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Agenda
To analyze the different dimensions of Chinese culture. To analyze the Political risks and its impact on foreign firms. To analyze the prevalent risks in the Chinese economy. To analyze the stages of China s development using Rostow s Model. To analyze the impact of Banking Reforms in China and its impact on the overall economy. To give a brief overview of the current Chinese economic model. To understand the rising inequalities in the Chinese society and the causes for it. To put forward a broad outline of the strategy that China should adopt in the final stage of reform.
PDI/HNO Relationship
HIGH PDI Laws challenged to a certain degree LOW PDI Pragmatic rules; most people respect and obey
Positive HNO
CHINA
Negative HNO
Cross border issues with India. Instabilities pertaining to the issue of Tibet.
Economic Risks
Type Exchange Control Prevalent in China Fixed currency exchange rate Yuan valued at 8.51 in 2005 Recent revaluation in 2010 Chinese exports are cheaper
Strict censorship Curtailing media freedom Currently the Chinese economy follows a market driven pricing system, thereby mitigating the inherent risks of state-fixed prices. Divided tax system in 1994 Streamlined the tax system and enabled it for the socialist market economy 2006 China started facing shortage of unskilled labor Increasing labor costs has forced companies to look towards companies like Bangladesh or Philippines. Fixed exchange rates makes it unfavorable for other countries to export to China
Tax Control
Labor problems
Import Restrictions
Banking Reforms
People s Bank Of China (PBOC) had absolute control over the monetary system and the four state owned banks. Incessant lending to troubled SOEs and TVEs. Steep increase in the number of Non Performing Loans(NPLs) In 2004,total NPLs amounted to 1.7 trillion RMB or 13% of total GDP The banking reforms adopted by the Chinese government can be classified into two phases.
Phase Phase 1
Reforms Started in early 90 s Open market operations Interest rate controls Eliminated quotas on banking credit Restructured internal management system Establishing the China Bank Regulatory Commission(CBRC) Started in 1999 Govt. borrowed 1.4 trillion RMB from PBOC and state commercial banks Purchased NPL equivalents from state owned Banks Injected $60 Bn from Forex reserves into the banks through a new institution named China SAFE(Huijin) Established four new Asset Management Companies(AMCs)
Impact Recentralization of power in PBOC, pushing it closer to the market Failed to make an impact on NPLs
Phase 2
Transformed the banks into listed companies, ready for foreign investments Restructuring or disposing of debts Sharp fall in the number of NPLs Creation of modern capital markets in China However there was little interest from foreign investors
Revaluing Yuan
China dropped the Dual exchange rate system in the late 90 s The main purpose of this was to provide the Chinese manufacturers with an advantage in the international markets. The fixed exchange rate or pegged exchange rate system essentially kept the value of Yuan lower than what the market would have chosen. Chinese goods remain lower in price for purchasers in other countries thus benefitting all Chinese exporters. However a spew of revaluations and adjustments after 2005 should be considered as an effort by the Chinese in providing greater currency flexibility.
Private Sector
Due to the poor performance of traditional state enterprises in the market economy, China embarked on a massive restructuring program of privatisation. The private sector's share of the GDP rose from less than 1% in 1978 to 70% by 2005 Numerous sectors that were previously run by the state were privatised during the formation of China's current market economy. Under this scheme, the state retains ownership and control of large enterprises but the central government has little direct control over the operations of state-owned enterprises.
End of Reforms
By 2005 the market-oriented reforms, including privatisation, was virtually halted and partially reversed. In 2006, the Chinese government announced that the armaments, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping industries had to remain under "absolute state control" and public ownership by law. The state retains indirect control in directing the non-state economy through the financial system, which lends according to state priorities. Liberalization continues to be rolled back in the state-sector by the consolidation of state enterprises into large "national champions" with the goal of consolidating efforts and creating internationally-competitive national industries.
The state sector is concentrated in the 'commanding heights' of the economy with a growing private sector engaged primarily in commodity production and light industry.
Rising Inequalities
Gini co-efficient for China has been hovering between 0.4 and 0.5. External liberalisation may have facilitated more rapid growth, it has also been a major factor behind increasing inequalities. As profitability of the SOEs declined in the reform era, the system was marked by chaos with local governments imposing other revenue raising measures. Since 1984,, agricultural growth has decelerated and lagged behind industrial and service sector growth rates. Agriculture sector has not received much state patronage in terms of investment, nor has it seen proliferation of small enterprises on the scale of the industrial and service sectors. Restrictions on labour movements have been one important factor behind rural-urban inequalities in China. Govt. unwilling to eliminate Hukou system. Public resource mobilisation has shown an increasing in-equalising tendency and a bias towards richer, coastal areas. CCP s reluctance to slow down growth for dealing with rising inequalities.
Move to Democracy
Highly improbable after the existence of a single party for 63 years. This has led to a apolitical urban youth population. However, the growing middle class attributes their prosperity to the current government and its policies. Hence there is no mass consensus among the citizens of the country about democracy. Sudden move to a new system can hamper the growth and aggravate the issues in hand. Furthering the concept of Socialist Democracy is a better alternative for China s current set up.