1. CHINA

2. CHINA, the largest emerging market economy, the largest creditor country, the fastest-
growing economy, the oldest continuous civilization, and governed by a one-party
communist bureaucracy, is on its way to returning to the centre of the global economy, a
position it held between 1300 and 1820.
China’s economy on various macroeconomic factors
1. GDP of China
In 2010, china becomes the second largest economy surpassing Japan and it is
expected to grow more than U.S by 2020
Even in 2009, during recession times, China has registered a growth rate of
9.2%.
2012 is the first year china has reduced its growth target to 7.5% after keeping
as 8% for the past seven consecutive years
In the 12th five year plan, China announced an annual average GDP growth rate
of 7 % from 2011-2015
The Q-2, 2012 growth rate of 7.6% is already an achievement because of the
economic situation
Due to the global crisis, Chinese exports demand went down and this resulted in
the slowdown of the economy
The post crisis Chinese economy is widely regarded as the principal engine of
regional and global growth.
Another cause of the decline in GDP is the slowdown in construction sector, which
in turn created an negative impact in banking sector

3. 2. Policy Initiatives:
Fiscal policy: With the current economic slowdown, the government announced an
expansionary budget for 2012, with the cash deficit anticipated to expand to 1.9% of
GDP, compared to 1.1 % in 2011. Fiscal policy will provide a boost to the economy
equivalent to 0.8% of GDP in 2012, which will help stabilize demand. The 12th Five-Year
Plan calls for greater spending on social program, including affordable housing and
infrastructure while emphasizing greater energy efficiency and conservation. The
government‘s fiscal position remains sound, with a debt to GDP ratio of 27%. Even after
considering potential contingent liabilities of local governments and future bank NPLs
from the rapid credit expansion during the crisis, the central government‘s gross debt
situation would remain manageable at around 80% of GDP.
Monetary policy: With both food and non-food inflation abating (particularly the
former) and with the economy gearing down, the central bank has now eased bank
reserve requirements twice since December, freeing funds to extend additional credit.
Nonetheless, credit conditions will remain tight for certain sectors, particularly for buyers
of second and third residences. In recent months, the government ordered banks to
rollover loans to local governments and continue funding infrastructure projects already
underway, as the credit and monetary tightening of early 2011 had resulted in a marked
slowdown in loan growth.

4. External sector: The European debt crisis has dampened economic activity and
consumption in China‘s main export market. Exports grew 7.6% y/y in Q1, the weakest
increase since the crisis. With the global uncertainty and weakening balance of payment,
the remninbi‘s pace of appreciation has slowed noticeably since the beginning of Q3. As
a result, markets are increasingly expecting the currency to weaken going forward;
the12-month NDF in Hong Kong has been depreciating since February and showing a
widening spread with thespot rate. China continues to be a prime destination for global
FDI, attracting US$ 220 billion in foreign capital in 2011. At the same time, Chinese
corporations are taking advantage of their stronger currency to acquire foreign
operations to complement their activities, improve their technology and expand their
markets, to the tune of US$ 50 billion in 2011, a figure that is expected to exceed US$
60 billion in 2012.
3. INDUSTRY
FDI
FDI is an important factor in measuring the health of external economy, but for China, it
contributes a small share as compared to exports, in overall capital flows.
Statistics about Utilization of Foreign Investment in China from Jan. to Jun. 2012

5. In the first half of 2012 (Jan – June), China‘s FDI inflows have fallen by 3% to $59.1bn,
compared to last year, as per the report by the Commerce Ministry. June‘s inflow alone
was down by 6.9% ($12 bn).
This fall is attributed mainly towards falling investments in the property sector, which is
a result of macro-economic policies. Beijing is curbing speculation in the real estate
sector, which has led to sharp rise in property prices, to unaffordable levels.
FDI in the property sector alone fell by 12.4%. If it were not for this, FDI would have
been down only by 0.1%, at $46.8bn.
Surprisingly, given the sovereign debt crisis, FDI from the European Union rose by 1.6%
y-o-y at $3.5 bn.
Investments from Germany, Switzerland and the Netherlands rose 31.2 percent, 213.1
percent and 67.3 percent, respectively
But, it is said that the withdrawal of some foreign companies (such as Adidas) is
necessary for China as it moves from being the world‘s factory to a technical innovation
focussed economy. This indicates that China is adopting a more sustainable development
model.
Also, FDI by China, in the US reached $3.6 billion (Jan-June 2012). The 33 projects
evaluated during the first six months of 2012 -12 acquisitions and 21 green-field
investments (new-facility construction) - have set the highest value half yearly record for
China.

