Country presentation final china


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Country presentation final china

  1. 1. By: ANUJ GOYAL Nmims Mumbai
  2. 2.  Located in East Asia, on the western shore of the Pacific Ocean, the Peoples Republic of China (PRC) has a land area of about 9.6 million sq km, and is the third largest country in the world, next only to Russia and Canada. China has land borders 22,800 km long, with 15 contiguous countries. The largest of these islands, with an area of about 36,000 sq km, is Taiwan, followed by Hainan with an area of 34,000 sq km. The Bohai Sea is Chinas continental sea, while the Yellow, East China and South China seas are marginal seas of the Pacific Ocean. China is bordered by 14 countries -- Korea, Vietnam, Laos, Burma, India, Bhutan, Nepal, Pakistan, Afghanistan, Tajikistan, Kyrgyzstan, Kazakstan, Mongolia, and Russia. Regional Divisions: people tend to divide China into four regions, that is, the North, South, Northwest and the Qinghai-Tibetan areas. The Yangtze, the longest river in China and even in Asia, is the third- longest in the world. Climate varies radically.
  3. 3.  The People’s Republic of China (26th) continues to lead the way among large developing economies, improving by one more place and solidifying its position among the top 30. The world’s most populous country continues to lead the BRICS economies. Its macroeconomic situation is again very favorable (10th), despite a prolonged episode of high inflation. China is one of the world’s least indebted countries, boasts a savings rate of some 53 percent of GDP, and runs only moderate budget deficits. These factors, combined with good economic prospects, contribute to an improvement of the quality of its sovereign debt far greater than that of the other BRICS. China also achieves relatively high standards in terms of health and basic education (32nd), with positive trends in health indicators and nearly universal access to primary education, which is well assessed in terms of quality. China ranks high in business sophistication (37th) and innovation (29th), particularly when considering its level of development. A number of challenges persist in the areas of corruption and judicial independence within the institutions pillar (48th). Standards of business ethics (57th) and corporate accountability (66th) are below those found in a number of other economies. The country improves markedly in the financial market development (48th, up nine spots), due to increased availability and affordability of financial services and better access to credit.
  4. 4.  Very large internal market Very high savings and investment rate Excellent at tapping into global knowledge through direct foreign investment and Chinese diaspora Becoming world’s manufacturing base Very large supply of excess labor will continue to give it low wage advantage But moving rapidly up value chain from labor intensive to more technology intensive exports Efficient export trade logistics Critical mass in R&D is beginning to be deployed to increase competitiveness Strong investments in education and training Government with strong sense of national purpose The government system is a Communist state. China has a unique and large, socialist, market-oriented economy. China has a market-based system, changed from a centrally planned system in the 1970s.
  5. 5.  Mobilization of Funds across Time & Space Sources of Fund / Pooling of Resources Investment of funds / Methods of Financing Allocation of Risk Incentive Problems / Conflict of Interest Informational role of Asset prices / Information gatekeeper
  6. 6.  Economic Indicators  Monetary Policy  Fiscal Policy Financial Indicators  Banking Sector  Insurance Sector  Securities Sector
  7. 7.  Monetary and Credit Performance Monetary Policy Operations Financial Market Analysis Macro-economic Analysis Monetary Policy Stance for the Next Period
  8. 8.  After the subprime crises of 2008, timely adjustments were made to the monetary policy Cutting benchmark lending rates Lowering reserve requirement ratio Encouraging proper credit expansions In mid 90’s, policy intensity refined to modified credit growth as the economy began to stabilize and recover In early 2010, due to rising inflationary pressures, the mix of quantitative and price-based mix was used for to control monetary conditions As the sovereign debt crisis in Europe escalated, with Greece defaulting and Spain & Italy facing higher debt crisis; China and other emerging market economies felt the shock as there was a sharp volatility in the short-term capital flows. China recorded a net capital inflow in 2011
  9. 9.  Also, a temporary decline in RMB, economy slowdown, drop in price levels, operational difficulties faced by enterprises As a result, a number of preemptive adjustments were made to increase liquidity and ensure proper money and credit supply Firstly, the PBC suspended the 3-year central bank bills, adjusted the issuance of central bank bills and lowered the interest rate for 1-year central bank bill Also to increase the credit supply, the differentiated reserve requirements were adjusted on a continuous and cash-by- cash basis It encouraged, the financial institutions to maintain strong CAR, quality capital assets, sound governance, etc.
