Country Report: CHINA

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12/15/2012

Country

Report:

CHINA

Submitted by| Neha Jain

ECONOMICS PROJECT

Country Report: CHINA

2

Acknowledgements Projects in which students can apply their knowledge practically are an excellent opportunity for learning and development.

We thank Ms. Shilpi Gupta, Faculty IILM-AHL who inspired us to do the project work effectively.

Index 1. List of tables and figures

2. Introduction

3. Business and Trade

4. Economic statistics of China

5. Opportunities

6. References

List of Tables and Figures 1. Figure 1: Map of China

2. Figure 2: Table of economic statistics of China

3. Figure 3: Customer price Index

4. Figure 4: Inflation rate of China

5. Figure 5: CNY v/s USD

6. Figure 6: CNY v/s INR

7. Figure 7: Interest rate of China

8. Figure 8: GDP growth rate table

9. Figure 9: GDP growth

10. Figure 10: FDI flows to China table

11. Figure 11: FDI flows to China

Introduction Geography

Figure 1

Located in Southeast Asia along the coastline of the Pacific Ocean, China is the world's third largest

country, after Russia and Canada. With an area of 9.6 million square kilometers and a coastline of

18,000 kilometers, its shape on the map is like a rooster. It reaches Mohe in Heilongjiang Province as its

northern end, Zengmu Ansha (or James Shoal) to the south, Pamirs to the west, and expands to the

eastern border at the conjunction of the Heilongjiang (Amur) River and the Wusuli (Ussuri) River,

spanning about 50 degrees of latitude and 62 degrees of longitude. China is bordered by 14 countries --

Korea, Vietnam, Laos, Burma, India, Bhutan, Nepal, Pakistan, Afghanistan, Tajikistan, Kyrgyzstan,

Kazakstan, Mongolia, and Russia. Marine-side neighbors include eight countries -- North Korea, Korea,

Japan, Philippines, Brunei,

The greater part of China is mountainous. Its principal ranges are the Tien Shan, the Kunlun chain, and

the Trans-Himalaya. In the southwest is Tibet, which China annexed in 1950. The Gobi Desert lies to the

north. China proper consists of three great river systems: the Yellow River (Huang He), 2,109 mi (5,464

km) long; the Yangtze River (Chang Jiang), the third-longest river in the world at 2,432 mi (6,300 km);

and the Pearl River (Zhu Jiang), 848 mi (2,197 km) long.

Government

China is a communist state.

History

The earliest recorded human settlements in what is today called China were discovered in the Huang He

basin and date from about 5000 B.C. During the Shang dynasty (15001000 B.C.), the precursor of

modern China's ideographic writing system developed, allowing the emerging feudal states of the era to

achieve an advanced stage of civilization, rivaling in sophistication any society found at the time in

Europe, the Middle East, or the Americas. It was following this initial flourishing of civilization, in a

period known as the Chou dynasty (1122249 B.C. ), that Lao-tse, Confucius, Mo Ti, and Mencius laid the

foundation of Chinese philosophical thought.

The feudal states, often at war with one another, were first united under Emperor Ch'in Shih Huang Ti,

during whose reign (246210 B.C.) work was begun on the Great Wall of China, a monumental bulwark

against invasion from the West. Although the Great Wall symbolized China's desire to protect itself from

the outside world, under the Han dynasty (206 B.C.A.D. 220), the civilization conducted extensive

commercial trading with the West.

In the T'ang dynasty (618907)often called the golden age of Chinese historypainting, sculpture, and

poetry flourished, and woodblock printing, which enabled the mass production of books, made its

earliest known appearance. The Mings, last of the native rulers (13681644), overthrew the Mongol, or

Yuan, dynasty (12711368) established by Kublai Khan. The Mings in turn were overthrown in 1644 by

invaders from the north, the Manchus.

Ancient China was built along the two main riversfirst the Yellow River (Huang He) in the north, and

later the Yangtze in the south. In the settlements along the Yellow River, people grew millet in the rich,

easily worked loess soil. In the south, people grew rice along the Yangtze river, ate a good deal of fish,

together with vegetables, especially water plants such as water chestnuts and lotus.

Today, China is the world's most populous country, with a continuous culture stretching back nearly

4,000 years.

After stagnating for more than two decades under the rigid authoritarianism of early communist rule

under its late leader, Chairman Mao, China now has the world's fastest-growing economy and is

undergoing what has been described as a second industrial revolution.

It has also launched an ambitious space exploration programme, involving plans to set up a space

station by 2020.