6. SERVICES
Services industry in China accounts for nearly 43% of its output economy, and has
managed to sustain the global downturn much better than the factory sector. The
government aims to raise the share to 47% by 2015.
Growth in China‘s services sector has been its fastest in the past 3 months in June.
Market expectations retain status that Beijing will deliver policy reforms to support
growth.
As per a survey by National Bureau of Statistics and CFLP, PMI (purchasing managers‘
index, based on 1200 companies and 27 industries) for non-manufacturing sector rose to
56.7 in June, from 55.2 in May (and 58.0 in March), which indicates expanding activities
(>50). It also suggests stable and steady economic growth for China.
A sub-index measuring new orders in the services sector rose to 53.7 in June from 52.5
in May.
China plans to expand its investment in services sector (and infrastructure), by
deepening cooperation with Africa. Service providers are being encouraged to go global
to boost the country‘s foreign trade in services.
4. Capital Market
Quoting Wikipedia , a capital market is a market for securities (debt or equity), where
business enterprises (companies) and governments can raise long-term funds. It plays a
significant role in the national economy. A developed, dynamic and vibrant capital
market can immensely contribute for speedy economic growth and development.
Capital markets may be classified as primary markets and secondary markets. In
primary markets, new stock or bond issues are sold to investors via a mechanism known
as underwriting. In the secondary markets, existing securities are sold and bought
among investors or traders, usually on a securities exchange, over-the-counter, or
elsewhere.

7. Keeping this in perspective let us look at China and its capital market‘s health and
beyond.
Capital Market in China – The Story so far:
In absolute size China‘s equities markets have now grown to a significant level, from
USD 400 billion in 2005, to USD 4 trillion in 2010. This growth has been fuelled by more
than 500 initial public offerings, including the listings of China‘s largest banks. Shanghai
now has some of the world‘s largest companies represented on its bourse.
As the global financial crisis is consigned to history, longer term factors are now coming
into play. With pricing remaining a concern, and few large unlisted companies left to
sustain the IPO boom, attention is turning to China‘s plans for capital account
liberalisation and the potential implications for the future development of equities, bonds
and derivative products.
Over the past three years several new products and innovations have been introduced
and the market response has in many cases been dramatic. We can see that when the
government and regulatory authorities act, things can happen quickly and any would-be
investor needs to be committed and ready to act to take advantage of the opening up of
different asset classes.
A lot has changed, but China is still a young market with huge potential for further
growth in all asset classes.
Equity Market:
By the end of Q1 2011, the combined market capitalisation of China‘s Shanghai and
Shenzhen bourses surpassed USD 4.2 trillion, a significant rise compared to USD 400
billion in July 2005. Combined, these bourses have surpassed the Tokyo Stock Exchange,
which stood at USD 3.6 trillion at the same quarter end. More than 2,000 companies are
now listed on the Shanghai or Shenzhen stock exchanges.
China‘s equity markets are evolving towards a more even mix of investor classes. In
some respects, institutional investors have now taken over from retail investors as the
major force driving equity markets. The role of both domestic and foreign institutions is
growing, as investment funds, pension funds, insurance companies, corporates,
sovereign wealth funds (SWFs) and QFIIs all look to increase their allocations to Chinese
equities.