  10. 10.  Credit structure to be optimized Market-based interest rate reform and RMB exchange-rate regime reform to be advanced i.e. enhance the exchange rate flexibility in both directions Development of financial markets and advancement in opening up of inter-bank bond market Effective measures to mitigate the systemic financial risks and preserve stability in the financial markets
  11. 11.  The countrys fiscal deficit and government debt ratio both remain within a safe zone, giving room for the government to maintain its proactive fiscal policy (Finance Minister of China, Xie Xuren) Chinas economy grew at its slowest pace in 10 quarters during the last quarter of 2011. Its fiscal revenue jumped 24.8 percent year-on-year to hit a record high of 10.37 trillion yuan (1.65 trillion U.S. dollars) last year. The central governments infrastructure investment will remain at a "reasonable" level this year, focusing on the construction of affordable housing projects, building new water conservancy projects in rural areas, emission reduction and energy-saving, as well as the development of emerging strategic industries. China will enhance support for micro- and small-sized enterprises, lower import tariffs on some commodities and increase imports of energy, resources and advanced equipment. The country will also push resource tax reforms forward in 2012 and promote property taxes on a trial basis.
  12. 12.  Central Bank: People’s Bank of China (PBOC) Bank Regulator: China Banking Regulatory Commission (CBRC) Securities Regulator: China Securities Regulatory Commission (CSRC) Insurance Regulator: China Insurance Regulatory Commission (CIRC) Other Regulators: State Administration of Foreign Exchange (SAFE) State-owned Assets Supervision and Administration Commission of the State Council (SASAC) Association: National Association of Financial Market Institutional Investors (NAFMII, a self regulatory organization on China’s interbank market) CCP/TR Status: Shanghai Clearing House (SHCH) was established in 2009 to provide clearing services for financial market participants in China.
  13. 13.  Banking Sector Insurance Sector Securities Sector Financial Markets Stock Exchanges & Indices Investments (FDI, etc.)
  14. 14.  In 2010, China’s banking sector seriously implemented macroeconomic policies, continued to optimize credit structure to support transformation of the economic development pattern and economic restructuring, and continuously improved financial services. Great achievements were made in the reform of banking institutions.
  15. 15.  According to China Insurance Regulatory Commission (CIRC) as of June 30, 2006, there were around 100 insurance companies in China. Out of these 100 companies, there were 56 domestic insurance companies and 44 foreign insurance companies. Domestic insurance companies had a market share of approximately 93.3% and the remaining 6.7% was controlled by the foreign insurance companies. The entire market is quite fragmented and most of these 56 domestic insurance companies are region-centric and are strong in their respective markets. The largest foreign companies are AIU (a subsidiary of AIG), Tokio Marine, and Mitsui Somitomo. Several factors are responsible for this astounding level of growth:  China’s aging population; high savings rate and poor social security systems  Also number of wealthy consumers segment that is spurring growth in the property and casualty, auto and health insurance sectors.
  16. 16.  Equities  State-owned shares  Entrepreneurs shares  Foreign owners  Legal entity holders  Employee shares  A shares: Available to Qualified Foreign Institutional Investor (QFII) since December 2002, also available to domestic investors  B shares: available to foreign and individual domestic investors which are listed, traded and settled in HKD.  H Shares: Chinese Company listed in Hong Kong (shares can only be traded on the HK Exchange but can be held by anyone) Debt: Exchange-traded corporate bonds, Treasury bonds, convertible bonds (available to QFIIs). Money Market: Not applicable to foreign investors. Open-ended funds, close-ended funds, Exchange Traded Funds(ETFs), Listed Open-ended Funds (LOFs), warrants (available to Chinese Nationals and QFIIs).
  17. 17.  Issuance of bonds
  18. 18.  Shanghai Stock Exchange:  SSE had 1,500 listed securities and 894 listed companies. Shenzhen Stock Exchange:  By 30 December 2011, SZSE had 1,411 listed companies, with 484 on the Main Board, 646 on the SME Board and 281 on the ChiNext.  SZSE’s products cover equities, mutual funds and bonds. The product lines for both the exchanges include A- shares, B-shares, indices, mutual funds (including ETFs and LOFs), fixed income products (including SME collective bonds and asset-backed securities), and diversified derivative financial products (including warrants and repurchases).
  19. 19.  China is one of the world’s top recipients of FDI: nearly $72 billion and stock of $318 billion. China was the second-largest recipient of Foreign Direct Investment (FDI) in 2009, attracting US$95 billion, (behind only the U.S., which drew in $130 billion).
  20. 20.  China attracted $105.7 billion in foreign direct investment in 2010—the first time FDI in China crossed the $100 billion mark.
