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China Reform


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China Reform

  1. 1. China Reform China has lots of political reform in its model in the past 20 to 30 years. Due to its highly unperfected diversity, China can’t have a fixed model. Instead, its central bank needs to have the ability to pick certain cities for implementing special reform. For instance, more freedom on academic and speech areas in Hong Kong, shorter income gap in Chengdu, and the financial reform of Wenzhou. Chinese market is expanding; and almost everybody is interested in entering into Chinese market. However, the local government is stronger and becoming more complicated. The international companies need to understand the government before they take actions. The transition of China reform still has a long way to go. The country needs to deal with increasing moral education, disclosure, and opening society, and reducing corruption. Even though the corruption is a key issue about this country, it’s still a better situation than those countries such as Russian. The financial system reform in China currently is functional. Its issue is the imbalance of low share of consumption GDP and high share investment GDP, which involves majorly real estate investments. The reasons may be as follows: First, negative deposit rate causes too saving of household. Second, negative real interest rate lead to the transferring capital flow from households to investors. As a result of this, China needs financial reform to increase deposit rate to rebalancing by reduce household saving and increasing consumption. In addition, price bubble in real estate is driven by subsidies of construction and lending rate; and it respond to Chinese financial system. The shadow banking system is an alternative way to high interest rate and domestic saving. This underground networkreduces bank’s income. Household is protected by low loan-to-value ratio. And the shadow banking offers high interest rate to household by investingtheir capital into real estate. After the Second World War, China offers direct lending with interest rate control. Both of the lending rate and net interest margin in bank are fixed and stable. As a result of this, certain extent of exchange rate and capital control are needed. China banks need to think about controlling interest rate and direct lending when implementing the internationalization of RMB. They as stable and highly regulated financial system; but it faces deregulation pressure and the competition of shadow banking. There is no easy way to rebalancing the conflicting issue. The country has no capital flows, fixed interest rate, fixed direct lending rate and relay on exports; and it needs to rebalance by increasing consumption. China has over capacity in buildings, cheap labor, and low interest rate. It has 5-6% mortgage rate; and its property non- tradable price is going up currently. The average property return is 10% in normal cities or 15% in large cities. The government has
  2. 2. restriction on how much property one people can buy; after that, people tried to become single so that they can buy one more house by divorcing; then the government started to restrict those people who tried to buy more house by divorcing. Generally speaking, the transfer of China modelis becoming more rebalancing and improving. China’s growth potential drops to 6-8% from 10%. The government policy is adjusting and aiming at a minimum wage growth rate of 13% and lowing investment efficiency because of labor shortage problem and imbalance of wealth distribution. The government also set up a quota to limit property growth not higher than real income growth. As a result of this, the whole Chinese economy will drop down in certain extent to 7.4% or maybe more further. The rise of wage will lead to more inflation. As we know, high- income household rely on investment income; while the wages are increased, the capital will flow to low-income household. However, we cannot be too pessimistic. After 2008, the official data ignored the increasing economic activities in both service consumption and high-income household consumption. These activities are becoming more and more important to the growth of the whole economy. The Chinese market is becoming the global manufacture factory; and China has become the major importer of commodities and consumer. The transition of China model with lower growth will face inflation pressure, have more rebalanced structure and income distribution, industry acceleration, and more dramatic volatility to its economy cycle.