210 points， which had descend to a new level since early January 2011. The previous day's central parity reported 6.5791. China Foreign Exchange Trade Center data show that at January 12， 2011， the RMB against the US dollar central parity reported 6.6128. Obviously， RMB again went into the 6.6 era after five and a half years. Since May the RMB exchange rate depreciation was significantly faster， only second to that of the implementation of the August 2015 exchange rate reform. As the Fed rate hike is expected to heat up again， the dollar index down turn liter， rose 3.0% during full month. In the case of the appreciation of US dollar against other currencies， according to “closing rate + a basket of currencies exchange rate changes，” the formation mechanism of the RMB exchange rate against the US dollar has depreciated. In June， the RMB exchange rate swinging， the overall continued to show a downward trend. At June 9， the exchange rate （RMB against the US dollar） in the offshore market has fallen below 6.6 .（Figure 2）

Using Macroeconomics we can analysis that a lower domestic price level leads to a lower domestic interest rate.With the lower return on domestic assets， holding foreign assets becomes more desirable.The purchase of foreign assets requires the sale of dollars to acquire foreign currency in the foreign-exchange market. The rise in the supply of dollars in the foreign exchange market causes the dollar to depreciate relative to other currencies （the real exchange rate， E， falls）. This makes domestic goods cheaper abroad and foreign goods more expensive domestically， which， in turn， causes an increase in net exports.However， the rise in net exportsmeans a rise in aggregate demand. The increased demand for cash shifts the LM curve up. This happens because at any given level of income and money supply， the interest rate necessary to equilibrate the money market is higher.（Figure 6） US dollar index rebounded， along with RMB response that the current exchange rate is more closely tied to the dollar index trend and the range should be manageable.At July 21， 2005， the RMB exchange rate formation mechanism reformed， no longer pegged to the dollar， instead of choosing “the implementation of market supply and demand with reference to a basket of currencies， managed floating exchange rate system.” The new exchange rate system for the regulation of the central bank left a lot of space. Precisely because of this， it shows increasing the impact of exchange rate factors and the uncertainty of exchange rate changes. This relative increase flexibility of the RMB exchange rate， thus ensuring the RMB exchange rate basically stable at a reasonable and balanced level.

2. Gross domestic product （Figure 3）

1） the point of three industries

During a quarter of a year， GDP was15.8526 trillion yuan， calculated at comparable prices， an increase of 6.7% （this data record a new low level of 28 quarters）. The primary industry was 880.3 billion yuan， an increase of 2.9%； the secondary industry was 5.951 trillion yuan， an increase of 5.8%； the tertiary industry was 9.0214 trillion yuan， an increase of 7.6%. Using 2015 prices， the first quarter GDP growth was 985.1 billion yuan which was more than 22.2 billion yuan over the previous year.（Figure 4-1， Figure 4-2）

As can be seen， the economic downturn is caused by the decline in the primary industry （industry and construction） and tertiary industry. The secondary industry is growing.The primary industry accounted for 5% GDP and the tertiary industry accounted for 57% GDP， which means that more than half of GDP growth is downward， resulting in an overall decline of GDP.

2） the point of three demand

①Investment： In the first quarter of year， investment in fixed assets （excluding farmers） is 8.5843 trillion yuan， up 10.7% nominal growth （after deducting price factors， the actual increase of 13.8%）. At the same time， the growth rate accelerated 0.7 percentage points faster than last year， compared with January - February accelerating 0.5 percentage points. Among them， the state-controlled investment is 2.912 trillion yuan， an increase of 23.3%； private investment is 5.3197 trillion yuan， an increase of 5.7% of the total investment accounting for 62.0%.

②Consumption： in the first quarter of year， total retail sales of social consumer goods is 7.8024 trillion yuan， up 10.3% nominal growth （after deducting price factors， the actual growth of 9.7%）， the growth rate down 0.4 percentage points compare with last year， and faster than that between January to February this year， accelerating 0.1 percentage points .

