CHINA, the largest emerging market economy, the largest creditor country, the fastest-growing economy, the oldest continuous civilization, and governed by a one-partycommunist bureaucracy, is on its way to returning to the centre of the global economy, aposition it held between 1300 and 1820.China’s economy on various macroeconomic factors 1. GDP of China In 2010, china becomes the second largest economy surpassing Japan and it is expected to grow more than U.S by 2020 Even in 2009, during recession times, China has registered a growth rate of 9.2%. 2012 is the first year china has reduced its growth target to 7.5% after keeping as 8% for the past seven consecutive years In the 12th five year plan, China announced an annual average GDP growth rate of 7 % from 2011-2015 The Q-2, 2012 growth rate of 7.6% is already an achievement because of the economic situation Due to the global crisis, Chinese exports demand went down and this resulted in the slowdown of the economy The post crisis Chinese economy is widely regarded as the principal engine of regional and global growth. Another cause of the decline in GDP is the slowdown in construction sector, which in turn created an negative impact in banking sector
2. Policy Initiatives:Fiscal policy: With the current economic slowdown, the government announced anexpansionary budget for 2012, with the cash deficit anticipated to expand to 1.9% ofGDP, compared to 1.1 % in 2011. Fiscal policy will provide a boost to the economyequivalent to 0.8% of GDP in 2012, which will help stabilize demand. The 12th Five-YearPlan calls for greater spending on social program, including affordable housing andinfrastructure while emphasizing greater energy efficiency and conservation. Thegovernment‘s fiscal position remains sound, with a debt to GDP ratio of 27%. Even afterconsidering potential contingent liabilities of local governments and future bank NPLsfrom the rapid credit expansion during the crisis, the central government‘s gross debtsituation would remain manageable at around 80% of GDP.Monetary policy: With both food and non-food inflation abating (particularly theformer) and with the economy gearing down, the central bank has now eased bankreserve requirements twice since December, freeing funds to extend additional credit.Nonetheless, credit conditions will remain tight for certain sectors, particularly for buyersof second and third residences. In recent months, the government ordered banks torollover loans to local governments and continue funding infrastructure projects alreadyunderway, as the credit and monetary tightening of early 2011 had resulted in a markedslowdown in loan growth.
External sector: The European debt crisis has dampened economic activity andconsumption in China‘s main export market. Exports grew 7.6% y/y in Q1, the weakestincrease since the crisis. With the global uncertainty and weakening balance of payment,the remninbi‘s pace of appreciation has slowed noticeably since the beginning of Q3. Asa result, markets are increasingly expecting the currency to weaken going forward;the12-month NDF in Hong Kong has been depreciating since February and showing awidening spread with thespot rate. China continues to be a prime destination for globalFDI, attracting US$ 220 billion in foreign capital in 2011. At the same time, Chinesecorporations are taking advantage of their stronger currency to acquire foreignoperations to complement their activities, improve their technology and expand theirmarkets, to the tune of US$ 50 billion in 2011, a figure that is expected to exceed US$60 billion in 2012. 3. INDUSTRYFDIFDI is an important factor in measuring the health of external economy, but for China, itcontributes a small share as compared to exports, in overall capital flows.Statistics about Utilization of Foreign Investment in China from Jan. to Jun. 2012
In the first half of 2012 (Jan – June), China‘s FDI inflows have fallen by 3% to $59.1bn,compared to last year, as per the report by the Commerce Ministry. June‘s inflow alonewas down by 6.9% ($12 bn).This fall is attributed mainly towards falling investments in the property sector, which isa result of macro-economic policies. Beijing is curbing speculation in the real estatesector, which has led to sharp rise in property prices, to unaffordable levels.FDI in the property sector alone fell by 12.4%. If it were not for this, FDI would havebeen down only by 0.1%, at $46.8bn.Surprisingly, given the sovereign debt crisis, FDI from the European Union rose by 1.6%y-o-y at $3.5 bn.Investments from Germany, Switzerland and the Netherlands rose 31.2 percent, 213.1percent and 67.3 percent, respectivelyBut, it is said that the withdrawal of some foreign companies (such as Adidas) isnecessary for China as it moves from being the world‘s factory to a technical innovationfocussed economy. This indicates that China is adopting a more sustainable developmentmodel.Also, FDI by China, in the US reached $3.6 billion (Jan-June 2012). The 33 projectsevaluated during the first six months of 2012 -12 acquisitions and 21 green-fieldinvestments (new-facility construction) - have set the highest value half yearly record forChina.