The People's Republic of China (PRC) was founded in 1949 after the Communist Party defeated the

previously dominant nationalist Kuomintang in a civil war. The Kuomintang retreated to Taiwan, creating

two rival Chinese states - the PRC on the mainland and the Republic of China based on Taiwan.

The leadership of Mao Tse-Tung oversaw the often brutal implementation of a Communist vision of

society. Millions died in the Great Leap Forward - a programme of state control over agriculture and

rapid industrialization - and the Cultural Revolution, a chaotic attempt to root out elements seen as

hostile to Communist rule.

However, Mao's death in 1976 ushered in a new leadership and economic reform. In the early 1980s the

government dismantled collective farming and again allowed private enterprise.

The rate of economic change hasn't been matched by political reform, with the Communist Party - the

world's largest political party - retaining its monopoly on power and maintaining strict control over the

people. The authorities still crack down on any signs of opposition and send outspoken dissidents to

labour camps.

Economy

Nowadays China is one of the world's top exporters and is attracting record amount of foreign

investment. In turn, it is investing billions of dollars abroad.

The collapse in international export markets that accompanied the global financial crisis of 2009 initially

hit China hard, but its economy was among the first in the world to rebound, quickly returning to

growth.

In February 2011, it formally overtook Japan to become the world's second-largest economy, though by

early 2012 the debt crisis in the euro zone - one of the biggest markets for Chinese goods - was

beginning to act as a drag on China's growth.

As a member of the World Trade Organization, China benefits due to access to foreign markets.

However, relations with trading partners have been strained over China's huge trade surplus and the

piracy of goods.

The former has led to demands for Beijing to raise the value of its currency, the Renminbi, which would

make Chinese goods more expensive for foreign buyers and possibly hold back exports. Beijing has

responded with a gradual easing of restrictions on trading in the Renminbi.

Political change has not kept up with economic reform.

Some Chinese fear that the rise of private enterprise and the demise of state-run industries carries

heavy social costs such as unemployment and instability.

Moreover, the fast-growing economy has fuelled the demand for energy. China is the largest oil

consumer after the US, and the world's biggest producer and consumer of coal. It spends billions of

dollars in pursuit of foreign energy supplies. There has been a massive investment in hydro-power,

including the $25bn Three Gorges Dam project.

Social discontent

The economic disparity between urban China and the rural hinterlands is among the largest in the

world. In recent decades, many impoverished rural dwellers have flocked to the country's eastern cities,

which have enjoyed a construction boom. By the beginning of 2012, city dwellers appeared to

outnumber the rural population for the first time, according to official figures.

Social discontent manifests itself in protests by farmers and workers. Tens of thousands of people travel

to Beijing each year to lodge petitions with the authorities in the hope of finding redress for alleged

corruption, land seizures and evictions.

Other pressing problems include corruption, which affects every level of society, and the growing rate of

HIV infection. A downside of the economic boom has been environmental degradation; China is home to

many of the world's most-polluted cities.

Business and Trade As part of China's continuing effort to become competitive in the global marketplace, China joined the

World Trade Organization in 2001. China's entry into the WTO has benefited coastal cities, especially in

the southeast. Although a British crown colony until its return to Chinese control in 1997, Hong Kong has

long been a major maritime outlet of South China.

China Exports

In 2010, China exports total $1.194 trillion, down from $1.429 trillion in 2008. Its main exports are

electrical goods and other machinery, including data processing equipment, apparel, textiles, iron and

steel, optical and medical equipment;

China's main export partners are US (17.7%), Hong Kong (13.3%), Japan (8.1%), South Korea (5.2%) and

Germany (4.1%)

China Imports

In 2010, China imports totaled $921.5 billion, down from $1.131 trillion in 2008. Its main imports are

electrical components and other machinery, oil and mineral fuels, optical and medical equipment, metal

ores, plastics and organic chemicals;

China's main import partners are Japan (13.3%), South Korea (9.9%), US (7.2%) and Germany (4.9%).

Challenges facing China

In the early 21st century, China faced the challenge of balancing its highly centralized political system

with an increasingly decentralized economic system.

Also, China's economy, though strengthened by liberal economic policies of the 1980s and 90s,

continues to suffer from inadequate transportation, communication, and energy resources. However,

since the 1980s, China has undertaken a major highway construction program and China is working hard

on building world-class infrastructure.

China's poor human development index highlights the economic disparity between urban China and the

rural hinterlands. Human rights campaigners continue to criticize China for executing hundreds of

people every year and for failing to stop torture.

Other critical problems include corruption, which affects every level of society, and the growing rate of

HIV infection. Tensions between a highly centralized political - and an increasingly de-centralized

economic system is also a cause of tension.

