Transcript Document 7315430

China’s economy
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Autori:
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Andrea Agostini,
Valentina Merani,
Charles Turay,
Caterina Schimizzi
Course: International financial institutions and
markets
Professor: Federica Ielasi
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The our work is about to describe the economy of China.
We divide the text in three parts:
First part is an introduction: we’ll talk about the position
of China in the world economy, what’s happened in the
economic reform of the eighties and how is structured
the economy today.
In the second part we examined the banking system.
In the third part we describe the financial market.
In the last part we’ll see what’s happening today in
China.
The Chinese development
Since 20 years the Chinese economy has a
very important role in the international scene,
and also continues to be subject of
contrasting reviews.
The surface of China is 9,671,018 km2,
making it the largest state in East Asia and
the population is approximately 20% of the
world: China is the most populous country
in the world.
The importance of China in the XXI century is
reflected in its role as second largest
economy to GDP after United States.
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China is also member of the many important instututions:
United Nations, who has as one of his goals the achievement of
international cooperation in economic development.
WTO, which aim to oversee a number of trade agreements between
member states, they representing approximately 97% of world trade in
goods and services.
APEC (Asia-Pacific Economic Cooperation): which aims to foster
cooperation, economic growth, free trade and investment in the AsiaPacific.
ASEAN(Association of South-East Asian Nations):which the main
purpose is to promote cooperation and mutual assistance between
member states to accelerate economic progress and increased stability
in the region of South-East Asia
G20:that enclosing the most industrialized countries to encourage
international economic development by promoting new strategies and
sustainable development.
THE ECONOMIC REFORM
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With the introduction of economic reform based
on capitalism, in 1978 China became the country
with the fastest economic development in the
world: is the second largest exporter and third
largest importer of goods.
there was a slow process of transformation in
the Chinese economy, its institutions, structure
and regulations relating to the
Financial sector.
There were reforms in industry and agriculture
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Also there were important and decisive initiatives
to encourage foreign investment: opening up to
foreign countries and the introduction of the free
market is so central to the reform.
The reforms implemented have led to a "socialist
market economy", a new economic structure
which combined socialism, which held the
administrative and institutional structure, an
economic system which provided for the free
market and free trade.
An incredible growth
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Over the last 20 years China has got an extremely high savings rate,
averaging around 40 %, Chinese economy has enjoyed one of the
highest growth rates in the world.
At the beginning of the nineties there was an incredible increase in GDP,
from 4% in 1990 to 12.7% in 1994.
In the ranking of GDP, in 2007 China surpassed Germany and in 2010
Japan.
Of course the gap whit the United State is still very large.
In 2010, China is expected to score a gross domestic product amounted
to 5000 billion dollars, while the U.S. is at an altitude of 15 thousand.
In the last years the country has been able to rapidly build up its capital
stock and shift a massive pool of underutilized labor from the
subsistence-agriculture sector into higher-productivity activities that use
capital.
CHANGES IN ECONOMY
AGRICULTURE
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China is one of the world's largest producers and consumers of
agricultural products.
Today Agriculture contributes for around 10% of China's GDP.
In the nineties we assist to a crises in the rural world.
The profitability of the grain cultivation decrease because the prices,
state-controlled, increase less than the production costs.
Many farmers leave the grain cultivation for other activity and between
1979 and 2000 the sowned surface decrease of 12%.
To finance the social service and the infrastructure the government
multiply the taxes, and the campaigns suffer insufficient investment: the
poor regions miss the agricultural means and the rich regions the
resources are invested in industrial activity.
Industry
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Industry and construction account for 46.8]% of China's GDP. Around 8%
of the total manufacturing output in the world comes from China itself.
China ranks third worldwide in industrial output.
China is the largest producer of steel in the world.
Since the founding of the People's Republic, industrial development has
been given considerable attention. Among the various industrial
branches the machine-building and metallurgical industries have
received the highest priority. These two areas alone now account for
about 20–30 percent of the total gross value of industrial output
An important event in the Chinese industry is the development of the
privatization.
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In the nineties we assist to a decrease of the productivity of the public industry.
They are very penalized from the taxes, from the costs of the social protection
of their employees and because antiquated techniques of production.
In the 1993 the government decide the China must became a “modern
country”, so the public companies must become private company.
First step was opening to other subjects the participation to the business
capital.
