VIEWS: 4 PAGES: 45 CATEGORY: Government POSTED ON: 11/5/2011
China's economy during the past 40 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy, in 2010 China became the world's largest exporter. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2010 stood as the second-largest economy in the world after the US, having surpassed Japan in 2001.
China’s economy • Autori: • Andrea Agostini, • Valentina Merani, • Charles Turay, • Caterina Schimizzi • Course: International financial institutions and markets • Professor: Federica Ielasi • 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. • 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 Asia- Pacific. • 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 • 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 • 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 • 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 • 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 • 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. • 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 • 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) • 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) • 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 • 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. • 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. • 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 The Mao Era (1949-1978) The Post-Mao Era or Deng Era (1978 onwards) The Mao Era In 1949 the People's Bank Of China took over functions of central bank (regulation and monetary policy) functions of commercial bank (control on all banking business) The Mao Era PBOC CBRC As central bank the PBOC as the The China Banking Regulatory objective of promoting Commition (CBRC) manages economic growth and price the functions of supervision. It stability. focus on the strenght of the It focus on monetary policy financial issues and financial system institutions and the restructuring liquidity. 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 Bank of China (BOC) Industrial & Commercial Bank of China (ICBC) China Construction Bank (CCB) 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: Recapitalize and restructure the Big Four into joint- stock banks (strenghtening the balance sheets) Invite strategic investors 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 How chinese stock market was in the past 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 The Stock Market Taiwan stock market 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 and regulations in the bond Rules market Why Financial Markets are among the most heavily regulated sector in the economy? Asymmetric information Adverse selection and moral hazard Mitigating the problem Why investors should consider investing in China? Capital reserves Exit strategy Ready to serve (service sector) More to China than exports Recommendation and Conclusion 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 Issued in 1948 Fixed to the rate of 2.56 RMB per USD 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''
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