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

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

• there was a slow process of transformation in the Chinese economy. 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.THE ECONOMIC REFORM • With the introduction of economic reform based on capitalism. structure and regulations relating to the . its institutions.

an economic system which provided for the free market and free . a new economic structure which combined socialism.• 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". which held the administrative and institutional structure.

• Of course the gap whit the United State is still very large. China is expected to score a gross domestic product amounted to 5000 billion dollars. • In 2010. is at an altitude of 15 thousand.An incredible growth • Over the last 20 years China has got an extremely high savings rate. Chinese economy has enjoyed one of the highest growth rates in the world. • In the ranking of GDP. while the U. .7% in 1994. in 2007 China surpassed Germany and in 2010 Japan. from 4% in 1990 to 12. • At the beginning of the nineties there was an incredible increase in GDP. averaging around 40 %.S.  • 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.

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CHANGES IN ECONOMY .

• To finance the social service and the infrastructure the government multiply the taxes. • Many farmers leave the grain cultivation for other activity and between 1979 and 2000 the sowned surface decrease of 12%. • Today Agriculture contributes for around 10% of China's GDP. increase less than the production costs. state-controlled. • The profitability of the grain cultivation decrease because the prices.AGRICULTURE • China is one of the world's largest producers and consumers of agricultural products. and the campaigns suffer insufficient investment: the poor regions miss the . • In the nineties we assist to a crises in the rural world.

These two areas alone now account for about 20–30 percent of the total gross value of industrial output . industrial development has been given considerable attention. • Since the founding of the People's Republic. China ranks third worldwide in industrial output. • China is the largest producer of steel in the world.Industry • Industry and construction account for 46. Around 8% of the total manufacturing output in the world comes from China itself. Among the various industrial branches the machinebuilding and metallurgical industries have received the highest priority.8]% of China's GDP.

• In the nineties we assist to a decrease of the productivity of the public industry. where investor get the 25% of capital. they can be cooperatives where the division of the profits are defined by contract or they . • Companies whit foreign capital are an important part of the private sector: they can be company whit mix capital. so the public companies must become private company. • In 1988 private companies get a real legal status: they can be whit single owner. whit more owners or limited liability companies. • In the 1993 the government decide the China must became a “modern country”. • They are very penalized from the taxes. • First step was opening to other subjects the participation to the business capital. from the costs of the social protection of their employees and because antiquated techniques of production.An important event in the Chinese industry is the development of the privatization.

notably machinery and high-technology equipment. most of which are textiles and electronic equipment. • Out of the five busiest ports in the world. primarily Japan and the United States. with agricultural products and chemicals constituting the remainder. • About 80 percent of China's exports consist of manufactured goods. the majority of which comes from the developed countries. • Regionally. . and about one-fourth of China's exports go to the same destinations. three are in China.Import-export • The vast majority of China's imports consists of industrial supplies and capital goods. almost half of China's imports come from East and Southeast Asia.

insurance. and other services. travel. (% of GDP) . royalties.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. financial. business. personal. construction. information. They include the value of merchandise. license fees. transport.Exports of goods and services • 26. freight. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments. such as communication. and government services.

such as communication. and government services. business. personal. They exclude compensation of employees and investment income (formerly called factor services) and transfer payments. (% of GDP) . transport. information. travel.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. and other services. construction. freight. royalties. insurance. license fees. They include the value of merchandise.Imports of goods and services • 20. financial.

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.  • This indicates the dominant role of banks in the Chinese financial system. 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.Financial system • the entire financial system has a high proportion of savings and investments of the population. . the presence of not yet very developed bond market does not allow companies to diversify their sources of research funding. • The total value of deposits at the end of 2005. Moreover.

the huge increase in capital combined whit the gains in productivity from moving labor out from lowproductivity. • Regulation of the banking system is still in its formative stages. and the banking sectors is dominated by large-state owned banks. subsistence agriculture have been . so that high-quality information about creditors is hard to find.• Indeed the financial development of China remains in the early stages. • Even though available savings have not been allocated to their most productive uses. • The country’s legal system is weak so that financial contract are difficult to enforce. while accounting standards are lax.

• In addition. • To move into next stage of development. . China will need to allocate its capital more efficiently. • The Chinese leadership is well aware of this challenge.• As China gets richer. which requires that it must improve its financial system. however this strategy is unlikely to continue to work. • The governed has announced that stateowned banks are being put on the path to privatization. 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) .

It focus on monetary policy issues and financial system liquidity.The Mao Era PBOC CBRC As central bank the PBOC as the objective of promoting economic growth and price stability.Common overlapping of functions. it has considerable regulatory power. PBOC remains still very influential. . 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.

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 .

NPL ratio of the Big Four was above 20% in 2003.Reforming the Banking Sector The chinese banking sector used to be debt-laden because of its status of ‘fakely independent’ from the government. Stages of the restructuring:  Recapitalize and restructure the Big Four into jointstock banks (strenghtening the balance sheets)  Invite strategic investors .

E. Nevertheless rather small role. Shangai) as they cannot compete with Chinese banks in term of the number of branches . Often geographically focused (I.Foreign Banks 2006 – removing of all geographic and (most) business restrictions for foreign banks.

The Financial Markets Major function of the financial markets How Financial Markets have improved Chinese economy .

 HK Stock Exchange  Growth potential of the stock market  The chinese stock market crash .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.

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? .

56 RMB per USD  RMB gradually depreciated to enhance the competitivity of Chinese exports  1994 – lowest value 8.62 RMB per USD .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.

Fluctuation of the exchange rate of RMB .

Big Mac Index  Limitations: it doesn't consider purchasing patterns.062 Yuan . inflation  Accoriding to the International Monetary Fund in 2006 1 USD = 2. difference in quality of goods in different countries.PPP (Purchasing Power Parity)  Method based on the “law of one price”. I.E.

 Calculates the equilibrium of the REER. .  Limitations: uncertainty of estimating internal and external balance.FEER (Fundamental equilibrium exchange rate)  Determines the internal balance GDP.  Determines a target current account that conforms to the sustainable capital account flows.

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 % .

 China contributes with 11% of US trade. .  Appreciation of RMB will affect the deficit.American Trade Deficit  China contributes with 25% of US trade deficit.  The impact is proportional to the overall 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. the goods produced in China. However. in western markets. while limiting the exports of other countries to China. 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. . All of this would result in a strong limitation on the labour market in most developed countries for the benefit of the Chinese occupation.

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. the Chinese government has declared as its currency will gradually appreciated and will be subjected to an oscillation of 0. in June 2010. would destabilize the economy and hurt growth. Nevertheless.5% .

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.Conclusions Yuan undervaluation is source of increasing tension in world economy. the economic policies implemented by China to manage the crisis are going in the right direction'' .