SERVICESServices industry in China accounts for nearly 43% of its output economy, and hasmanaged to sustain the global downturn much better than the factory sector. Thegovernment aims to raise the share to 47% by 2015.Growth in China‘s services sector has been its fastest in the past 3 months in June.Market expectations retain status that Beijing will deliver policy reforms to supportgrowth.As per a survey by National Bureau of Statistics and CFLP, PMI (purchasing managers‘index, based on 1200 companies and 27 industries) for non-manufacturing sector rose to56.7 in June, from 55.2 in May (and 58.0 in March), which indicates expanding activities(>50). It also suggests stable and steady economic growth for China.A sub-index measuring new orders in the services sector rose to 53.7 in June from 52.5in May.China plans to expand its investment in services sector (and infrastructure), bydeepening cooperation with Africa. Service providers are being encouraged to go globalto boost the country‘s foreign trade in services. 4. Capital MarketQuoting Wikipedia , a capital market is a market for securities (debt or equity), wherebusiness enterprises (companies) and governments can raise long-term funds. It plays asignificant role in the national economy. A developed, dynamic and vibrant capitalmarket can immensely contribute for speedy economic growth and development.Capital markets may be classified as primary markets and secondary markets. Inprimary markets, new stock or bond issues are sold to investors via a mechanism knownas underwriting. In the secondary markets, existing securities are sold and boughtamong investors or traders, usually on a securities exchange, over-the-counter, orelsewhere.
Keeping this in perspective let us look at China and its capital market‘s health andbeyond.Capital Market in China – The Story so far:In absolute size China‘s equities markets have now grown to a significant level, fromUSD 400 billion in 2005, to USD 4 trillion in 2010. This growth has been fuelled by morethan 500 initial public offerings, including the listings of China‘s largest banks. Shanghainow has some of the world‘s largest companies represented on its bourse.As the global financial crisis is consigned to history, longer term factors are now cominginto play. With pricing remaining a concern, and few large unlisted companies left tosustain the IPO boom, attention is turning to China‘s plans for capital accountliberalisation and the potential implications for the future development of equities, bondsand derivative products.Over the past three years several new products and innovations have been introducedand the market response has in many cases been dramatic. We can see that when thegovernment and regulatory authorities act, things can happen quickly and any would-beinvestor needs to be committed and ready to act to take advantage of the opening up ofdifferent asset classes.A lot has changed, but China is still a young market with huge potential for furthergrowth in all asset classes.Equity Market:By the end of Q1 2011, the combined market capitalisation of China‘s Shanghai andShenzhen bourses surpassed USD 4.2 trillion, a significant rise compared to USD 400billion in July 2005. Combined, these bourses have surpassed the Tokyo Stock Exchange,which stood at USD 3.6 trillion at the same quarter end. More than 2,000 companies arenow listed on the Shanghai or Shenzhen stock exchanges.China‘s equity markets are evolving towards a more even mix of investor classes. Insome respects, institutional investors have now taken over from retail investors as themajor force driving equity markets. The role of both domestic and foreign institutions isgrowing, as investment funds, pension funds, insurance companies, corporates,sovereign wealth funds (SWFs) and QFIIs all look to increase their allocations to Chineseequities.
Bond Market:China‘s bond markets have played an important role in the implementation of nationalmacroeconomic policies, financial sector reforms and more recently the government‘seconomic stimulus measures. However, when compared with other developed markets,the bond market‘s role in resource allocation remains limited and it has not been able tofulfil the demand created by China‘s dramatic economic growth. On the one hand, thecomposition of bond issuers is uneven. More than 80% of the depository balancecomprises government bonds, central bank notes and financial bonds and there has beena comparatively slow development of credit bonds. On the other hand, the approval andregulatory organisations are still not unified and a market-oriented issuance system hasyet to be realised. The constraints for cross-market issuance and trading of bondsprohibit investors from investing and trading cross-market and there is also a lack of aunified and linked settlement system.There have been a number of triggers for the growth of the bond markets over the pastfive years. These include:• The launch of short term bonds in the inter-bank market in 2005• The introduction of corporate bonds by the CSRC In 2007• The launch of medium-term notes by the National Association of Financial MarketInstitutional Investors in 2008• The launch of Small and Medium Sized Enterprises Collective Notes in 2009, aparticularly positive development in helping small and medium-sized enterprisesovercome financing barriers• The launch of credit risk mitigation instruments and 270-day super and short-termcommercial paper in 2010, which further enriched the variety of bonds.
