CHINA

By:ANUJ GOYAL

Nmims Mumbai

Geography of China Located in East Asia, on the western shore of the Pacific Ocean,

the People's 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 China's 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.

Global Competitiveness Report 2011-12 Highlights

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.

China Strengths 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.

Composition of China’s GDP

China’s GDP growth for 2012 is forecasted to be 9.5%

Six Functions

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

Provision of Information

Economic Indicators

Monetary Policy Fiscal Policy

Financial Indicators

Banking Sector Insurance Sector Securities Sector

Monetary Policy

Monetary and Credit Performance Monetary Policy Operations Financial Market Analysis Macro-economic Analysis Monetary Policy Stance for the Next

Period

Monetary and Credit Performance

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

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.

Monetary Policy during the next stage

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

Fiscal Policy The country's 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)

China's 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 government's 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.

Inflation rate (consumer prices) %

Overview of China’s Financial System

Financial System Composition

Key Regulators

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.

Financial Indicators

Banking Sector Insurance Sector Securities Sector Financial Markets Stock Exchanges & Indices Investments (FDI, etc.)

Banking Structure

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.

China: An Insurance Giant 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.

Insurance Sector

Adjustment of Objects, Scope and Proportion of Insurance Funds Investment

Securities Sector

Instruments/Asset Classes

Equities State-owned shares Entrepreneur's 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).

Financial Intermediaries/Institutions in China(Pooling of resources)

Mobilizing resources

Financial Markets (Allocation of risk)

Issuance of bonds

Yield Curve of Govt. Securities

Interest rate movements

Major Stock Exchages

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). 

Growth of Fixed-Asset Investments

FDI and China (Investments)

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).

China attracted $105.7 billion in foreign direct investment in 2010—the first time FDI in China crossed the $100 billion mark.

China’s FDI Flows to Developing Countries

Africa3%

Asia53%

Latin America37%

Other7%

Trade and China (Investments)

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)

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.

Foreign Trades

Payment System in China 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.

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.

Corporate Governance 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.

Corporate Governance (Supervisory boards)

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 representsshareholders.

The board of supervisors should be independent of the board of directors, andthus, 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.

Conflict of Interest

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.

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.

Corporate Governance Summary @ CHINA

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.

China Tax Rates

For Individuals The tax on an individual's income is progressive. As at 2012, an

individual's income is taxed progressively at 3% - 45%.

The 2012 corporate tax rate for domestic and foreign companies is 25%.

Small companies pay 20% corporate tax in certain cases.

Tax % Monthly Income (CNY)

3% 1 - 1,50010% 1,501-4,50020% 4,501-9,00025% 9,001-35,00030% 35,001-55,00035% 55,001 - 80,00045% 80,001 and above

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.

Capital Gains

An individual's 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 deductionsThe 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%

Country Rating

Standard & Poor's

Fitch

Moody's

Dagong

 China AA- Stable 2012-2-20

 China A+ Stable 2011-11-21

 China Aa3 Positive 2011-08-05

 China AAA Stable 2010-07-11

Country Risk

Economic Freedom Overall Score

World’s Largest Economies 2011

A Comparative Analytical View on Key Aspects

  China India  USA  Japan Germany Russia

Gross FDI as % of GDP 4.6 0.4 3.1 0.8 3.9 1.5

Royalty and license fees payments ($ mil) 1938 306 19901 11099 5243 337

Royalty and license fees receipts ($ mil) 110 83 42962 10462 3149 146

Science & engineering enrolment ratio (% of tertiary level students) 43 25 19 21 47 50

Researchers in R&D / mil. Pop 742700 149326 1114100 675898 259597 505778

Researchers in R&D / mil. Pop 583.88 157.38 4048.33 5322 3154.28 3492.9

Total expenditure for R&D as % of GNP 1 1.23 2.69 2.98 2.48 1

Total R&D expenditure (bill, PPP) 60 19 253 97 48 1

Manuf. Trade as % of GDP 36.79 12.47 14.98 13.87 45.23 18.2

Scientific and technical journal article 11675 9217 163526 48726 37308 15654Scientific and technical journal articles / mil. Pop 9.31 9.23 586.8 377.62 454.89 106.99

Patent 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 1.65

High-Tech exports as % of manuf. Export 20 6 32 26 18 8

Global R&D effort in Comparative Perspective

2010 vs 2020

India vs China

Tradition and Culture Economy Drivers of Growth Future

Tradition and Culture

Economy

Drivers of Growth

Future

References

http://blogs.reuters.com/financial-regulatory-forum/2011/03/09/interview-china-seeks-developed-country-benchmark-in-corporate-governance/

http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8411.2011.01283.x/pdf

http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1005&context=ics

http://cg.org.cn/english/index.asp

THANK YOU