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CHINA
Submitted To:
Prof. Puneet Rai
Submitted By:
Geetika Sikka
Sunidhi Trivedi
Nishkarsh Gupta
Economic Overview:
The Chinese economy experienced astonishing growth in the last few decades that catapulted
the country to become the world's second largest economy. In 1978when China started the
program of economic reformsthe country ranked ninth in nominal gross domestic product
(GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of
USD 9.2 trillion.
Since the introduction of the economic reforms in 1978, China has become the worlds
manufacturing hub, where the secondary sector (comprising industry and construction)
represented the largest share of GDP. However, in recent years, Chinas modernization propelled
the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%,
while the secondary sector still accounted for a sizeable 45.0% of the countrys total output.
Meanwhile, the primary sectors weight in GDP has shrunk dramatically since the country opened
to
the
world.
China weathered the global economic crisis better than most other countries. In November 2008,
the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an attempt to
shield the country from the worst effects of the financial crisis. The massive stimulus program
fueled economic growth mostly through massive investment projects, which triggered concerns
that the country could have been building up asset bubbles, overinvestment and excess capacity
in some industries. Given the solid fiscal position of the government, the stimulus measures did
not derail Chinas public finances. The global downturn and the subsequent slowdown in demand
did, however, severely affect the external sector and the current account surplus has
continuously diminished since the financial crisis.
Apparently, China exited the financial crisis in good shape, with GDP growing above 9%, low
inflation and a sound fiscal position. However, the policies implemented during the crisis to foster
economic growth exacerbated the countrys macroeconomic imbalances. Particularly, the
stimulus program bolstered investment, while households consumption remained repressed. In
order to tackle these imbalances, the new administration of President Xi Jinping and Premier Li
Keqiang started to unveil economic measures aimed at promoting a more balanced economic
model at the expense of the once-sacred rapid economic growth.
interest rate liberalization and capital account convertibility. In this regard, Chinese authorities
have started to implement some measures, such as removing a cap on foreign-currency deposit
rates in Shanghai.
The capital account benefited from strong inflows of Foreign Direct Investment (FDI). FDI has
performed strongly in the last decade, with record inflows of USD 118 billion in 2013, thereby
becoming the second largest recipient of foreign investment. Among the countries that invest
more in China are Hong Kong, Singapore, Japan, Taiwan, and the United States. In addition,
Chinas outward investment soared in recent years and, according to some analysts, the country
could become a net exporter of capital in the coming years.
trillion in 2013, which represents annual average growth of 20.2%. According to Focus Economics
Consensus Forecast panelists projections from September 2014, Chinese exports are expected
to slow to a 6.6% increase in 2014 following an expansion of 7.9% in 2013. Panelists see exports
picking up in 2015 to an 8.8% expansion.
Imports to China:
In order to supply factories and support Chinas rapid development, the countrys imports are
mostly dominated by intermediate goods and a wide range of commodities, including oil, iron
ore, copper and cereals. Chinas soaring demand for raw materials has pushed global commodity
prices up in recent years, thereby boosting the coffers of many developing nations and
commodity-exporting economies.
Supply of imports into China is mostly dominated by Asian countries, with a combined share of
nearly 50% of total imports. Purchases from Europe and North America account for 17% and
10%, respectively. As a major global buyer of commodities, imports from Africa, Australia, the
Middle East and South America have increased strongly in the last decade to represent a
combined share of around 23%.
In parallel with skyrocketing exports, growth in imports of real goods and services soared in the
2002-2008 period, recording an annual average expansion of 24.4%. Imports experienced a
contraction in 2009 due to the global crisis, but recovered quickly in 2010 and 2011. In the 20122013
period,
imports
recorded
a
modest
increase
of
7.2%.
In nominal terms, merchandise imports increased more than eight-fold in the 2001-2013 period,
increasing from USD 244 billion in 2001 to USD 2.0 trillion in 2013. Focus Economics Consensus
Forecast panelists projections from September 2014 show Chinese imports moderating slightly
from a 7.3% increase in 2013 to a 6.9% expansion in 2014. In 2015, panelists expect imports to
accelerate to a 9.3% expansion.
key policy rate was in July 2012 and the lending rate has remained at 6.00% since then. In
monetary policy reports from Q1 and Q2 2014, the Central Bank vowed to maintain a prudent
monetary policy while conducting policy fine-tuning at an appropriate time.
The Central Bank manages money supply through Open Market Operations (OMO), which are
conducted with both domestic and foreign currencies and comprise repo and reverse repo,
government securities and PBOC bills. The Bank also uses the reserve requirement ratio to
influence lending and liquidity. The reserve requirement ratio for major lenders currently sits at
20.0%, where it has rested since May 2012. Other instruments that the Central Bank uses to
manage and adjust liquidity in the banking system are short-term loans, short-term liquidity and
standing lending facility operations.
The agenda of Chinas top authorities include bold reforms on interest rate and monetary policy
management in order to adopt a more market-driven approach.
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