North, South , East, WestNatural barriers isolated China from all other civilizations.

Pacific Ocean

Plateau of Tibet

Gobi Desert

Taklimakan Desert

Himalaya Mountains

Mongolian Plateau

China: Cultivating the LandChina is geographically divided into two parts. Outer China is a sparsely settled region of high mountains, plateaus, steppes, and deserts. Agricultural China is where 95% of the Chinese people live.

Under Communist rule, China’s agricultural land and farmers were organized in to collective farms in an attempt to increase agricultural production.

China: Size and Population

9,596,960 Square area 9,629,091 Square area

1,284,303,705 Population 280,562,489 Population

ChinaUnited States

The population of China is more that one billion people, the largest national group in the world. Two-thirds of the Chinese people are farmers, but only 4% of China’s land can be cultivated.

In an effort to balance the relationship between land and people, China adopted a “one-couple, one-child” policy in the 1980’s.

China: Ruling the PeopleDynasties: Ancient China was governed by a ruling class of warrior nobles headed by a king. Ruling families are referred to as dynasties. The Shang Dynasty (1766 BC) was the first verifiable dynasty and ruled China for 600 years. The Shang dynasty was overthrown by Zhou who established a dynasty and introduced the idea of the Mandate of Heaven.

The Han dynasty centralized the Chinese government and established a bureaucracy which included eighteen different ranks of civil service jobs that civilians obtained by taking competitive examinations.

1911-1949 The Republic of China was established under the leadership of Sun Yat-sen

1949- The Republic of China moved to the island of Taiwan

1949 –The People’s Republic of China came to power under the Communist leader Mao Zedong.

China: Philosophy and Religion

Confucius was addressed as The Master all over China.  His teachings were based on virtue and goodness.  Confucius believed that the past tells us how to live in the present.  His sayings were recorded in a book called The Analects. 

Other Chinese philosophies include Taoism ( Daoism) and Legalism

Buddhism spread to China from India.

China: Development of Writing

The Chinese writing system is not alphabetic like English. It used symbols for words called characters.  Each character stands for an idea, not a sound. The characters are read vertically in columns (down and up). The written language is not linked to the spoken language, so people all over China could learn the same system of writing, even if they spoke different languages.

China: Technology

During the Shang dynasty, Chinese artisans learned to make beautiful objects from bronze to be used in religious ceremonies.

Ancient Chinese learned how to build blast furnaces that allowed them to produce cast iron used for weapons and agricultural tools such as the mold board plow.

Bronze

Iron

China: Economic Development After the death of Mao Zedong in 1976, China adopted a plan of modernization, The Four Modernizations. Under the new leadership of Deng Xiaoping, China wanted to improve agricultural production, expand industry and improve the army.

Deng Xiaoping 1904-1997

Zhongnanhai, Beijing Headquarters of Communist PartyPresident Hu Jintao moves China toward capitalism

At the 16th National Congress of the Communist Party, the National People's Congress of China elected President Hu Jintao.

The Chinese development

Since 20 years the Chinese economy has a very important role in the world, 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.

• APEC (Asia-Pacific Economic Cooperation): which aims to foster cooperation, economic growth, free trade and investment in the Asia-Pacific.

• G20:that enclosing the most industrialized countries to encourage international economic development by promoting new strategies and sustainable development.

THE ECONOMIC REFORM• 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 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 Japan.

• Of course the gap whit the United State is still very large..

CHANGES IN ECONOMY

AGRICULTURE• 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.

Industry

• 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.

An important event in the Chinese industry is the development of the privatization.

• In the nineties we assist to a decrease of the productivity of the public industry.

• In the 1993 the government decide the China must became a “modern country”, so the public companies must become private company.

• Companies whit foreign capital are an important part of the private sector: they

Import-export• The vast majority of China's imports (machinery and high-

technology equipment) comes from the developed countries (Japan and the United States)

• About 80 percent of China's exports consist of manufactured goods, most of which are textiles and electronic equipment, with agricultural products.

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 payments.

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 payments.

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 system.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 find.

• 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 SectorThe 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 onwards)

The Mao EraIn 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 EraPBOC

As central bank the PBOC as the objective of promoting economic growth and price stability.

It focus on monetary policy issues and financial system

liquidity.

CBRC

The China Banking Regulatory Commition (CBRC) manages the functions of supervision. It focus on the strenght of the financial

institutions and the restructuring of the banking sector.

PBOC remains still very influential, it has considerable regulatory power.Common overlapping of functions.

The Post-Mao EraIn 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

(CCB)

Agricultural Bank of China

(ABC)

The Structure of the Banking Sector

The Big Four

Reforming the Banking SectorThe 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 efficiency)

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 markets

How Financial Markets have improved Chinese economy

The Stock Market How chinese stock market was in the past

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

Rules and regulations in the bond market

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 reservesExit strategyReady to serve (service sector)More to China than exports

Recommendation and Conclusion Increase information to investors Monitoring and control of credit rating

institutions Diversification of loan portfolio Encourage small banks to raise capital Minimization of the financial panic

How sound and safe is the China's financial system?

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

exports

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 balance.

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.

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 occupation.

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 undervaluation

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%

Advantages and Disadvantages of undervaluation

Strengths and weaknesses of the Chinese economy in the globalization

Proactive policies,

Period of rapid growth, sustainable and balanced.

Which makes it the third global economy and the largest exporter since 2008.

Questions :

The experience of catching now known China is sustainable?

What are the main strengths and weaknesses of the Chinese economy?

China will, as the major economic power in the twenty-first century, or is it a giant with feet of

clay ?

