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Stanford University Panel on The World in Crisis:Financial Pressures from Abroad, Impacts Inside and


Summary of the Stanford University Panel on

The World in Crisis:

Financial Pressures from Abroad, Impacts Inside and China's Response

On the morning of November 8, the Stanford University Panel is hosted in Peking University. Chaired by Professor Nicholas C. Hope, this panel focuses on “The World in Crisis: Financial Pressures from Abroad, Impacts Inside and China's Response”. Four professors from Stanford University share their ideas and discuss the impacts of the financial crisis. Professor Wu Ho-Mou form National School of Development, Peking University, makes the comments.

About the topic “The Global Credit Crisis and China''s Exchange rate”, Professor Ronald McKinnon asserts that the case for stabilizing China's exchange rate against the dollar is strong. Before 2005 when the yuan/dollar rate was credibly fixed, it helped anchor China's domestic price level. But gradual RMB appreciation from July 2005 to July 2008 created a “one-way-bet” that disordered China's financial markets in two respects: (1) no private capital outflows to finance China's huge trade surplus leading to an undue build up of official exchange reserves and erosion of monetary control, and (2) a breakdown of the forward exchange market in 2007-08 so that exporters could no longer get trade credit—probably worsening the severe slump in Chinese exports. But after July 2008, the credit crunch induced an unexpected unwinding of the dollar carry trade leading to a sharp appreciation in the dollar's effective exchange rate. The People's Bank of China (PBC) then stopped RMB appreciation against the dollar. China's forward exchange market was restored and monetary control regained. Now the PBC can better support the fiscal stimulus by promoting a parallel expansion of bank credit. But, since March 2009, the fall in the dollar (with the RMB tied to it) again threatens to undermine the yuan/dollar rate and China's monetary stability.

For the topic “Emerging Contours of Financial Regulation: Challenges and Dynamics”, Professor Rakesh Mohan gives his opinions. The current financial crisis is attributed to a variety of factors such as the developments in the sub-prime mortgage sector, excessive leverage, lax financial regulation and supervision. However, the crisis also reflects the effects of long periods of excessively loose monetary policy in the major advanced economies during the early part of this decade. The policy has led to severe problems in both macro management and financial regulation. Therefore, this will remain a challenge since there is little international discussion on this issue. The theory and belief of efficient and rational markets have been severely discredited by the current crisis. There is, therefore, a growing agreement for much strengthened, and perhaps, intrusive regulation and supervision in the financial sector. Whereas the suggested reform principles are being increasingly well accepted, many challenges will arise on their modes of implementation, and their practicality. The crisis is global, so is the response to it. Along with the coordinated fiscal and monetary policy actions, a comprehensive re-examination of the financial regulatory and supervisory framework is also underway around the world. Against this backdrop, this author then analyses the emerging contours of regulation of financial institutions with an emphasis on the emerging challenges and dynamics.

Professor Jean C. Oi considers the relationship between world economic crisis and China's development model. There are signs that China's development model has softened the impact of the world economic crisis both for the economy as a whole but also for those who have lost jobs following the sharp decline in exports. This presentation explores the role of different levels of the state in facilitating a softer landing, especially in the rural areas. China leads the economic recover, and one explanation of China's ability to weather the crisis is 4 trillion investments and many other subsidiary measures. State provides assistance called Dibao to returned migrants, and local governments help peasant workers get back wages, provide training, and help them to start small business. Governments build the needed infrastructure, up the value chain, create more jobs in service sector, and increase in R&D to recover economy. China's development model also faces many challenges. We need to consider questions like that what is the long term impact of stimulus policies, how sustainable are government policies, and how many are people loss job but cannot find job and so on.

Professor Scott Rozelle investigates the impact of financial crisis on rural labor employment and income in China. The result of the first independent national household survey of 1,200 household in six provinces provided a means to verify the official statistics and a basis for analyzing the impact on not just migrant workers but the entire off-farm rural workforce. The survey data show that the initial impact of the crisis was much worse. Of the 265 million rural-dwellers with off-farm employment, 45 million, or 17%, either lost their jobs or delayed their move out of agriculture between September 2008 and April 2009. The impact was felt more deeply in southern provinces than northern; younger workers were hit harder than older workers; less educated workers were more likely to lose their jobs than more educated; the impact of the crisis was neutral between men and women. But the results also show that the ability of China's migrant workers to adapt to the crisis was much better than was previously imagined. By April 2009, 25 million of those rural workers who lost their off-farm jobs had found new employment. By August, that number had increased to 32 million. The reason for the success of migrant workers in finding new employment was a willingness to accept lower wages. The market for China's off-farm rural labor is flexible, and wages have adjusted to accommodate the shock from the sharp decline in demand. Although China's labor markets were flexible and dynamic enough to allow the group most affected by the crisis, the off-farm rural workforce, to transform their energy into determination to find another job, the effect of the crisis has been to further increase the income differential. The reality for many rural residents is more likely stagnant or even falling incomes.

Comments from Wu Ho-Mou:

Ronald has made substantial contribution to China's exchange rate policy by bringing in his consciousness about Japan's experience in 1980s for Chinese people. And, China's exchange rate policy, according to the officials in China, is different from Ronald's conclusion from the data. Finally, nowadays, the pressure on the appreciation of the renminbi has been persisted and the inflow of hot money will challenge China's monetary policy. Therefore, Professor Wu suggests cooperation with the US and speed up the structural readjustment for China.

Professor Wu has made connection between Professor Mohan's presentation and Professor Arrow's, thinking that the economic research about risk is under heavy responsibility and a long way. Also, Professor Mohan has raised the crisis is attributed to over-leverage and over financial innovation. However, the appropriate level is still a mystery which pushes us to research. We should learn from the crisis, looking for more advanced theory and model to prevent it.

For China's development model, I think we should look at the 4 trillion RMB stimulus plan. We should be noticed that it is an actual subtle change from November 2008 to March 2009. Beginning with controlling aggregate demand and maintaining the economic growth, it enforces the stimulus plan and emphasizes the structure change. Including the energy ecology, Chinese government is looking into future now. It worries about the updating of economic structure. Another face of the stimulus plan is that the SOE begin power and private sectors lose power in the industry. There are also some problems about bubble, like the high housing price in Beijing. China is out of crisis, but it is being recovered.

Scott has made ground work in China, and it is difficult for an American scholar to do these works. In his original abstract, Scott mentions the lack of formal legal title to land. We have different view, because our study at Chengdu and Chongqing suggest the success of the land reform. Success should be recognized by government and be helped to set down the policies.