  21. 21. Other Africa 7% 3%Latin America 37% Asia 53%
  22. 22.  Significant growth in trade $11 billion in 2000 $40 billion in 2005 9% annual growth rate 5-fold increase in 10 years China net importer of oil since 1993. China is 2nd largest consumer of petroleum products. Source of Oil for China:  Middle East 40%  Africa 23%  Asia 21%  Latin America destined to become big: engagement with Columbia, Brazil, Argentina, Venezuela and China National Petroleum Corp (CNPC) and China Petroleum and Chemical Corp (Sinopec)
  23. 23.  China is the world’s number one exporter after taking the top spot from Germany in 2009. China’s total 2009 exports were US$1.2 trillion, compared to Germany’s US $1.17 trillion (816 billion euros). About 20% of China’s exports go to the United States. The U.S. is China’s largest trading partner. In 2010, U.S. exports of goods to China jumped 32%, to US$92 billion. 7 of China’s top 10 trading partners are in Asia, including Japan, South Korea, Taiwan, Singapore (and Hong Kong). Six of the world’s largest container ports are in China (Shanghai, Shenzhen, Ningbo, Qingdao, Tianjin, Xiamen) China is North Korea’s largest trading partner.
  24. 24.  The payment system was constantly improved and operated safely and smoothly:  First, the inter-bank market clearing house was integrated into the payment system, enabling the Large Value Payment System (LVPS) to play a stronger role in supporting financial market development.  Second, the Bulk Electronic Payment System (BEPS) was extended to cover the Centralized Collections and Payments Center and China Union Pay, which improved settlement service for the retail payment market.  Third, emergency exercises were conducted to improve the capacity to deal with possible failures of the Centralized Accounting Booking System (ABS), and efforts were made to promote remote data backup.  Fourth, the inter-bank settlement system for online payments was successfully launched.  Fifth, supervision and management of the payment system was strengthened to ensure its sound operation, including efforts to step up daily supervision on system participants, and to assess and improve contingent plans.
  25. 25.  New non-cash payment instruments were developed, and risk management was enhanced:  The electronic commercial draft system was extended to have a nationwide coverage, and the circulating environment of checks was improved by promoting check financing.  The use of bank cards was facilitated, as bank cards designed to assist vocational school students were widely adopted and bank cards for government employees were launched on a pilot basis. Management of non-financial institution payment services was enhanced , representing a major breakthrough in supervision over payment institutions.
  26. 26.  The six principles of a domestic corporate governance framework are to:  promote transparent and efficient markets, while being consistent with the rule of law and a clear articulation of the responsibilities of all participants  protect and facilitate the exercise of shareholder rights  ensure equitable treatment of all shareholders, including minority and foreign parties and their rights and methods of redress for any violations  recognize the rights of stakeholders and encourage co‐operation between the company and the stakeholders  ensure that accurate and timely disclosure is made in a transparent way – all material matters, including the financial situation, performance, ownership and governance of the company must be disclosed;  ensure strategic guidance and effective monitoring of management by the board and the board’s accountability to the company and its shareholders.
  27. 27.  China has adopted a two-tier board structure. The main characteristic of this structure is the existence of a board of supervisors. Since the Company Law was enacted in 1994, listed firms are required to establish a board of supervisors, which monitors the board of directors and reports to the general shareholders meeting. The board of supervisors for listed firms has to have at least three members, of which at least one is elected by employees and at least one represents shareholders. The board of supervisors should be independent of the board of directors, and thus, directors, managers, and financial officers cannot be supervisors. However, the board of supervisors has not been given the right to vote on executive decisions and the right to electing directors, managers, and financial officers. Without these rights, supervisors cannot perform their supervisory duties well. Additionally, most of the chairmen of supervisory boards in government- controlled listed firms (which dominate the Chinese stock market as mentioned earlier) are communist party secretaries who usually lack professional expertise and appropriate experience. Therefore, most literature suggests that the board of supervisors is more of a decorative division than an effective committee.
  28. 28.  Managerial share ownership is typically less than 1 per cent of the total shares on issue. Furthermore, the non-tradable shares restrict the merger and acquisition activities of domestic companies through the stock markets. Due to disadvantages of the split-stock structure, the government began non-tradable share reform in April 2005. According to the literature, the main agency problem under a diffused ownership structure is the conflict between management and shareholders, whereas the central agency problem under a concentrated ownership structure is the exploitation of minority interests by controlling block holders. It is accepted that institutional investors can reduce the information asymmetry and help increase the voice of minority investors in listed firms’ corporate decisions.
