top of page

Will the Dragon Retain Excellence: A Quick Survey On China– Economy, Banking & Financial Markets

C3S Paper No. 0020/2016


photo

QUANTITATIVE & QUALITATIVE ANALYSIS


2

China  is now the world’s largest manufacturer, merchandise exporter, and holder of foreign exchange reserves. China is currently the second-largest economy after the United States, and some analysts predict that it could become the largest within the next five years or so.

The Chinese government views a growing economy as vital to maintaining social stability.

However, China faces a number of major economic challenges which could dampen future growth, including distortive economic policies that have resulted in over-reliance on fixed investment and exports for economic growth (rather than on consumer demand), government support for state-owned firms, a weak banking system, widening income gaps, and drop in Global demand.,

This report provides a background on China’s economic rise; describes its current economic structure; identifies the challenges China faces to maintain economic growth; and provides a financial view to the challenges, opportunities, and implications of China’s future growth and Global Economic order

DISCLAIMER; THIS REPORT IS MERELY FOR INFORMATION PURPOSES ONLY.THE REPORT IS NOT TO BE RELIED UPON FOR TRADE OR INVESTMENTS WITH CHINA.THE REPORT IS PREPARED FROM DATA AVAILABLE  IN PUBLIC DOMAIN AND CAN NOT VOUCH FOR THE ACCURACY OF DATA.

China at the Crossroads?

Concerns

  1. In 2014, China’s economy continued to slow down.

  2. In 2015, growth is estimated at 7 percent, slower than 2014.

Causes:

  1. Deceleration in growth.

  2. Painful economic restructuring and the hangover of previous economic stimulus policies.

  3. Weakening demand, industrial overcapacity and property market adjustment.

Effect:

  1. GDP is expected to grow at around 7.4 percent in 2014 on an annualized basis, the lowest since 1990.

  2. Financial risks gathering and increasing amid the rising costs of production and other factors.

  3. Increase in nonperforming assets in the books of major banks.

  4. Defaults by huge corporations of regional governments in banking & financial markets.

  5. Elevated leverage ratio and weakening profitability of enterprises.

  6. Heavier pressure on resources and environments.

  7. Diminishing comparative advantages.

  8. Huge industrial overcapacity.

Structural Initiatives

  1. China is shifting its primary growth engine from export – led manufacturing and infrastructure development to consumption and innovation, shifting into a new normal moderate growth, optimized structure and better quality.

  2. Major reforms in banking and financial sector.

Outlook:

  1. We expect the government to set the target GDP growth rate at about 7 percent for 2015, down 0.5 percentage point from 2014. Meanwhile, the tertiary industry which account for about 48 percent of GDP, is expected to contribute more to growth stabilization and job creation. Agriculture is expected to remain flat at 10 percent. The services sector is expected to contribute the remaining 50 percent of growth. Consumption will contribute to about 50 percent of incremental growth, 1 percentage point higher than in 2014, with hot spots continuing.

  1. Both agriculture and manufacturing are expected to remain flat in the short to medium term.

THE GREAT LEAP 


3

China GDP Annual Growth Rate 

The Gross Domestic Product (GDP) in China expanded 7.30 percent in the fourth quarter of 2014 over the same quarter of the previous year. GDP Annual Growth Rate in China averaged 9.08 percent from 1989 until 2014, reaching an all time high of 14.20 percent in the fourth quarter of 1992 and a record low of 3.80 percent in the fourth quarter of 1990. GDP Annual Growth Rate in China is reported by the National Bureau of Statistics of China.

China GDP per capita PPP 1990-2015

The Gross Domestic Product per capita in China was last recorded at 11524.57 US dollars in 2013, when adjusted by purchasing power parity (PPP). The GDP per Capita, in China, when adjusted by Purchasing Power Parity is equivalent to 65 percent of the world’s average. GDP per capita PPP in China averaged 5061.14 USD from 1990 until 2013, reaching an all time high of 11524.57 USD in 2013 and a record low of 1554.01 USD in 1990. GDP per capita PPP in China is reported by the World Bank.

China Inflation Rate 1986-2015

The inflation rate in China was recorded at 0.80 percent in January of 2015. Inflation Rate in China averaged 5.65 percent from 1986 until 2015, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999. Inflation Rate in China is reported by the National Bureau of Statistics of China.