8. Bond Market:
China‘s bond markets have played an important role in the implementation of national
macroeconomic policies, financial sector reforms and more recently the government‘s
economic stimulus measures. However, when compared with other developed markets,
the bond market‘s role in resource allocation remains limited and it has not been able to
fulfil the demand created by China‘s dramatic economic growth. On the one hand, the
composition of bond issuers is uneven. More than 80% of the depository balance
comprises government bonds, central bank notes and financial bonds and there has been
a comparatively slow development of credit bonds. On the other hand, the approval and
regulatory organisations are still not unified and a market-oriented issuance system has
yet to be realised. The constraints for cross-market issuance and trading of bonds
prohibit investors from investing and trading cross-market and there is also a lack of a
unified and linked settlement system.
There have been a number of triggers for the growth of the bond markets over the past
five years. These include:
• The launch of short term bonds in the inter-bank market in 2005
• The introduction of corporate bonds by the CSRC In 2007
• The launch of medium-term notes by the National Association of Financial Market
Institutional Investors in 2008
• The launch of Small and Medium Sized Enterprises Collective Notes in 2009, a
particularly positive development in helping small and medium-sized enterprises
overcome financing barriers
• The launch of credit risk mitigation instruments and 270-day super and short-term
commercial paper in 2010, which further enriched the variety of bonds.

10. Outlook for the Next Decade:
1. Roll out of an International Board in order to allow foreign organizations to access
the Chinese market.
2. Currency Liberalization mainly to open up its capital account and make RMB as an
international currency.
3. Deeper capabilities in research and accumulated experience in portfolio
management and risk management will be critical foundations for the
development of capital markets
4. Tax competitiveness to attract talent to its financial sectors.
Although these factors will present challenges, what is evident is that China is firmly set
on this ambition. By setting 2020 as a target, the State Council is already considering
incentives for departments to lift restrictions, simplify regulatory processes and push
towards this goal. It is a journey that China has already embarked upon and all
businesses need to start thinking about the impact this will have on their business -
whether they are a domestic or international business.
5. EXPORT AND IMPORT TRENDS IN CHINA
China joined the WTO in year 2001 to become a globally competitive nation. China‘s
entry into World Trade Organization highly benefitted the coastal cities, especially the
cities in southeast.
China has been constantly accused of controlling the exchange rate of Renminbi and
Yuan which has led to its currency being undervalued. This under valuation of currency
has helped Chinese exports to become attractive and imports cheaper.
China has increased its exports over the years because of an increase in Chinese
manufactured products' competitiveness [due to undervaluation of renminbi] which in
turn has led to an expansion of China‘s shares in the international market. Chinese
government reduced administrative obstacles to liberalise trade in the country.
However, in the face of economic crisis which the world is facing, this undervaluation of
RMB is causing global imbalances. This imbalance could be described in terms of United
States consuming beyond its savings and China producing beyond its consumption and
spending. The world economy in general believes that appreciation of Renminbi would
solve the problems to some extent.

11. China currently has trade surplus and no trade deficit. As of today, broad money supply
is 93 trillion Yuan which is 4.5X the foreign exchange reserves.
As per May 2012 Y-o-Y, Chinese exports have increased by 15.3% to $181.1 billion and
imports risen by 12.7% to $162.4 billion. This also indicated a slightly widening trade
surplus.
60 GOLD
50 RESERVES [in
40 million oz]
30 RMB PER USD
20 [average]
10
RMB PER USD
0
[end period]
Apr/12 May/12 Jun/12
Outlook: EDC Economics expects growth in China to moderate to 7.7% in 2012 from
9.2% in 2011 with a marked slowdown in housing construction and export demand in
the first half of the year. Nonetheless, the slowdown is expected to be relatively short-
lived with authorities loosening monetary policy and credit conditions, leading to a
resumption of credit flows and economic activity in 2013.
Investment Environment: China continues to be a top destination for global FDI and
investments. At the same time, China's complicated commercial environment poses

