Zhou Xiaochuan: Issues related to the global financial crisis
Address by Mr Zhou Xiaouchuan, Governor of the People's Bank of China, at the Global
Think-tank Summit, Beijing, 3 July 2009.
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Ladies and Gentlemen,
It is a great pleasure to attend the Global Think-tank Summit organized by the China Center
for International Economic Exchanges (CCIEE). I would like to take this opportunity to
discuss issues related to the global financial crisis, possible post-crisis scenarios for
international economic adjustments and policy responses by national governments.
1. Pay adequate attention to the micro causes of the current crisis and
strengthen regulation.
The causes for the outbreak of this crisis were very complex. Factors both at the macro and
micro levels had played some roles. We have heard about a lot of discussions, or even
overemphasis, from some parts of the world, on the impact of macro factors. However, the crisis
originated from Wall Street and many indisputable facts have established that micro factors
had played an overwhelmingly important role in causing this crisis, including pro-cyclical
factors at the micro level, problems with credit rating agencies, mark to market and fair value
accounting rules, problems with financial institutions including lax lending standards,
excessive leverage and deficient corporate governance, frivolous development of derivative
products, chaos in the originate-to-distribute models of asset securitization, and etc. These
glaring problems have exposed the great havoc caused by inadequate regulation and should
deserve adequate attentions and dramatic remedial measures.
2. Distribution of global imbalances
There are macro factors among the causes of current crisis. To what extent these factors
contributed to the crisis has always been subject to dispute, including the role of global
imbalances. In the view of traditional Chinese philosophy, imbalance is a state of normalcy
and balance is only a relative concept. The current global imbalances have a
counterintuitive feature. That is, in relative terms, low-income countries have high savings rates
whereas rich people in the high-income countries have consumed beyond their means.
Some advocate that both China with too much savings and the U.S. with too little of it should
make adjustments. We want to make efforts towards this end, but it is not plausible to
overestimate the impact of the two countries. There is no available data on the flow of global
savings. We have found the following graph of current account positions of the major
economic blocks. I have used it earlier this year when speaking at an event hosted by Bank
Negara Malaysia.
On this graph, China's current account surplus, though large, is just a part of the global total.
Oil exporters, Japan and other Asian economies all have a significant share in the global
surplus. Among the deficit or low saving countries, the share of U.S. deficit is very large. The
East and Central European countries account for a very small share of the total deficit. Other
economies do not have a prominent share in global imbalances.
In recent years, this matter has received a lot of attentions. The IMF (International Monetary
Fund) has organized a series of discussions, and the focus has shifted from balance of
payments surplus to savings gluts. It is comforting to see that the household savings rate has
gone up to almost 7 percent in the U.S. as recently as this last May. Whether this is a
sustainable long-term trend remains a question for prudent judgment. Generally speaking,
structural adjustment is never easy. In addition, the U.S. has a problem of public deficit. How
the US healthcare reform will unfold, a matter that the international community follows with
great interest may shape the future trend of U.S. savings rates.
3. The distribution of savings in China
People outside China need a better insight into the high savings rate in China. The general
view is that China consumes too little and has to consume more. The following chart shows
that the income distribution during China's economic transition has contributed to the savings
pattern.
The share of China's household savings in GDP has been quite stable. It was 20.3 percent in
1992 and 20 percent in 2007. Though once hitting a low of 17 percent, it basically remains
around 20 percent. The share of corporate savings in GDP was 11.3 percent in 1992, and
doubled to 22.9 percent by 2007. Meanwhile, the share of government savings, namely
public sector savings in GDP was 4.4 percent in 1992, and nearly doubled to 8.1 percent by
2007. Given the comparatively small size of the government savings, surging corporate
savings played a more important role.
High corporate savings in China are closely related to the large rural labor surplus. Seeking
opportunities to better realize their productivity, surplus rural labor has gradually found jobs in
coastal and urban areas, in industrial and the service sectors. This, as matter of fact, is part
of the urbanization process. Labor cost has remained and will remain comparatively low
before the process is completed. During this process, the choice of staying on farms or going
to cities depends mainly on the comparative advantages and benefits of farming and working
in cities. Other policy related factors, however, are relatively insignificant.
Due to the equity ownership structure, employees only receive a small proportion of
corporate profits, which have maintained at high levels. To solve this problem, the 17th Party
Congress stated in its report that conditions would be created to enable more people to
receive incomes from properties and investments. For the same reason, part of the
stateowned common equity is transferred to the national social security fund when a company
goes public. Greater efforts are needed to enable the public to share the corporate profits.
In China's structural adjustments, the optimal choice is to expand household consumption,
which will directly enhance the domestic demand and lower the savings rate. This is,
however, easier said than done. While the current income distribution structure cannot be
dramatically changed in the short term, the second-best choice is to maintain and expand
investments, and channel investments to sectors and areas to achieve efficient but not
wasteful allocations. This way, the residual savings, namely, total savings net of total
investments (savings surplus), will not be so large, and will not have a major impact
internationally. Apparently, over-investment in industries leads to overcapacity. However,
with urbanization still a long way to go, there is enormous investment potentials in the
process. Urbanization will prepare China for its demographic migration, consumption
expansion and the development of the service sectors. After all, China's urbanization will go
on for many years to come.