③Export： a quarter of total imports and exports are 5.2144 trillion yuan， down 5.9%. Among this， export is 3.0123 trillion yuan， down 4.2%； import is 2.2021 trillion yuan， down 8.2%， leading to trade surplus of 810.2 billion yuan. In March， total imports and exports are 1.9056 trillion yuan， an increase of 8.6%. Among this， export is 1.0501 trillion yuan， an increase of 18.7%； import is 855.5 billion yuan， down 1.7%.（Figure 4-3， Figure 4-4）

As can be seen， the economic downturn was mainly caused by falling exports， while consumption is stable and investment accounted for a greater impact. Exports accounted for 6% GDP， which means that only a small fraction of GDP is downward. Most of them are stable， while only part of the descending speed a little faster led to a slight decline in GDP.

3. Financial Supervision

People's Bank of China has adopted a series of targeted measures to further strengthen financial supervision. People's Bank of China recently introduced a new MPA system， focusing on capital and leverage to consider seven assets of liabilities， liquidity， pricing behavior， asset quality， debt risk， credit policy execution.

“Macro Prudential Assessment” （MPA）， is capable of better risk management.MPA coverage in the regulatory system is mainly reflected in narrow loans turned to concern generalized credit. The latter put bonds， shares and other investments， assets purchased under resale agreements etc. into them. For the last part of the bank to circumvent the credit， they control it through practicing maneuvers asset constraints， and reducing credit risks blind. Micro Prudential Assessment aimed at stabilizing the individual financial institutions and a single financial sector supervision of financial institutions to prevent every single agency problems. However， the scope of Macro Prudential Assessment means regulation is not limited to a single agency or department， and the target aimed at achieving overall the stability of the financial system， the financial system to prevent the outbreak of systemic risk.

4. Real interest rate affect consumption

The figure 7 shows that an interest rate rotates the consumers budgeting line around the point （Y1， Y2） and ， thereby， alters the amount of consumption in both period. Here， the consumer moves from point A to B. You can see that for the indifference curves drawn in this figure first-period consumption falls and second-period consumption rises.

Ⅳ. Conclusion

Overall， China's economic growth is still faster， which has the world's largest foreign exchange reserves， low external debt percentage of GDP， the huge current account surplus.In addition， its high degree of capital account is not open， and the banking system is comparatively healthy in spite of some overvalued house prices.Therefore， the probability of financial crisis China is very low， but the potential risks， real estate bubble point and heavy chemical industry production capacity clearing barriers， need to resolve as soon as possible.

1. The exchange rate policy should be flexible and stable

Experience shows that a stable and competitive exchange rate arrangements for the export-oriented developing countries is critical. It is a guarantee what maintains the competitiveness of export enterprises， while ensuring the smooth conduct business without interference exchange rate fluctuations . However， in a non-flexible exchange rate arrangement， when the currency was overvalued，it would lead to the crisis of balance of payments and currency ； when the currency is undervalued， it can cause a bubble economy and inflation. Chinese exchange rate policy need to stick to market-oriented reform， while China has clearly central bank intervention in foreign exchange market conditions， methods and objectives， enhances transparency to intervene， and stabilize market expectations. For example， it can explicitly declare that when the RMB exchange rate volatility to a certain extent， the central bank intervention is inevitable. At the beginning， the relevant departments take warning from the self-adjusting manner to guide the market. If the warning method fails， the transaction is to take further substantive steps to intervene. Government is supposed to maintain 'effective exchange rate basically stable' established policy goals， while the RMB against the dollar wave Motion is controlled in a small range.

2. monetary policy to “l(fā)oose” based.