China Food Inflation 1993-2015

Food Inflation in China decreased to 1.10 percent in January of 2015 from 2.90 percent in December of 2014. Food Inflation in China averaged 6.46 percent from 1993 until 2015, reaching an all time high of 40.20 percent in October of 1994 and a record low of -5.50 percent in April of 1999. Food Inflation in China is reported by the National Bureau of Statistics of China.

China Trade


4

SOURCE: Trading Economics

Since 1995, China has been recording consistent  trade surpluses which from 2004 to 2009 has increased 10 times. In 2014 as a whole, China’s trade growth reached only 3.4 percent, below the 7.5 percent target, as exports rose at a slower pace and imports almost remained unchanged. In 2014, the biggest  trade surpluses were recorded with Hong Kong, the United States, Netherlands, Vietnam and the United Kingdom. China recorded trade deficits with Taiwan, South Korea, Australia and Germany.

In China, external debt is a part of the total debt that is owed to creditors outside the country.

Foreign Direct Investment (FDI) in China

China’s trade and investment reforms and incentives led to a surge in FDI beginning in the early 1990s. Such flows have been a major source of China’s productivity gains and rapid economic and trade growth. There were reportedly 445,244 foreign-invested enterprises (FIEs) registered in China in 2010, employing 55.2 million workers or 15.9% of the urban workforce. FIEs account for a significant share of China’s industrial output. That level rose from 2.3% in 1990 to a high of 35.9% in 2003, but fell to 25.9% as of 2011. In addition, FIEs are responsible for a significant level of China’s foreign trade. In 2013, FIEs in China accounted for 47.3% of China’s exports and 44.8% of its imports, although this level was down from its peak in 2006 when FIEs’ share of Chinese exports and imports was 58.2% and 59.7%, respectively.FIEs in China dominate China’s high technology exports. From 2002 to 2010, the share of China’s high tech exports by FIEs rose from 79% to 82%. During the same period, the share of China’s high tech exports by wholly owned foreign firms (which excludes foreign joint ventures with Chinese firms) rose from 55% to 67%.


5


6

Source: Congressional Research Service

China’s Growing FDI Outflows

A key aspect of China’s economic modernization and growth strategy during the 1980s and 1990s was to attract FDI into China to help boost the development of domestic firms. Investment by Chinese firms abroad was sharply restricted. However, in 2000, China’s leaders initiated a new “go global” strategy, which sought to encourage Chinese firms (primarily SOEs) to invest overseas. One key factor driving this investment is China’s massive accumulation of foreign exchange reserves. Traditionally, a significant level of those reserves has been invested in relatively safe, but low-yielding, assets, such as U.S. Treasury securities. On September 29, 2007, the Chinese government officially launched the China Investment Corporation (CIC) in an effort to seek more profitable returns on its foreign exchange reserves and diversify away from its U.S. dollar holdings. The CIC was originally funded at $200 billion, making it one of the world’s largest sovereign wealth funds. Another factor behind the government’s drive to encourage more outward FDI flows has been to obtain natural resources, such as oil and minerals, deemed by the government as necessary to sustain China’s rapid economic growth. Finally, the Chinese government has indicated its goal of developing globally competitive Chinese firms with their own brands. Investing in foreign firms, or acquiring them, is viewed as a method for Chinese firms to obtain technology, management skills, and often, internationally recognized brands, needed to help Chinese firms become more globally competitive. For example, in April 2005, Lenovo Group Limited, a Chinese computer company, purchased IBM Corporation’s personal computer division for $1.75 billion. Similarly, overseas FDI in new plants and businesses is viewed as developing multinational Chinese firms with production facilities and R&D operations around the world.

China has become a significant source of global FDI outflows, which, according to the U.N., rose from $ 2.7 billion in 2002 to $101 billion in 2013 China ranked as the third-largest source of global FDI in 2013 (up from sixth in 2011). The stock of China’s outward FDI through 2013 is estimated at $512 billion.

China’s FDI outflows by destination for 2012 indicate that the largest destinations of total Chinese FDI through 2012 were Hong Kong (57.5% of total), the BVI, the Cayman Islands, the United States, and Australia. In terms of Chinese FDI flows in 2012, the largest recipients were Hong Kong (58.3% of total), the United States, Kazakhstan, the United Kingdom, and the BVI.


