Chinas 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: well talk about
the position of China in the world economy,
whats 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 well see whats happening

The Chinese
Since 20 years the Chinese economy has a
development
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

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

 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

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

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 machinebuilding and metallurgical industries have received
the highest priority. These two areas alone now
account for about 2030 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

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

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.

(% of GDP)

Imports of goods and services

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.

(% of GDP)

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 nonfinancial 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 countrys 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 lowproductivity, subsistence agriculture have been

 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 stateowned banks are being put on the path to
privatization.
In addition, the government is engaged in
legal reform to make financial contracts more
enforceable.

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

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

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 jointstock banks (strenghtening the balance sheets)

Invite strategic investors

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
Rules and regulations in the bond
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''