Another long term threat to China's continued economic growth is the deterioration in the environment,

notably air pollution, soil erosion and the steady fall of its water table in the north.

Economic statistics of China: (source: http://www.imf.org)

Subject Descriptor Units Scale 2009 2010 2011 2012

Gross domestic product, current prices U.S. dollars Billio

ns

4,990.

526

5,930.3

93

7,298.1

47

8,250.2

41

Gross domestic product per capita, current prices U.S. dollars Units 3,739.

622

4,422.6

63

5,416.6

68

6,094.0

42

Gross domestic product based on purchasing-power-parity

(PPP) valuation of country GDP

Current

international

dollar

Billio

ns

9,049.

450

10,128.

399

11,299.

787

12,382.

559

Gross domestic product based on purchasing-power-parity

(PPP) per capita GDP

Current

international

dollar

Units 6,781.

154

7,553.3

77

8,386.6

75

9,146.3

79

Population Persons Milli

ons

1,334.

500

1,340.9

10

1,347.3

50

1,353.8

21

Figure 2

Growth story

Since the late 1970s, China moved from a closed, centrally planned system to a more globally oriented

one. In 2010, Peoples Republic of China became the world's largest exporter. Reforms began with the

phasing out of collectivized agriculture, and expansion was carried out to include the slow but sure

liberalization of prices, economic decentralization, increased sovereignty for state enterprises,

formation of a diversified banking system, enlargement of stock markets, rapid growth of the private

sector, and opening to foreign trade and investment.

Macroeconomic environment

According to International Monetary Fund study, the growth rate of the Chinese economy hit a five-year

low in 2008 (from 12.7% in 2007 it declined to 9.6% in 2008). The IMF also made public that Chinas per

capita income in 2008 was about $3,180.The Gross Domestic Product (GDP) estimates based on

Purchasing Power Party totaled $7.8 trillion. Owing to this, China became the second-largest economy in

the world. If Chinas average national income continues to rise at an annual rate of 8%, it will reach

$8,500 by 2020 and touch the $20,000 mark by 2030.

According to Goldman Sachs estimates, Chinas Gross National Product (GNP) stood at $1,529 billion in

2005. The research organization projected that by 2050 Chinas GNP would reach $44,453 billion.

Around 4% of Chinas national earnings results from state-owned enterprises. According to World Bank

reports, Chinas GNP doubled in 2007 and reached an impressive level of $3,126 billion.

Chinas Monetary Policy tools

1. Interest rates

The Peoples Bank of China (PBOC) controls all rates across maturities and both types of rates, i.e. both

lending and deposit rates. The utter control on all the rates have been made lenient to some extent in

recent years, and particularly in the recent months. Now banks are free to set lending and deposit rates

with wider deviations from the benchmark rates.

2. Open market operation

The PBOC performs open market operation in the forms of bill selling, reverse repo, etc., to regulate

liquidity in the banking system

3. Reserve requirement ratio (RRR)

PBOC actively maneuvers reserve requirement ratio. Chinese Yuan (CNY) has a soft peg mainly with the

US dollar. The PBOC announces the daily exchange rate fixes of CNY against other currencies every day,

and the market price of CNY is allowed to deviate within a rigid range (currently 1%). The demand for

CNY was strong due to massive foreign trade and capital inflows. The authorities did not want CNY to

appreciate too quickly, they have to intervene in order to keep CNY within a tight range, and the

movements of daily fixes are usually small. That means creating more CNY to meet the demand.

The interference is so huge that the Chinese banking system almost permanently had too much liquidity.

There are ways to lock up the excess liquidity: either by selling bills to absorb, or increasing RRR.

4. Loan targets

The fact is the Chinese banking system is governed by state-owned and policy banks, which makes it

possible for the government to direct specific amount of lending to where it sees necessary.

Effect of 2008 recession in Chinas economy

As the United States suffers the worst recession since the great depression, China suffered a huge

impact due to United States giant role in its trade. Chinese economy had negative effect due to its

heavy reliance on exporting goods to the U.S., which accounts for 40% of Chinas GDP. Indeed according

to International Monetary Fund, the growth rate of the Chinese economy hit a five-year low in 2008

(from 12.7% in 2007 it declined to 9.6% in 2008).