7

Source: United Nations


8

9

Source: Global Trade Atlas Using Official Chinese Data

China Gross Fixed Capital Formation 1952-2015

Gross Fixed Capital Formation in China increased to 4341billionUS$ in 2013 from 3900billionUS$ in 2012. Gross Fixed Capital Formation in China averaged 559billionUS$ from 1952 until 2013, reaching an all time high of 4341billionUS$ in 2013. Gross Fixed Capital Formation in China is reported by the National Bureau of Statistics of China.

Gross fixed capital formation includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings.

Amount in CNY Hundred Million


10

(Amount in CNY hundred million)

China Government Budget   1990-2015

China recorded a government budget deficit of 236billionUS$ in December of 2014. Government Budget Value in China averaged -3.9billion US$ from 1990 until 2014, reaching an all time high of 95billion US$ in January of 2012 and a record low of -251billion US$ in December of 2013.

Total Budget is US$2.2 trillion (2014)

Government Budget Value in China is reported by the National Bureau of Statistics of China


11

China Government Debt to GDP 1984-2015

China recorded a Government Debt to GDP of 22.40 percent of the country’s Gross Domestic Product in 2013. Government Debt to GDP in China averaged 12.94 Percent from 1984 until 2013, reaching an all time high of 33.50 Percent in 2010 and a record low of 1 Percent in 1984. Government Debt to GDP in China is reported by the Ministry of Finance of the People’s Republic of China.

China’s debt remains low relative to GDP


12

          China Taxes         taxesLastReference Corporate Tax Rate25 percentJan/14 Personal Income Tax Rate45 percentJan/14 Sales Tax Rate17 percent

Source: Trading Economics-State Administration of Taxes


13.1

In China, the Corporate Income tax rate is a tax collected from companies. Its amount is based on the net income companies obtain while exercising their business activity, normally during one business year. The benchmark used, refers to the highest rate for Corporate Income. Revenues from the Corporate Tax Rate are an important source of income for the government of China.


14

In China, the Personal Income Tax Rate is a tax collected from individuals and is imposed on different sources of income like labour, pensions, interest and dividends. The benchmark we use refers to the Top Marginal Tax Rate for individuals. Revenues from the Personal Income Tax Rate are an important source of income for the government of China.

Social Security Tax

For companies 37%

For Individuals 11%

In China, the Social Security Rate is a tax related with labor income charged to both companies and employees. Revenues from the Social Security Rate are an important source of income for the government of China because they help to pay for many social programs including welfare, health care and many other benefits- March 24, 2015.

Housing  sector registered no growth in the lead up to the year 2014 when the economy grew at 7.5%

The Government’s ambitious plans to accelerate urbanization has suffered in the process in 2014

China Newly Built House Prices YoY Change 2011-2015

China newly built house prices decreased 5.10 percent in January of 2015 over the same month of the previous year, the largest drop on record. In Beijing, prices decreased 3.2 percent year-on-year and in Shanghai prices were down 4.2 percent. Housing Index in China averaged 2.94 percent from 2011 until 2015, reaching an all time high of 9.90 percent in November of 2013 and a record low of -5.10 percent in January of 2015. Housing Index in China is reported by the National Bureau of Statistics of China.


15


17

Six of the World’s biggest banks are from China

INDUSTRIAL&COMMERCIAL BANK OF CHINA

CHINA CONSTRUCTION BANK CORPORATION

BANK OF CHINA

CHINA DEVELOPMENT BANK CORPORATION

BANK OF COMMUNICATION COMPANY

SHANGAI&PUDONG DEVELOPMENT BANK

CURRENT TRENDS

Despite concerns over shadow banking in China, the banking sector has remained broadly stable in 2014. Although income growth is slowing, it is converging into more normal trend growth rates.

Non performing loans (“NPLs”) and overdue loans balances have risen sharply driven by the deceleration of the economy. The increase in NPLs was more noticeable in selected industries and SMEs. Overall, the sector’s NPL ratio remained at 1.6 percent at the end of 2013.

Adequate provisioning has enabled banks to write-off bad debts in 2013. As a result, provision coverage to NPL fell by 9 percentage points in the first nine months of 2013, but even so remains at a healthy 287 percent in September 2013.How ever stressed loans and NPAs and are widely expected to go up in 2014-2015,mainly on account of stagnation in industry &Real Estate &infrastructure

Implementation of Basel III2 since January 2013 has been smooth and as the next step, the major national banks are expected to migrate into internal rating based models, strengthening risk management and capital ratios.

