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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.

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									                   China’s economy
•   Autori:
              •   Andrea Agostini,
              •   Valentina Merani,
              •   Charles Turay,
              •   Caterina Schimizzi

•   Course: International financial institutions and
•   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
     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-
•   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.
•   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
•   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
•   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 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
•   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
•   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%.
•   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
•   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
        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
                    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
    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
•   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
                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
   Agricultural Bank of China
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
                   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

How Financial Markets have
improved Chinese economy
           The Stock Market

   How chinese stock market was in the

   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
 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
   Increase information to investors
   Monitoring and control of credit rating
   Diversification of loan portfolio
   Encourage small banks to raise capital
   Minimization of the financial panic
How sound and safe is the China's financial
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
  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
  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
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

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

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%
Yuan undervaluation is source of increasing tension in world

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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