It suffers from one obvious problem. It is dated. The IMF completed this report in early July, and it is now almost November. China’s current account surplus simply is not going to be $180b. Q3's trade surplus showed that. It will be far bigger. If the IMF thinks the ability to its analysis to stimulate public debate is central to the impact of its assessment, particularly for countries that are not likely to borrow from the IMF, it needs to shorten the lag between finishing the report and releasing the report. Yes, Board debate is important – but, well, could this still have come out a bit earlier?
I am eagerly looking forward to the staff report (mentioned in a footnote) which will explore the reasons why China’s current account surplus exploded in 2005. Among other things, the IMF Article IV indicates that if you adjust for reserves shifted to ICBC and for swaps with the banking system, China’s 2005 reserve growth was $236b, not $208. That is useful information for reserve-obsessed people like me – among other things, it implies I actually was slightly underestimating China's 2005 reserve growth (the swaps were larger than I had estimated), and thus slight underestimating global reserve growth.
The IMF also notes that China's July revaluation against the dollar has had virtually no impact on China's real exchange rate: "on a real effective exchange rate bases, the renminbi by May 2006 had returned to roughly its June 2005 level despite the revaluation." Why? The change in the RMB/ $ was offset by changes in the $/ euro — and by higher inflation in the US. Updating the calculation through the end of October wouldn't change much. The RMB would still be about 15% below its early 2002 levels.
What else jumped out at me as I skimmed the report?
- The surge in China’s national savings since 2001. Savings is estimated to have increased from 34% of GDP in 2001 to 51% of GDP in 2006. That is extraordinary. Household savings is high, but the IMF – like the World Bank – says that the real drivers of the surge in savings have been the government and businesses, especially business. A lot of the debate over China comes down to why folks think business savings surged. One explanation is rising profits in the export sector linked the RMB’s big real depreciation since 2002 (the IMF, as usual, has great charts). Another is a set of reforms that allowed state firms to shed their social responsibilities – increasing their profitability — without introducing mechanisms for the distribution of their profits. And rather than deposit their profits in the banks ay 2% and change (nominal), firms had a strong incentive to invest ….
- Investment is expected to rise from 34% of GDP in 2001 to 44% of GDP in 2006. That kind of investment surge usually leads to a current account deficit … the puzzle of China is that it was overwhelmed by an even bigger surge in savings.
- Consumption has fallen dramatially as a share of China's GDP since 2002 (the Economist should take note)
- And the chart comparing bank lending growth and m2 growth shows that a ton of liquidity has been bottled up inside the banking system since early 2004. A ton. If the banks were ever allowed to lend all their deposits out, investment could soar even higher … as the banks now have the ability to lend out more than they take in for quite some time.
In Martin Wolf’s analysis, China’s ability to bottle up these funds in the banking system is a key reason why the RMB has depreciated in real terms, not just nominal terms. Only by constraining bank lending could China hold inflation down. Turning a nominal depreciation into a sustained real depreciation required that China adopt a set of policies that raised national savings …. Read more »