Comments on Professor Yang Yao’s

presentation: Focus on re-balancing

China’s growth structure through
capital market/capital account reforms

Linda Yueh
University of Oxford

The views expressed in this paper are the views of the author(s) and do not necessarily reflect the views
or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they
represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any
statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make
any representation concerning the same.
Salter-Swan Model
xY ∗ (θ )Y ∗
• BT:
= YTB
θmY (θ )
• AD:

a + I (Θ, r ) + G − cT + xY ∗ (θ )Y ∗
YAD =
(1 − c + θm (θ ))
Y∗

• Pass-through to ΔP:

∆P = (1 − φ )(1 + µ )MC ∗ ∆E

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 Reforms to reduce saving & move
gradually from a  b
• Complete liberalization of
interest rates
– “floor” on inter-bank lending
rates
– “ceiling” on deposit rates

• Gradual capital account

liberalization
– “going out” policy
– accessing global credit
markets

• Macroeconomic benefits
– reduce reserve accumulation
– financial liberalization requires
improved regulation including 3
at global level
 Re-balancing China & the World
• Greater exchange rate flexibility is thought to follow:
interest rate + exchange rate reforms in the context
of S-I=X-M.
• Further implies re-balancing the global imbalances
that is already happening but unlikely to be complete.
• So, what happens if U.S. current account deficit is:
– Pre-crisis: 1.5% of GDP (< 0.5% of world GDP)
– Crisis: 6% of GDP (1.5% of world GDP)
– 2010: 3% of GDP (0.7% of world GDP)
 Back to pre-crisis level…

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 Global imbalances: 1994-2008

Source: IMF 5
 Four-fold growth in reserves since 1998
$7
Trillions

$6

$5

$4

$3

$2

$1

$0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total foreign exchange holdings Emerging and developing economies Advanced economies

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Source: IMF COFER.
 Conclusion
• Global imbalances will continue.
• Reformed capital markets/capital account will
help China to restructure its economy &
reduce reserve accumulation.
• The result would be a more balanced Chinese
economy with stronger growth & would also
help reduce liquidity build-up from global
imbalances, as befitting a large, open
economy.
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