In 1988 private companies get a real legal status: they can be whit single
owner; whit more owners or limited liability companies.
Companies whit foreign capital are an important part of the private sector:
they can be company whit mix capital, where investor get the 25% of capital;
they can be cooperatives where the division of the profits are defined by
contract or they can be total foreign capital.
From 1978 to 2001 the public companies in urban area decrease their
presence from 78% to 32%.
Import-export
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The vast majority of China's imports consists of industrial supplies and
capital goods, notably machinery and high-technology equipment, the
majority of which comes from the developed countries, primarily Japan
and the United States.
Regionally, almost half of China's imports come from East and Southeast
Asia, and about one-fourth of China's exports go to the same
destinations.
About 80 percent of China's exports consist of manufactured goods,
most of which are textiles and electronic equipment, with agricultural
products and chemicals constituting the remainder.
Out of the five busiest ports in the world, three are in China.
Exports of goods and services
(% of GDP)
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26,17813% in 2009
Exports of goods and services represent the value of all
goods and other market services provided to the rest of the
world. They include the value of merchandise, freight,
insurance, transport, travel, royalties, license fees, and other
services, such as communication, construction, financial,
information, business, personal, and government services.
They exclude compensation of employees and investment
income (formerly called factor services) and transfer
payments.
Imports of goods and services
(% of GDP)
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20,92528% in 2009
Imports of goods and services represent the value of all
goods and other market services received from the rest of
the world. They include the value of merchandise, freight,
insurance, transport, travel, royalties, license fees, and other
services, such as communication, construction, financial,
information, business, personal, and government services.
They exclude compensation of employees and investment
income (formerly called factor services) and transfer
payments.
Financial system
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the entire financial system has a high proportion of savings and
investments of the population.
The total value of deposits at the end of 2005, it has approached to
160% of GDP while the share of these deposits used by banks to extend
credit in the economy of the country was greater than 100% of GDP.
This indicates the dominant role of banks in the Chinese financial
system.
China's economy is mainly financed by bank loans: loans granted by
banks in the first quarter 2006 were 87% of the total funds raised by
domestic non-financial sector.
Moreover, the presence of not yet very developed bond market does
not allow companies to diversify their sources of research funding.
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Indeed the financial development of China remains in the
early stages.
The country’s legal system is weak so that financial contract
are difficult to enforce, while accounting standards are lax,
so that high-quality information about creditors is hard to
find.
Regulation of the banking system is still in its formative
stages, and the banking sectors is dominated by large-state
owned banks.
Even though available savings have not been allocated to
their most productive uses, the huge increase in capital
combined whit the gains in productivity from moving labor
out from low-productivity, subsistence agriculture have been
enough to produce high growth.
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As China gets richer, however this strategy is unlikely to
continue to work.
To move into next stage of development, China will need
to allocate its capital more efficiently, which requires
that it must improve its financial system.
The Chinese leadership is well aware of this challenge.
The governed has announced that state-owned banks
are being put on the path to privatization.
In addition, the government is engaged in legal reform to
make financial contracts more enforceable.
New bankruptcy law is being developed so that lenders
have the ability to take over the assets of firms that
default on their loan contracts.
The Banking Sector
The history of the banking system in China can be
subdivided into two main periods
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The Mao Era (1949-1978)
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The Post-Mao Era or Deng Era (1978
onwards)
The Mao Era
In 1949 the People's Bank Of China took over
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functions of central bank (regulation and
monetary policy)
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functions of commercial bank (control on all
banking business)
The Mao Era
PBOC
CBRC
As central bank the PBOC as the
objective
of
promoting
economic growth and price
stability.
It focus on monetary policy
issues and financial system
liquidity.
The China Banking Regulatory
Commition (CBRC) manages
the functions of supervision. It
focus on the strenght of the
financial
institutions and the restructuring
of the banking sector.
PBOC remains still very influential, it has considerable regulatory
power.Common overlapping of functions.
The Post-Mao Era
In 1983 the control on banking
business has been took over by
the “Big Four” namely
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Bank of China (BOC)
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Industrial & Commercial
Bank of China (ICBC)
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China Construction Bank
(CCB)
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Agricultural Bank of China
(ABC)
The Structure of the Banking Sector
The Big Four
Reforming the Banking Sector
The chinese banking sector used to be debt-laden because of its
status of ‘fakely independent’ from the government. NPL ratio of
the Big Four was above 20% in 2003.
