A cross-country comparative analysis shows that there is substantial room for further integration
of China into global financial markets, especially in the case of the international bond market. A
further successful liberalization of the Chinese bond market would encompass not only loosening
bond market regulations, but also further developing of other markets, notably the foreign exchange
market. Even though the increased integration of China into international capital markets would
increase its exposure to the global financial cycle, the costs in terms of monetary autonomy would
not be large given China’s size and especially under a well-articulated macroeconomic framework.
The paper explores a different, supplementary way to assess and manage a particular type
of banking crises, those arising from a rise of nonperforming loans to the corporate sector.
It relies on a “national wealth approach,” focusing on the distribution of net wealth among
economic sectors and its interaction with developments in the banking system. It identifies
avenues for policy response optimization, based on an integrated macrofinancial analytical
framework, both for the prevention and the resolution of these types of economic events.
Mr. R. S Craig, Mr. Changchun Hua, Philip Ng, and Raymond Yuen
Offshore use of the renminbi expanded rapidly in Hong Kong SAR as China sought to develop an international role for its currency while maintaining capital controls. This prompts two questions addressed in this paper: How far advanced is renminbi internationalization? And, what role does Chinese capital account liberalization play? The first is addressed by testing the extent of integration of offshore and onshore markets for the renminbi using a Threshold Autoregression (TAR) model and finds that there are substantial unexploited arbitrage opportunities. A VAR model is used to indentify factors contributing to this limited market integration and finds that capital controls and shifts in global market sentiment explain much of the divergence in onshore and offshore renminbi exchange rates. To address the second question, the paper shows how capital account measures have been used to promote offshore use of the renminbi more actively in the wake of the global financial crisis, but that this was done asymmetrically with controls on inflows eased to a greater extent than on outflows. It concludes that a more balanced liberalization process will sustain progress in renminbi internationalization.
China’s current growth model— which has delivered steady and robust growth for two decades and lifted some 500 million individuals out of poverty—has become too reliant on credit and investment, and has begun to experience diminishing returns. Delays in advancing the government’s reform agenda will mean that vulnerabilities continue to grow and the probability of stalled convergence increases. On the other hand, with reforms to accelerate TFP growth and shift the economy away from its continued reliance on capital accumulation, China can grow at a healthy pace and maintain its convergence toward the level of high income economies. Evidence from China’s provinces indicates that there is room to improve productivity and sustain such a convergence toward the level of more prosperous economies.
China’s rapid credit expansion in 2009–10 brought local government financing platforms (LGFPs) into the spotlight. This paper discusses their function, reasons behind their recent expansion, and risks they are posing to the financial sector, local governments, and sovereign balance sheet. This paper argues that LGFPs were a fortune for China in the past, but would turn out to be a misfortune if the causes of the rapid expansion of LGFPs are not addressed promptly. In this context, the paper proposes ways to avoid misfortune by: acknowledging and addressing the revenue and expenditure mismatches at the local government level; establishing a comprehensive framework to regulate and supervise local government budgets; ensuring the sustainability of the financial resources obtained from the sale of land use rights; and developing local government bond markets and promoting financial reforms.
Although the budget deficit and the public debt feature prominently in political debate and
economic research, there is no agreement about how they should be measured. They can be
defined for different sets of public institutions, including the nested sets corresponding to
central government, general government, and the public sector, and, for any definition of
government, there are many measures of the debt and deficit, including those generated by
four kinds of accounts (cash, financial, full accrual, and comprehensive), which can be
derived from four nested sets of assets and liabilities. Each debt and deficit measure says
something about public finances, but none tells the whole story. Each is also vulnerable to
manipulation, and is likely to be manipulated if it is subject to a binding fiscal rule or target.
Narrow definitions of government encourage the shifting of spending to entities outside the
defined perimeter of government. Narrow definitions of debt and deficit encourage
operations involving off-balance-sheets assets and liabilities, while broad measures are
susceptible to the mismeasurement of on-balance-sheet assets and liabilities. Reviewing the
literature on these issues, the paper concludes that governments should publish several
measures of the debt and deficit in a form that clearly reveals their interrelationships.
Geert Almekinders, Mr. Alex Mourmouras, Ms. Jianping Zhou, Satoshi Fukuda, and Yong Sarah Zhou
The establishment of the ASEAN Economic Community (AEC) at end-2015 has brought into sharp focus the issue of financial and economic integration in the region. This paper takes stock of ASEAN’s financial integration and prospects. ASEAN integration could accelerate in the years ahead; it will likely be a safe, gradual process consistent with the “ASEAN way” of consensus decision-making. Properly phased and sequenced, closer financial integration has the potential to help increase real incomes and accelerate real convergence within ASEAN and narrow the region’s gap with advanced Asia. Realizing the promise of financial integration will require ASEAN countries to make long-term investments in financial infrastructure. Policymakers can draw on the experience of their more advanced peers and of other regions. Gradualism and safeguards should not be excuses for inaction or financial protectionism. Reliance on flexible policy frameworks and a strengthened and tested regional financial safety net should be part of the agenda. Closer engagement with the Fund could also help.
Countries implementing International Financial Reporting Standards (IFRS) for loan loss provisioning by banks have been guided by two different approaches: International Accounting Standards (IAS) 39 and Basel standards. This paper discusses the different accounting and regulatory approaches in loan loss provisioning, and the challenges supervisors face when there are different perspectives and lack of guidance from IFRS. It suggests actions that supervisors can take to help banks meet regulatory and capital requirements and, at the same time, comply with accounting principles.
In this paper, we argue that there is much room for China to strengthen its regulatory
framework for public-private partnerships (PPPs). We show that infrastructure projects carried
out through local government financing vehicles (LGFVs) were largely unregulated PPPs, and
significant fiscal risks have already manifested themselves. While PPPs can potentially provide
efficiency gains, they can also be used by governments to circumvent budgetary borrowing
constraints. Therefore, effective PPP regulation is key to delivering PPPs’ benefits while
containing their potential fiscal risks. The authorities have taken concrete steps in order to
establish a sound regulatory framework and foster a new generation of PPPs. However, to
make the framework effective, we highlight a few issues to be resolved. Based on international
best practice, we propose a four-pillar regulatory framework for China, which could be
implemented gradually in three stages.
China has been moving to a more market oriented financial system, which has implications for the monetary policy environment. The paper investigates the stability of the money demand function (MDF) in light of progress in financial sector reforms that, for example, have resulted in significant financial innovation (so-called shadow banking) and more liberalized interest rates. The analysis of international experience suggests that rapid development of the financial system often leads to structural shifts in the MDF. For example, financial innovation and liberalization alter the sensitivity of money balances to income and the interest rate. For China, we find that the stable long-run relationship between money demand, output, and interest rates that existed between 2002 and 2008 disappears after 2008. This coincides with the period of rapid financial innovation, especially the growth in off-balance sheet and nonbank financial intermediation. The results suggest that usefulness of M2 as an intermediate monetary target has declined with financial innovation and reform. A result that underscores the importance of moving toward increased reliance on more price-based targets such as interest rates.