The development and growth in China’s bond market is accelerating (notably with the recent rules on bank CD issues) and penetration of money market funds is beginning to grow from 2013.But lag behind significantly by Global  standards

Interest rate liberalisation, as defined as further relaxation of interest rate rules, will be in its final stages over the next few years. However, removal of the rate rules does not necessarily mean aggressive pricing competition amongst banks in China

The reality is that there has been little difference in pricing between banks

The only interest rate rule remains is deposit rate cap, which is set at 1.1x of the benchmark rates across different maturities. The PBOC is likely to raise the upper limits of deposit rates

The growth of non-traditional banking products is a vitally important step of China’s financial liberalisation process.But that is still a long way ahead

The Banking&Financial Sector Reforms by CBRC is unlikely to be a major de-stabilisation factor in the banking industry and in the next few years, China is expected to fully usher in  robust Banking and Financial markets like  the rest of the free market economies

Amongst all financial institutions in China, more than 90 percent of financial assets are controlled by commercial banks. In this light, the rapid growth in non-traditional banking products should exert more competitive pressure on banks, helping to improve pricing mechanism and competitions in the industry.


16

In comparison to their overseas counterparts, the four state-owned commercial banks exhibit strong capabilities and competitiveness compared to either in terms of asset scale, profitability and growth rate .As @September 2013


18

However, slowing economic growth and increased interest rate liberalisation have led to the banking sector experiencing an increase in non-performing loans and a slowdown in profit growth in 2014

Total liabilities of banking institutions (2003—2013)

RMB 100 MILLION


19

Total owner’s equity of banking institutions (2003—2013) 

RMB100 MILLION

20

DATA SOURCE :CBRC FIGURES HIGHLIGHTED PARTLY FOR 2013 ARE IN US$

Total deposits and loans of banking institutions (2003—2013)


21

Data are from the People’s Bank of China.

Profit after tax of banking institutions (2007—2013)


22

FIGURES HIGHLIGHTED FOR 2013  IN US$ BILLIONS                              REST IN RMB100MILLION

Returns of banking institutions (2007—2013)


23

NPLs of banking institutions (2010—2013)

24

Liquidity ratio of banking institutions (2007—2013) 


25

DATA SOURCE :CBRC

How is monetary policy conducted in China?

The PBoC is the Central Bank of the People’s Republic of China with the power to control monetary policy in mainland China. The PBoC conducts monetary policy through open market operations, which affect the amount of reserves in the banking system, and by setting the reserve requirement ratio for Chinese commercial banks, which affects the amount of bank lending. The current RRR is 20% and 18% for major-sized and middle- / small-size

Interest Rates

On 7 June 2012, the PBoC started to introduce some flexibility to the bank deposit rate, and banks are allowed to offer deposit rates over benchmark deposit rates by no more than 10%. On 20 July 2013, the PBoC removed the restriction of 30% downward floating to benchmark lending rates, lifting the restrictions on lending rates. On 21 November 2014 and 28 February 2015, the PBoC further released the upper limit over benchmark deposit rates from 10% to 30%, when it announced base rates cut. We believe these moves are considered to be very important steps forward to the liberalization of interest rate control


26

How are open market operations conducted?

The PBoC conducts open market operations on every Tuesday and Thursday, selling Central Bank notes and repos to 49 primary dealers.

What are the new tools the PBoC introduced to manage liquidity?

From early 2013, other than SLO, the PBoC implemented new liquidity management tools including Standing Lending Facility (SLF), Pledged Supplemented Lending (PSL) and Medium-term Lending Facility (MLF). These tools will help decrease the volatility of money market rates and will help to construct a policy interest rate framework from very short term to long term, moving forward.

SLO-SHORT TERM LIQUIDITY OPERATIONS

Standard  & Poor   credit rating for China stands at AA-. Moody’s  rating for  China’s sovereign debt is Aa3. Fitch’s   credit rating for China is A+. All  very  good ratings. In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of China thus having a big impact on the country’s  Borrowing  costs &FII inflows

How large is China’s bond market?

As China’s economy has grown, the country has developed a large and increasingly div