  29. 29.  Institutional shareholders such as mutual funds and pension funds usually act as an effective instrument for monitoring managerial inertia and hence mitigate the agency conflict between shareholders and managers in countries like USA and UK. Mutual funds can also play an important governance role in countries with poor minority investor protection such as China as mutual funds can mitigate free-rider problems by pooling diffused minority shareholders. Mutual funds were introduced by the CSRC as one of major types of institutional investors in the Chinese stock market and have been an effective mechanism in improving listed firm’s corporate governance.
  30. 30.  Under current circumstances, corporate governance instruments cannot exert substantial supervision over large block holders and board directors, and are incapable of boosting the performance of listed companies.  The leading reasons are:  the large stake of the state in listed firms  strong political connections between the government and listed firms  the lack of a truly independent judicial system.• Hence, both the central and local governments should keep reducing their shareholdings and personnel connections in listed firms.• The government should perform the role of regulator, rather than be both regulator and the major market participant.• Further, if a truly independent judicial system is not achieved in the near future, SPC should offer a judicial channel through which individual investors who suffer from the inappropriate behaviour of directors, supervisors, and managers can acquire civil remedies.• Further, the government should endow individual investors with the right to bring law suits against wayward large block holders and directors in order to constrain the opportunistic behaviours of these insiders.• We believe that if these suggestions are taken up, corporate governance mechanisms would become more effective in China.
  31. 31.  For Individuals  The tax on an individuals income is progressive. As at 2012, an individuals income is taxed progressively at 3% - 45%. Tax % Monthly Income (CNY) 3% 1 - 1,500 10% 1,501-4,500 20% 4,501-9,000 25% 9,001-35,000 30% 35,001-55,000 35% 55,001 - 80,000 45% 80,001 and above The 2012 corporate tax rate for domestic and foreign companies is 25%. Small companies pay 20% corporate tax in certain cases.
  32. 32.  China Value Added Tax  The standard rate of VAT in China is 17%.V.A.T. is imposed on sale and import of goods and supply of certain services.  There is a reduced rate of 13% that applies to products such as books and types of oils.  Small businesses with a turnover of less than the legally defined limit pay value added tax at 3%. China Business Tax  The tax rate is generally 3%-5% (20% for entertainment). China Consumption Tax  The relevant rates are 1%-45% filed monthly. Urban Real Estate Tax in China  A tax of 1.2% is imposed on owners of business rented real estate, according to the value of the real estate.  Alternatively tax on rental income is 12% of the rental price. Individuals may pay 4% for rental of residential real estate. Education Surcharge  All taxpayers of indirect taxes in China pay an additional 3% education tax. Urban Construction and Maintenance Tax  The rates are 1% for low populated areas, 5% in country areas and 7% in big cities.
  33. 33.  An individuals capital gains are taxable in China at the rate of 20%. Capital gains tax for a Chinese company is added to the regular tax. A 10% deduction at source is made from the capital gains of a foreign company in China. Other deductions The following payments are subject to a deduction of tax at source:  Dividend - 10%.  Interest - 10%, (plus 5% business tax)  Royalties -10%, (plus 5% business tax)  Capital gains -10%
  34. 34.  Standard & Poors China AA- Stable 2012-2-20 Fitch China A+ Stable 2011-11-21 Moodys China Aa3 Positive 2011-08-05 Dagong China AAA Stable 2010-07-11
  35. 35. China India USA Japan Germany RussiaGross FDI as % of GDP 4.6 0.4 3.1 0.8 3.9 1.5Royalty and license fees payments ($ mil) 1938 306 19901 11099 5243 337Royalty and license fees receipts ($ mil) 110 83 42962 10462 3149 146Science & engineering enrolment ratio (%of tertiary level students) 43 25 19 21 47 50Researchers in R&D / mil. Pop 742700 149326 1114100 675898 259597 505778Researchers in R&D / mil. Pop 583.88 157.38 4048.33 5322 3154.28 3492.9Total expenditure for R&D as % of GNP 1 1.23 2.69 2.98 2.48 1Total R&D expenditure (bill, PPP) 60 19 253 97 48 1Manuf. Trade as % of GDP 36.79 12.47 14.98 13.87 45.23 18.2Scientific and technical journal article 11675 9217 163526 48726 37308 15654Scientific and technical journal articles /mil. Pop 9.31 9.23 586.8 377.62 454.89 106.99Patent applications granted by the USPT 266 179 98666 34891 11895 239Patent applications granted by the USPTO/ mil pop 0.21 0.17 345.81 274.67 144.48 1.65High-Tech exports as % of manuf. Export 20 6 32 26 18 8
  36. 36.  Tradition and Culture Economy Drivers of Growth Future