Present economic condition:

Figure 3

(Source: chinadaily.com.cn)

The inflation rate in China was recorded at 1.70 percent in October of 2012 as reported by the National

Bureau of Statistics of China. Historically, from 1994 until 2012, Chinas Inflation Rate averaged 4.2

Percent reaching an all time high of 27.7 Percent in October of 1994 and a record low of -2.2 Percent in

March of 1999. In China, the most important components of the CPI basket are:

Food (31.8 percent of total weight)

Residence (17.2 percent)

Recreation, Education and Culture Articles account for 13.8 percent

Transportation and Communication for 10 percent

Healthcare and Personal Articles for 9.6 percent

Clothing for 8.5 percent

Households Facilities, Articles and Services for 5.6 percent

Tobacco, Liquor and Articles for the remaining 3.5 percent

The CPI basket is reviewed every five years based on household surveys. Revisions reflect new spending

patterns and economic development, according to the National Bureau of Statistics. Last revision took

place in 2011.

Figure 4

(Source: http://www.tradingeconomics.com/)

Foreign exchange: CNY

The Peoples Bank of China, the monetary authority of the China, issues Renminbi. The ISO 4217

abbreviation is CNY, although also commonly abbreviated as "RMB". The symbol is . The Yuan is

generally considered by outside observers to be undervalued by about 30-40%.

The Renminbi is held in a floating exchange-rate system managed primarily against the US dollar. On July

21, 2005, China revalued its currency by 2.1% against the US dollar and, since then has moved to an

exchange rate system that references a basket of currencies and has allowed the Renminbi to fluctuate

at a daily rate of up to half a percent.

There is a complex relationship between China's balance of trade, inflation, measured by the consumer

price index and the value of its currency. Despite allowing the value of the Yuan to "float", China's

central bank has controls its value with relationship to other currencies.

Figure 5

Figure 6

(Sources: http://www.x-rates.com/)

The above two graphs compare Yuan from USD and Indian Rupees respectively. In a free market, a trade

surplus should increase the value of a countrys currency. People want to be paid in local money,

creating demand for the currency, which in turn raises its value. Over time, this provides a

counterbalance against runaway trade imbalances. That process does not happen in China, because the

government constantly prints new currency and uses it to buy U.S. dollars and U.S. government debt,

thereby flooding the market with Chinese currency and increasing demand for American dollars. Chinee

government indeed devaluates its currency. As of October 2012, China holds $1.15 trillion in U.S.

government debt (source: IMF).

China interest rate

The benchmark interest rate in China was recorded at 6 percent in October 2012. The Peoples Bank of

China reports Interest Rate in China. In China, The Peoples Bank of China Monetary Policy Committee

takes interest rates decisions. From 1996 until 2012, China Interest Rate averaged 6.5 Percent reaching

an all time high of 11.0 Percent in May of 1996 and a record low of 5.3 Percent in August of 2010. The

PBC administers two different benchmark interest rates: one-year lending rate and one-year deposit

rate.

Figure 7

(image source: www.tradingeconomics.com/china/interest-rate)

GDP Growth in China: In 2010, Chinas GDP growth was 10.45%, totalling US $ 5,745.13 billion, and is expected to increase 11.79 % in 2011 to US $ 9,982.08 Billion, growing 10-12% per year between 2010 and 2015. China already has the biggest economy after the US and analyst predicts China will become the largest economy in the world this century.

YEAR GDP (%) YEAR GDP (%)

1979 7.6 1996 10.0

1980 7.9 1997 9.3

1981 5.3 1998 7.8

1982 9.0 1999 7.6

1983 10.9 2000 8.4

1984 15.2 2001 8.3

1985 13.5 2002 9.1

1986 8.9 2003 10.0 1987 11.6 2004 10.1

1988 11.3 2005 11.3

1989 4.1 2006 12.7

1990 3.8 2007 14.2

1991 9.2 2008 9.6

1992 14.2 2009 9.2

1993 13.9 2010 10.4

1994 13.1 2011 9.2

1995 10.9 2012 7.8 Figure 8

Figure 9

Chinas Market At a Glance

China will become the world's safest and largest investment economy in times to come given the following factors:

1. Huge market potential

2. Rich labor resources

3. Comparative advantage in labor cost

4. Corporate governance and

5. Stable government and society

All these factors will further attract the inflow of foreign capital into China. In short, China's economy will grow even faster in the future. In the next ten years, China's economy will still increase at a rate 7% - 8%. In 2020 years, should price index remains the same as today, GDP will amount to 38 trillion, per capita GDP will reach 26,000 Yuan. However, the level of per capita GDP is still very low in China now; GDP per capitas growth is still at a slow rate. GDP per capita will have to be further increased in order to raise Chinas standard of living to bridge the present income gap between the rich and poor. Satisfaction of consumers needs can be the main driver in raising Chinas living standards. Domestic demand will increase as the economy grows. Therefore, extensive production of goods and services can further push and sustain the economys growth. Moreover, there are abundant human resources in China, and labor cost in China is much lower than other industrialized countries. China's education system is also developing fast, thus more people will achieve higher level of education than in the past. With comparative advantage in cheap labor cost and increase of human capital brought about by education, future for China's economy can be only even brighter. Chinas labor force will get even bigger as the China is urbanizing at a fast speed, changing from a rural and agricultural society to an urban and industrialized society. Through this transition, more manpower