Outlook for the Next Decade: 1. Roll out of an International Board in order to allow foreign organizations to access the Chinese market. 2. Currency Liberalization mainly to open up its capital account and make RMB as an international currency. 3. Deeper capabilities in research and accumulated experience in portfolio management and risk management will be critical foundations for the development of capital markets 4. Tax competitiveness to attract talent to its financial sectors.Although these factors will present challenges, what is evident is that China is firmly seton this ambition. By setting 2020 as a target, the State Council is already consideringincentives for departments to lift restrictions, simplify regulatory processes and pushtowards this goal. It is a journey that China has already embarked upon and allbusinesses need to start thinking about the impact this will have on their business -whether they are a domestic or international business. 5. EXPORT AND IMPORT TRENDS IN CHINAChina joined the WTO in year 2001 to become a globally competitive nation. China‘sentry into World Trade Organization highly benefitted the coastal cities, especially thecities in southeast.China has been constantly accused of controlling the exchange rate of Renminbi andYuan which has led to its currency being undervalued. This under valuation of currencyhas helped Chinese exports to become attractive and imports cheaper.China has increased its exports over the years because of an increase in Chinesemanufactured products competitiveness [due to undervaluation of renminbi] which inturn has led to an expansion of China‘s shares in the international market. Chinesegovernment reduced administrative obstacles to liberalise trade in the country.However, in the face of economic crisis which the world is facing, this undervaluation ofRMB is causing global imbalances. This imbalance could be described in terms of UnitedStates consuming beyond its savings and China producing beyond its consumption andspending. The world economy in general believes that appreciation of Renminbi wouldsolve the problems to some extent.
China currently has trade surplus and no trade deficit. As of today, broad money supplyis 93 trillion Yuan which is 4.5X the foreign exchange reserves.As per May 2012 Y-o-Y, Chinese exports have increased by 15.3% to $181.1 billion andimports risen by 12.7% to $162.4 billion. This also indicated a slightly widening tradesurplus. 60 GOLD 50 RESERVES [in 40 million oz] 30 RMB PER USD 20 [average] 10 RMB PER USD 0 [end period] Apr/12 May/12 Jun/12Outlook: EDC Economics expects growth in China to moderate to 7.7% in 2012 from9.2% in 2011 with a marked slowdown in housing construction and export demand inthe first half of the year. Nonetheless, the slowdown is expected to be relatively short-lived with authorities loosening monetary policy and credit conditions, leading to aresumption of credit flows and economic activity in 2013.Investment Environment: China continues to be a top destination for global FDI andinvestments. At the same time, Chinas complicated commercial environment poses
several challenges for foreign investors. Frustrations include the lack of legal protectionfor investor and intellectual property rights, inconsistent application of regulations,burdensome bureaucracy, and corruption. A slew of vocal complaints by some membersof the international business-investment community about the alleged deterioration inthe business environment for foreign companies highlight frustrations faced by someforeign companies doing business in China.Even though China has made considerable progress towards allowing foreign business tooperate and own businesses, many obstacles remain. China continues to use a ‗foreigninvestment catalogues‘ that states which sectors are not open to foreigners. Protection oflocal firms especially by regional officials is not uncommon. While China continues tomove towards a more rules-based business environment, implementation andenforcement of new laws seem inconsistent across regions and industries. In February2012, Canada and China concluded negotiations for a Foreign Investment ProtectionAgreement, which in now in the process of ratification in both countries.These challenges are somewhat exemplified in the World Bank‘s Ease of Doing BusinessRankings. Overall China is ranked 79 (1 being the best) for Ease of Doing Business(ranked 78 in 2010); ranked 181 for dealing with Construction Permit, 93 for ProtectingInvestors, and 151 for Starting a Business.Corruption is entrenched at all levels of government in China. Apart from the economicimpact of corruption, the issue also has wider political risk implications. The CCPleadership recognizes the importance of tackling corruption to ensuring its legitimacyand therefore will continue attempt to tackle corruption as witnessed by a slew of recenthigh-profile arrests. 