Rod Tyers

Appreciating the Renminbi

International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non-traded prices. Yet, despite extraordinary growth after the mid-1990s China’s real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade has tightened China’s labour market. We show that, should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives the consequences would be harmful for both Chinese and global interests.

Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving

East Asian, and primarily Chinese and Japanese, excess saving has been comparatively large and controversial since the 1980s. That it has contributed to the decline in the global “natural” rate of interest is consistent with Bernanke’s much debated “savings glut” hypothesis for the decade after 1998, empirical explorations of which have proved unconvincing. In this paper it is argued that the comparatively integrated global market for long bonds is suggestive of trends in the “world” natural rate and that the longer term evidence supports a leading role for Asia’s contribution to the expansion of ex ante global saving in explaining the declining trend in real long yields. Evidence is presented that trends in US 10 year bond yields are indeed representative of those in the “world” natural rate. The relationship between these yields and excess saving in China and Japan is then explored using a VECM that accounts for US monetary policy. The results support a negative long term relationship between 10-year yields and the current account surpluses of China and Japan. Projections using the same model then suggest that a feasible range of future pathways for those current accounts could cause the path of long rates to deviate by 330 basis points over the next decade.

Real Exchange Rate Determination and the China Puzzle

While there is much controversy over exchange rates, particularly between the large, advanced economic regions, arguably more important real exchange rates receive comparatively little attention. Traditionally, these are seen to be influenced in the long run by forces that return economies to purchasing power parity (PPP) and by differences in productivity growth across sectors and across regions, as per the Balassa-Samuelson Hypothesis (BSH). Minor and realistic relaxations of the assumptions underlying the BSH greatly generalise the set of possible influences over real exchange rates, however. This paper surveys the literature on real exchange rate determination, as well as that addressing the puzzles over the trends in China’s real exchange rate. While this was widely expected to appreciate against the advanced economies after China’s first growth surge in the mid-1990s, it actually depreciated slightly until the early 2000s. Then, after 2005, its rate of appreciation was more rapid than expected. These puzzles are resolved by accounting for the effects of the trade liberalisations associated with WTO accession, China’s excess saving and the tightening of rural labour markets.

Gender ‘Rebalancing’ in China

The rise in Chinas sex ratio at birth during the last two decades has had a wide range of economic and social consequences, including excessive savings as families with boys compete to match their sons with girls who are scarce and rising rates of crime among the unmarried male population. These consequences are analysed using a global dynamic model that projects demographic behaviour and economic performance through to 2030. The results show that the proportion of unmatched unskilled Chinese men of reproductive age could be as high as one in four by that time. Policies to rebalance the sex ratio at birth will take decades to reduce the sex ratio at reproductive age and any associated allowance for higher fertility would slow growth in real per capita income. Yet our results suggest that more than offsetting gains could accrue from productivity improvements stemming from reduced crime.

Japan’s Economic Recovery: Insights from Multi-Region Dynamics

Despite its key contribution to global economic growth through the 1960s and 1970s, in recent decades the rise of China has seen the importance of Japan recede from the public discourse. This is notwithstanding its continuing key role as global investor and trading partner. Yet this role has been threatened by a tendency for its economy to stagnate since the 1990s and by the tragic earthquake of 2011, both of which have implications for global economic performance. This paper briefly reviews the many claimed sources of Japan’s stagnation and then analyses the sources of recovery along with the implications of the 3-11 disaster, using a multi-region global dynamic model. Both demand and supply side determinants prove important though it is shown that a key future role will be played by the performance of Japan’s services sector and of the industrial policies that affect it.

Projected Economic Growth in the People’s Republic of China and India: The Role of Demographic Change

As the third decade of economic reforms in the People’s Republic of China (PRC) draws to an end, its remarkable growth performance appears almost unstoppable. Between 1995 and 2005, gross domestic product (GDP) and per capita GDP grew at average annual rates of 8.8% and 8.0%, respectively. The central Government’s ambition to raise the level of GDP in 2020 to four times the level in 2000, which requires an annual growth rate of 7.2%, seems well within reach. India’s economic reforms began in earnest in the early 1990s and, like the PRC’s, signal a systemic shift toward an increasingly market-driven economy. Despite the fact that India’s average annual GDP growth performance of 6% in the last decade is enviable by virtually any standards Indian authorities have increased their growth target to 8%, indicating some degree of disappointment with the growth rates achieved in the first decade of reforms (Ahluwalia, 2002). In both countries, there is no question that achieving high and sustainable rates of GDP growth is a major policy objective.