4. Analysis of several scenarios of rebalancing the global economy
There can be a number of scenarios for rebalancing the global economy through
adjustments, and the analyses and policy implications for different scenarios are different.
A lot of discussions focus on the first and also the most desirable scenario. Both the
household savings rate and overall savings rate in the U.S. keeps going up, and Chinese
household consumption keeps rising, leading to a correction of the global imbalances.
Indeed, this is the most ideal scenario, but not easily realizable, because structural
adjustments involve quite a lot difficult issues. Furthermore, we cannot, based on the latest
short-term data, jump to the conclusion that this problem can be easily solved.
In the second scenario, U.S. household savings rate goes up, and thus the U.S. consumes
fewer Chinese products. Subsequently, China will see greater excess capacity, lower
equipment utilization, job losses, and a path for slower GDP growth. We need to avoid this
situation with our best efforts. A variation of this scenario may be that, inflation in China
causes effective RMB exchange rate movements in real terms and thus resulting in the
completion of the adjustment process.
A third scenario sees higher household savings rate in the U.S. and moderately stronger
consumption in China. Also in this scenario, China's investment in urbanization increases.
Together these will reduce the savings glut and its outflow. We can assume that this leads to
rapid developments in urban infrastructure, housing and the service sectors, supporting
future consumption and employment. This is another acceptable outcome. But this requires
appropriate reform for the modus operandi of investment and for financing instruments to
support urbanization. For example, we have been discussing for years whether local
governments should be allowed to issue municipal bonds to finance infrastructure projects.
In the fourth scenario, though higher U.S. savings rate reduces demand for Chinese
products, China successfully moves part of its excess capacity, including its manufacturing
capacity, to other developing countries through its Going Global investment strategy. In
terms of South-North relations, this will help facilitate industrialization and raise future
consumptions in developing countries. This scenario is also a step in the right direction. By
then, China's trade surplus will no longer be a major problem. A major test will be whether
the U.S. will still run large deficits against other developing countries.
In the fifth scenario, the U.S. fails to shore up its aggregate savings rate, its healthcare
reform falters, and its public consumption remains high. In contrast, the adjustment efforts in
China are successful. Part of its excess capacity is relocated to other developing countries,
its foreign trade reaches relative equilibrium, or its savings surplus, if any, is diverted to other
countries instead of flowing to the U.S. At that time, the U.S. may still run trade deficits and
have savings flow problems with Vietnam and other developing countries, and oil-producing
countries.
A sixth scenario is the last thing we want to see. Here, all adjustment efforts are made in
vain, the economic imbalances persist, and trade protectionism escalates.
There may be other scenarios. This list is by no means exhaustive. We may end up seeing
some combination of several scenarios listed above. I personally think we need to be aware
of the difficulties and should not be over-idealistic. A practical way forward, which is a
combination of several scenarios above, may be that continued reform leads to stronger
consumption and significant progress of urbanization in China. In this case, given the high
savings rate in China, we may still maintain residual savings. If any, I wish this to flow to
other developing countries. This will need the support of the international financial system
including the international monetary system, to help improve the global productivity and
income distribution, and drive broader global growth. We also want to emphasize that this
growth should be green in nature. Furthermore, from a demographic point of view,
developing countries will generate tremendous demand for the world.
5. Personal views
First, global imbalances are an important and difficult subject matter; however, in addressing
the financial crisis, we cannot afford to ignore the flawed micro-level mechanisms and the
importance of regulatory overhaul. We should prevent this micro focus from getting off-track.
Second, it is necessary to look into the causes and features of the global imbalances, its
interaction with the global development patterns, varying development stages of different
countries and their income distributions. One cannot expect a simple and straightforward
instrument to work the miracle of structural adjustment.
Third, based on the above scenario analysis, we should strive to achieve Scenario 1, avoid
Scenarios 2 and 6, and do more research on Scenarios 3, 4 and 5. To this end, institutional
reform needs to be designed and pursued along the direction of desirable outcomes to bring
about the desirable changes.
The scientific view on development conceived and established by the Party and the Chinese
government covers many aspects of the needed reforms and restructuring, including putting
the people first, expanding consumption and domestic demand, environmental-friendly
growth, promoting urbanization, developing the service sectors, trade and investment
facilitation and etc. Since the outbreak of the crisis, China has sped up economic structural
adjustment, expanded domestic demand, and made a lot of efforts to mitigate the impacts of
the crisis and to sustain development. Though the quest for specific rules and routes toward
sustainability involves trial and error, experimentation and knowledge renewal, I'm confident
that, as long as all countries work together, we will pull out of the crisis and find a path to
sustainable and scientific development.