Stages of the restructuring:
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Recapitalize and restructure the Big Four into jointstock banks (strenghtening the balance sheets)
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Invite strategic investors
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Become publicly listed (greater transparency and
efficiency)
Foreign Banks
2006 – removing of all
geographic and (most)
business restrictions for foreign
banks. Nevertheless rather
small role.
Often geographically focused (I.E.
Shangai) as they cannot
compete with Chinese banks in
term of the number of branches
The Financial Markets
Major function of the financial
markets
How Financial Markets have
improved Chinese economy
The Stock Market
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How chinese stock market was in the
past
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Analytical comparison of China stock and
US stock (at present).
Press coverage and speculation.
HK Stock Exchange
Growth potential of the stock market
The chinese stock market crash
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The Stock Market
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Taiwan stock market
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Political direction pursued by the
taiwanian leader
Enactment of new laws
New policies adopted
Taiwan Stock Exchange
Investment Risk in the Chinese
Stock Market
 Volatility
 Precautions
The Bond Market
 The
developing stage
 The
reformation of the bond markets
 Rules
and regulations in the bond
market
Why Financial Markets are among the most
heavily regulated sector in the economy?
 Asymmetric
 Adverse
information
selection and moral hazard
 Mitigating
the problem
Why investors should consider
investing in China?
 Capital
reserves
 Exit strategy
 Ready
 More
to serve (service sector)
to China than exports
Recommendation and
Conclusion
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Increase information to investors
Monitoring and control of credit rating
institutions
Diversification of loan portfolio
Encourage small banks to raise capital
Minimization of the financial panic
How sound and safe is the China's financial
system?
Undervaluation of China's Currency
The currency of China is
Renminbi and its unit is Yuan
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Issued in 1948
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Fixed to the rate of 2.56
RMB per USD
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RMB gradually
depreciated to enhance
the competitivity of
Chinese exports
 1994 – lowest value 8.62 RMB per USD
Fluctuation of the exchange rate of RMB
PPP (Purchasing Power Parity)
 Method based on the “law of one price”. I.E. Big Mac Index
 Limitations: it doesn't consider purchasing patterns;
difference in quality of goods in different countries; inflation
 Accoriding to the International Monetary Fund in
2006 1 USD = 2.062 Yuan
FEER (Fundamental equilibrium
exchange rate)
 Determines the internal balance GDP;
 Determines a target current account that conforms to the
sustainable capital account flows;
 Calculates the equilibrium of the REER.
 Limitations: uncertainty of estimating internal and external
balance.
BEER ( Behavioral equilibrium
echange rate)
Overcomes the FEER model'shortcoming by only modeling
the economic fundamentals
Explains the historic performance of the REER
Limitations: assumes the economy was in equilibrium during
the historical period
RMB undervalued by
According to the different model the RMB is
undervalued by different %
American Trade Deficit
 China contributes with 25% of US trade deficit;
 Appreciation of RMB will affect the deficit;
 The impact is proportional to the overall trade;
 China contributes with 11% of US trade.
 Ex: 20% appreciation would result in a 2% decrease in the
American trade deficit.
Advantages and Disadvantages of
undervaluation
An undervalued RMB artificially benefits Chinese exports, while
limiting the exports of other countries to China.
All of this would result in a strong limitation on the labour market
in most developed countries for the benefit of the Chinese
occupation.
However, this situation favours the interests of different
enterprises of developed countries that have moved production
to China. An undervalued exchange rate makes it much more
attractive, in western markets, the goods produced in China.
Advantages and Disadvantages of
undervaluation
The Chinese authorities claim that the abandonment of fixed
exchange rate would expose the country to activity of financial
speculation, would destabilize the economy and hurt growth.
Nevertheless, in June 2010, the Chinese government has
declared as its currency will gradually appreciated and will be
subjected to an oscillation of 0.5%
Conclusions
Yuan undervaluation is source of increasing tension in world
economy;
As stated by the President of the International Monetary Fund,
Dominique Strauss-Kahn in an interview:
'' If we want to avoid creating the conditions for a new crisis,
China should accelerate the process of revaluation; the
economic policies implemented by China to manage the crisis
are going in the right direction''