Fed rate hike expected to slow， easing monetary policy in the euro area and Japan continues to increase efforts to implement a more flexible and appropriate monetary policy to create a better international environment for China. I recommend that a bit more loose monetary policy earlier hands-on， will not be repeated and we can take the RRR， interest rates， monetary policy tools and other innovative ways to maintain adequate liquidity and reasonable and moderate growth in total social financing， to reduce financing costs. At the same time， by increasing the flow of bank loans supervision and inspection of credit ，and financial allocations bundled and other measures， we can actively clear the monetary policy transmission channels to the real economy and promote incremental currency business entities， financial markets and the real estate market in areas such as the rational allocation.

China is fully liberalized upper and lower deposit and lending rates floating. The real credit rate guidance and reference value of deposit and lending rates will gradually diminish. The central bank to effectively influence future policy rates by credit interest rates and logically also need to make some changes. The central bank stressed that “the interest rate pricing behavior” in the MPA system， not only to strengthen the supervision of banks' liabilities side， but also to prepare in the framework of monetary policy by the quantity to price-type transition. Overall， the central bank tends to strengthen the supervision of both ends of the assets and liabilities of the bank， further compressing the space of irregular financing， but also further streamlining the credit derivative channels， and raising the marginal utility of money policy.

3. Effective use of foreign currency

To effectively use foreign exchange reserves， on the one hand， it can increase the proportion of foreign exchange retained companies to encourage domestic enterprises to encourage enterprises to use foreign currency funds for foreign direct investment； on the other hand， when experienced a country's currency devaluation， if the country's external debt burden is too heavy， it may trigger a debt crisis， even financial and economic crisis. Therefore appropriate reduction to the level of external debt can reduce the risk of foreign exchange and financial risks in the country.

Ⅴ.Appendix of Graphs and Tables

Table 1

Increase in interest rates Time Degree Dollar Index SSE Composite Index

Round 1 12 months

（1994-1995） 3%

（3.25%-6%） -15.3%

（96.8-81.9） -26.5%

（833-612）

Round 2 11 months

（1999-2000） 1.75%

（4.74-6%） 13.8%

（94-107） 52.1%

（1275-1940）

Round 3 27 months

（2004-2006） 4.25%

（1%-5.25%） -2.4%

（87.2-85.1） 16.7%

（1430-1670）

Round 4 2015.12.1 began 99.07- 3578-

Figure 1

Figure 2

Figure 3

Figure 4-1

Figure 4-2

Figure 4-3

Source： McKinsey 2016 China Consumer Report

Figure 4-4

Figure 5

Figure 6

Figure 7

References：

[1]Wei Xinghua，Sang Baichuan.Causes of the Asian financial crisis，the impact and inspiration to China[J].Academic Monthly， 1999（1）：19-23.

[2]Yu Yongding.Lessons of the Asian financial crisis and macroeconomic management of China[J].International Economic Review，2007：5-6.

[3]Liu Shurui，Shen Yue.RMB exchange rate system reform process[J].Financial Economics.

[4]Li Hongmei.Revelation Asian financial crisis can not under triangle[J].financial sight，2016：103-104.

[5]summer，Luo Ranran.Mixed financial Trend of Chinese financial regulatory reform - based Commercial Bank Perspective[J].Southwest Finance，2016（6）：62-65.

[6]Tan Xiaofen.Negative impact of the Fed rate hike in China's economic and financial response[J].Chinese social and economic development strategy · New Vision，2016（01）：75-80.

[7]http：//www.federalreserve.gov/econresdata/default.htm.

[8]McKinsey 2016 China Consumer Report.

[9]Does Macro-Prudential Regulation Leak？ Evidence from a UK Policy Experiment，Journal of Money，Credit and Banking，Volume 46，Issue s1，pages 181–214，F(xiàn)ebruary 2014.

[10]Peek，Joe，and Eric Rosengren.（1995b）“Bank Regulation and the Credit Crunch.”Journal of Banking and Finance，19，679–92.

[11]王天龍.美聯(lián)儲未來加息對我國的影響[J].宏觀經(jīng)濟管理， 2014，10：79-80，85.