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1979

1981

1983

1985

1987

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1991

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1999

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2007

2009

2011

Growth rate

YEAR

can be utilized. Urban infrastructure will be further enhanced and an increase in urban population will bring about higher consumption level, thus driving the economy further. The presence of such a big market, coupled by the increase in consumption power of the population brought about by urbanization, will create greater prospects for almost every industry. Market will become more efficient and industries will grow even faster than before. Domestic demand for goods and services will grow, creating better opportunities for production and investment.

CAUSES OF CHINAs ECONOMY GROWTH

There are two main reasons behind the economy growth of China. 1. Large Scale Capital Investment 2. Rapid Productivity Growth In the large scale capital investment, foreign direct investment and savings are included. These two factors appear to have gone together hand in hand. Economy growth affects by the increase the resources of investment in the economy. China has historically maintained a high rate of savings, which were used by central government for domestic investments. As a result, Chinas gross savings as a percentage of GDP has steadily risen, reaching 53.9% in 2010 and is among the highest savings rates in the world. Another factor is rapid productivity growth. The improvements to productivity were caused largely by a reallocation of resources to more productive uses, especially in sectors that were formerly heavily controlled by the central government, such as agriculture, trade, and services.

Foreign Direct Investment (FDI) in China :-

To develop Chinas economy, Chinese government encourages FDI. To compete for foreign investment,

many local governments even gave treatment that is more favourable to foreign investors some of

which were illegal.

Chinas 'Four Modernisations' programme has resulted in an effort to attract foreign investment and the

promotion of joint ventures with foreign enterprises and governments. Four SEZs have been established

in there, which aim to attract direct foreign investment to wholly own or joint, venture concerns to

encourage technology transfer and boost exports and employment. As an incentive to attract greater

foreign participation in China enterprises, the government provides tax holidays and exemptions from

import restrictions. SEZs are not the only method that the PRC government has employed to attract

foreign investment however, as cities such as Shanghai, Dalian, Guagzhou, Tianjin and Beijing have been

allowed to employ policies similar to the SEZs to attract Foreign investors.

FDI in china will be optimistic because there are some factors to support this-

1. Globalization

2. A huge market with great potential

3. Much Human Resources

4. Investment Environment

FDI flows to China

Year FDI(Billion $)

Year FDI(Billion $)

1990 5 2001 42

1991 6 2002 50

1992 10 2003 50

1993 30 2004 60

1994 35 2005 72

1995 39 2006 74

1996 42 2007 82

1997 45 2008 108

1998 45 2009 95

1999 40 2010 105

2000 41 2011 118

2001 42 2012 110 Figure 10

Source: data.worldbank.org/country/china

Figure 11

Opportunities

Chinas economy is the worlds fastest growing economy and now at this time it is on the 2nd position in

the world. According to research, it would be the worlds biggest economy in size and be a trading and

investment source in the coming decade. Since 2008, china has been the worlds largest exporter.

0

20

40

60

80

100

120

140

1985 1990 1995 2000 2005 2010 2015

FDI(Billion $)

FDI(Billion $)

1. Due to this growth, there are great job opportunities in China.

2. China is the worlds largest telecommunications market with 280 million mobile

subscribers. There overall growth rate is 14%.`

3. In China, household manufactures are increases by 35% per year because the demand in

this sector increases for domestic use and for export.

4. In China, there are approximately 1.29 billion people. Therefore, the country is the

worlds most populous nation, where the use of Internet and E-commerce is high.

5. In China, there is a huge demand for talent jobs in business ordering from wind to solar.

6. Chinas banking system is largely controlled by the central government, which attempts

to ensure that capital (credit) flows to industries deemed by the government to be

essential to Chinas economic development.

7. Wine is especially popular in the large cities of China and has great potential due to the

income of local people.

8. As Chinese are becoming more prosperous the demand for sophisticated products with

great quality and freshness is increasing. Hence, it means there is huge demand of

processed food.

References http://www.imf.org

http://www.alsosprachanalyst.com/

http://www.tradingeconomics.com/

National bureau of Statistics of China

http://www.x-rates.com/

www.tradingeconomics.com/china/interest-rate

http://www.bbc.co.uk/

data.worldbank.org/country/china