6. Price and Wages :China, levies a minimum wage across the board irrespective of employment type,whereas India imposes different minimum levels dependent upon specific types of work.However, as the population demographics are now shifting to a younger workforce inIndia from China, such comparisons, while not exact, provide some clues about thenature of costs associated within the labour pools of each.In China, a mandatory welfare payment is added to the minimum wage as paid by theemployer and this typically adds an average 40 percent to 50 percent on top of theminimum wage identified above. India does not levy a uniform welfare payment uponsalaries, and this can either be discounted completely or is a typical maximum of 10percent of wages.Government policies have been made to boost consumption, policy makers could pull anumber of short-term levers, including tax breaks and rebates, and are likely to raise theminimum wage further. The 12th five-year plan calls for raising household disposableincome by 7 percent a year; thus the government may urge large state-ownedenterprises to increase wages across the board, which would pressure other companiesto follow suit. Policy makers are also likely to extend a popular program offering rebates
on purchases of electronics and appliances. (It fueled the sale of 200 million units,generating 450 billion renminbi—about $71 billion—in revenues from 2009 to 2011.) Inaddition, the government will invest heavily in manufacturing, particularly in the centraland western regions, offering incentives to attract industrial companies inland. Themanufacturing sector will continue to fuel China‘s growth, thanks in part to the lowercost of labor and the improving infrastructure in the country‘s interior.Economists, public policy mandarins, and decision-makers in the world businesscommunity have been awestruck by the People’s Republic of China’s vertiginous grossdomestic product (GDP) growth, relentless economic ascent, escalating regional andglobal heft, and integration with regional and global economies. With prompt and timelysupport of countercyclical macroeconomic policy measures, China weathered the globalfinancial maelstrom of 2007–9 resiliently, which indisputably accentuated its importancein the regional and global economies. Although GDP growth decelerated during the crisisperiod, China never suffered a recession. Chinese demand helped pull a number ofeconomies to recovery. It led the global recovery and contributed to the recovery ofAsia’s emerging market economies. Without China’s support, the so-called GreatRecession would have been more severe, deeper, and longer 7. Balance of Payment:Below is the China‘s BOP for Q1, 2012Item Q1 of 2012I. Current Account 247A. Goods and Services 35a. Goods 217Credit 4314Debit 4097b. Services -182Credit 436Debit 618B. Income 185C. Current Transfers 27 2II. Capital and Financial Account 499Incl. Direct Investments 441III. Reserves Asset -7463.1 Monetary Gold 03.2 Special Drawing Rights -23.3 Reserves Position in the Fund 43.4 Foreign Exchange -7483.5 Other Claims 0In Q1 of 2012 the current account and the capital and financial account posted a twinsurplus and international reserves maintained a growing momentum. In Q1, the surplus
under the current account totaled USD24.7 billion. Specifically, according to thestatistical coverage of the balance of payments, the surplus in goods, income, andcurrent transfers reached USD21.7 billion, USD18.5 billion, and USD2.7 billion,respectively, whereas the deficit in trade in services amounted to USD18.2 billion.Meanwhile, Chinas surplus under the capital and financial account (including net errorsand omissions) totaled USD49.9 billion. In particular, net inflows of direct investmentsamounted to USD44.1 billion. International reserve assets posted an increase ofUSD74.6 billion. Specifically, transactions in foreign exchange reserve assets registeredan increase of USD74.8 billion (exclusive of the influence of non-transaction changes invalue such as exchange rates and prices), the reserve position in the IMF registered adrop of USD400 million, and special drawing rights registered a rise of USD200 million.Below is the current account balance:Due to factors including insufficient channels for the capital outflow, inadequate policysupport and the low public outbound investment level, especially financial investmentlevel, China is still unable to fully digest its favorite balance of current account, whichobjectively leads to the ―double surplus‖ of international payments and the increasing ofthe foreign exchange reserves.In 2011, Chinas total balance of payments surplus was 422.8 billion U.S. dollars, down19 percent compared to that of 2010 and lower than the average level of 468.6 billionU.S. dollars between 2007 and 2010.The report predicts that, China will still have a balances of payments surplus in 2012,but the surplus will greatly decrease. Since developed countries structural problems willhardly be solved in a short period and the international financial and economic situationswill keep turbulent, China may face the risk of repeated fluctuations of cross-bordercapital flows. As the supply-and-demand relation of the foreign exchange is tending to a
balance and the expectation on the yuan exchange rate is differentiating, the trend ofthe exchange rate in the whole year may show a double-way fluctuation situation.