The advantages of Chinese economic power

The ingredients of the strong growth in China since the end of the Maoist period (1978) are no longer present.

China progressively liberalized its domestic market :

Extensive strucural reformsOpened its economy to the worldFacilitating the transition from a planned economy and rural underdeveloped economic power to a modern, integrated at the heart oh the globalization.

Profound transformations conditions living * 15 between 19978 and 2007 more than 500 M Chinese out of

poverty 800 M in a semi or total misery…

The first point

Growth in the years 1978-2007 (more than 9% per year) was based primarily on Growth factors of production.

1964 20070

10

20

30

40

50

60

70

80

Proportion of people working

About reforms…A political reforms :The Chinese authorities continue to perform high structural reforms magnitude to maintain growth potential of the country to the level of 1990-2000.

Economic reforms :•The recovery plan implemented after the crisis appears, from this point of view, having spent a turning development strategy in China, a model turned outwards, towards a model more self-reliant.•The Chinese authorities encourage strengthening transport infrastructure and communication to open up peripheral regions and make China a true internal market.

Social reforms : The gradual establishment of a real social system (pension law 1997, extension of social security to all the people, announced in 2007) should help stimulate consumer spending.

Others : Finally, the strengthening of property rights and strong support for research and development aimed at accelerating the rise in the range of Chinese industrial production

The growing attractiveness of this "workshop"

Increasingly open to foreign capital since the creation of "special economic zones" in 1979.

2002 = first recipient of foreign direct investment (FDI).

Main reason: The foreign-funded enterprises are attracted by the low cost of labor, and are now responsible for half of China's foreign trade.

Heavy industryEver since the Maoist period and stimulated by overinvestment in the 1980s and 1990s.

China is now the world's largest producer of:-steel-cement-and aluminum.

The expansion of light industry (textiles and clothing) due to the increasing integration of the world market since China's accession to the WTO and is the low cost of labor.

2007 1st world exporter.

China wants to dominate! If the automotive industry remains dominated by low

productivity and foreign manufacturers, appliances and electronics are fast-growing Chinese Lenovo (formerly Legend) became in 2007 the first world producer of PC by buying a part of IBM .

Telecommunications and electronic products accounted for 15% of China's industrial production in 2007. The steady growth in value added has characterized the whole process of the country's industrial take-off: the VA industry has increased by 23 between 1978 and 2007.

A balanced growth path. Despite the still rudimentary macroeconomic policy instruments available to the government and the Central Bank, the Chinese economy has so far followed a path of balanced growth. China could not avoid three episodes of falling prices, in 1999-2002, 2005-2006 and 2008-2009, feeding fears and speculations on overinvestment. Asset as well but managed to avoid hyperinflation in periods of "overheating" (7.8% / year between 1978 and 1995) and has maintained an overall trade balance in equilibrium, until fiscal surplus recorded disproportionately recent years (10% of GDP in 2009).

Prudent management ...

• The prudent macroeconomic management authorities, including the maintenance of exchange controls have allowed China to better withstand the recent crisis than other countries in the region (Asian crisis of 1997) and the countries of the Triad (crisis 2008).

The weaknesses of the Chinese economy

"New Giant" or "paper tiger"?

China, is it really a model?• These weaknesses are present from the regime of Deng

Xiaoping. It has an inability to control the side effects of its rapid development, such

as:- Increase inequality- environmental degradation insufficient energysupply.

All this shows that China is also becoming a cause for concern.

The country of seniors!Aging and the demographic challenge.

The first concerns the fragility Chinese production factor that has contributed to its development over the last thirty years: work

.The one-child policy has resulted in an abrupt transition and negative for its long-term development.

Over 65 years 25% to 35% of the Chinese population in 2030

And the "reservoir" of migrant workers available to the industry should stop growing soon

Who said China didn’t knew unemployment ?

Urban unemployment was around 10% in 2010, and China has created efficient "only" 9 million jobs per year between 2003 and 2010.

China does catch its technological backwardness?

• The main problem with China is its inability to quickly specialize in technology-intensive industries.

Public spending on education are below average in developing countries (2.8% of GDP in 2007, against 4% on average for developing countries)

China is ranked as 104th in terms of enrollment in secondary education (71.8%).

Absence of a culture of scientific criticism.

• The importance of corruption, piracy and counterfeiting to explain slow "upmarket" Technology of the Chinese economy.

• The legal framework protecting intellectual property is misapplied by the authorities and the local police.

• also to Chinese entrepreneurs themselves discouraged from investing in research and development.

China Daily, March 2008)

Degradation of the environment• Growth of the Chinese economy continues to continue at a pace compatible

with the population density and the relative scarcity ofnatural resources that characterize the country.

• Environmental problems-the erosion of soils, -deforestation and -desertification affecting 30% of its area.

• Pollution: China is now responsible for 22% of global greenhouse gas greenhouse with 16 of the 20 most polluted cities in the world.

• Sanctions ^__^

The energy issue• Energy consumption has increased by 13% per

year restart is the industries most intensive fossil fuels, such as steel,cement and glass.

• If China has significant energy reserves (15% of production World fifth largest oil producer), it must import substantial quantities fossil fuels to compensate for the low efficiency of the industry.

Rising inequality

China is a predominantly rural (55%).In agriculture overstaffing and underemployment affect 150-200 million people.(poor living conditions).

Exploit the opportunities offered by the Chinese market

• Income growth• Third largest economy in the world.• Market Chinese can offer new opportunities

for European firms, provided that the opening will continue in all sectors (industry, services, finance).