China Up Close: Understanding the Chinese Economy and Financial System
Moskow, Michael H., Lemieux, Cathy, Chicago Fed Letter
In March 2007, the authors paid a weeklong visit to Beijing and Shanghai, China. In this article, they summarize some of the most striking impressions from their visit concerning the Chinese economy and financial system.
The specific occasion for our visit to China in March 2007 was a series of lectures on monetary policy that Michael delivered to three leading Chinese universities: Tsinghua University, Fudan University, and the Central Party School of the Communist Party. The broader purpose of the trip was to enhance mutual understanding between U.S. and Chinese officials concerning economic and financial conditions in both countries.1
As part of the visit, we met with officials of government agencies, including the People's Bank of China (the central bank), the China securities Regulatory Commission, and the Shanghai Metropolitan Government Financial Services Office. We also met with senior representatives of leading manufacturing companies (BorgWarner, Caterpillar, and General Motors) and financial services companies (Citigroup, Deutsche Bank, JPMorgan Chase, Northern Trust, and Tianan Insurance). Finally, we visited two key financial markets: the Shanghai Stock Exchange and the Shanghai Futures Exchange.
China has made huge progress in achieving high rates of economic growth, lifting hundreds of millions of people out of poverty, developing its manufacturing sector, producing impressive rates of savings and investment, and building export growth. It has been an amazing success story, and the signs of this success were visible throughout our visit.
Our trip highlighted some major differences between macroeconomic policy and central banking in China and in the U.S. We were also struck by some of the challenges China faces as it continues to modernize its economy and improve its business processes and the functioning of its financial markets in the context of its existing political system. These challenges include corporate governance, market infrastructure, and economic efficiency. Finally, we address some issues that may affect China's future economic development, including concerns about unmet needs of certain population segments and the environment.
Macroeconomic policy and central banking
Economic growth in China has been very different from that in the U.S. Since economic reform began in 1978, China has averaged gross domestic product (GDP) growth of almost 10% per year-the fastest in the world over this period. Not only is China's growth much faster than that of the U.S., but it has also been largely driven by investment. Investment represents approximately 40% of GDP in China, compared with about 20% in the U.S. The downside of this impressive investment performance is that the consumption sector in China is underdeveloped, with significant unmet needs. In per capita terms, China is still a lowermiddle-income country, with 130 million Chinese falling below international poverty lines.2 Moving toward a growth path that relies more on domestic consumption demand is part of China's current five-year plan. China also wants to promote faster development of the service sector, including the small- and medium-sized enterprises that are so important to the U.S. economy. To increase consumption of goods, such as televisions, refrigerators, and washing machines, China has completed rural water and electrification projects. Another positive sign is that consumer loans are increasing.
China's central bank also functions quite differently compared with the U.S. model. Unlike our Federal Reserve System, the People's Bank of China is not politically independent. It reports directly to the State Council, which serves as China's cabinet as well as its highest executive body. Monetary policy in China aims at limiting the appreciation of mainland China's official currency, the renminbi (RMB),3 while keeping economic growth at a sustainable pace and inflation under control and preserving a fragile banking system. …