12. several challenges for foreign investors. Frustrations include the lack of legal protection
for investor and intellectual property rights, inconsistent application of regulations,
burdensome bureaucracy, and corruption. A slew of vocal complaints by some members
of the international business-investment community about the alleged deterioration in
the business environment for foreign companies highlight frustrations faced by some
foreign companies doing business in China.
Even though China has made considerable progress towards allowing foreign business to
operate and own businesses, many obstacles remain. China continues to use a ‗foreign
investment catalogues‘ that states which sectors are not open to foreigners. Protection of
local firms especially by regional officials is not uncommon. While China continues to
move towards a more rules-based business environment, implementation and
enforcement of new laws seem inconsistent across regions and industries. In February
2012, Canada and China concluded negotiations for a Foreign Investment Protection
Agreement, which in now in the process of ratification in both countries.
These challenges are somewhat exemplified in the World Bank‘s Ease of Doing Business
Rankings. Overall China is ranked 79 (1 being the best) for Ease of Doing Business
(ranked 78 in 2010); ranked 181 for dealing with Construction Permit, 93 for Protecting
Investors, and 151 for Starting a Business.
Corruption is entrenched at all levels of government in China. Apart from the economic
impact of corruption, the issue also has wider political risk implications. The CCP
leadership recognizes the importance of tackling corruption to ensuring its legitimacy
and therefore will continue attempt to tackle corruption as witnessed by a slew of recent
high-profile arrests.
6. Price and Wages :
China, levies a minimum wage across the board irrespective of employment type,
whereas India imposes different minimum levels dependent upon specific types of work.
However, as the population demographics are now shifting to a younger workforce in
India from China, such comparisons, while not exact, provide some clues about the
nature of costs associated within the labour pools of each.
In China, a mandatory welfare payment is added to the minimum wage as paid by the
employer and this typically adds an average 40 percent to 50 percent on top of the
minimum wage identified above. India does not levy a uniform welfare payment upon
salaries, and this can either be discounted completely or is a typical maximum of 10
percent of wages.
Government policies have been made to boost consumption, policy makers could pull a
number of short-term levers, including tax breaks and rebates, and are likely to raise the
minimum wage further. The 12th five-year plan calls for raising household disposable
income by 7 percent a year; thus the government may urge large state-owned
enterprises to increase wages across the board, which would pressure other companies
to follow suit. Policy makers are also likely to extend a popular program offering rebates

13. on purchases of electronics and appliances. (It fueled the sale of 200 million units,
generating 450 billion renminbi—about $71 billion—in revenues from 2009 to 2011.) In
addition, the government will invest heavily in manufacturing, particularly in the central
and western regions, offering incentives to attract industrial companies inland. The
manufacturing sector will continue to fuel China‘s growth, thanks in part to the lower
cost of labor and the improving infrastructure in the country‘s interior.
Economists, public policy mandarins, and decision-makers in the world business
community have been awestruck by the People’s Republic of China’s vertiginous gross
domestic product (GDP) growth, relentless economic ascent, escalating regional and
global heft, and integration with regional and global economies. With prompt and timely
support of countercyclical macroeconomic policy measures, China weathered the global
financial maelstrom of 2007–9 resiliently, which indisputably accentuated its importance
in the regional and global economies. Although GDP growth decelerated during the crisis
period, China never suffered a recession. Chinese demand helped pull a number of
economies to recovery. It led the global recovery and contributed to the recovery of
Asia’s emerging market economies. Without China’s support, the so-called Great
Recession would have been more severe, deeper, and longer
7. Balance of Payment:
Below is the China‘s BOP for Q1, 2012
Item Q1 of 2012
I. Current Account 247
A. Goods and Services 35
a. Goods 217
Credit 4314
Debit 4097
b. Services -182
Credit 436
Debit 618
B. Income 185
C. Current Transfers 27
2
II. Capital and Financial Account 499
Incl. Direct Investments 441
III. Reserves Asset -746
3.1 Monetary Gold 0
3.2 Special Drawing Rights -2
3.3 Reserves Position in the Fund 4
3.4 Foreign Exchange -748
3.5 Other Claims 0
In Q1 of 2012 the current account and the capital and financial account posted a twin
surplus and international reserves maintained a growing momentum. In Q1, the surplus

14. under the current account totaled USD24.7 billion. Specifically, according to the
statistical coverage of the balance of payments, the surplus in goods, income, and
current transfers reached USD21.7 billion, USD18.5 billion, and USD2.7 billion,
respectively, whereas the deficit in trade in services amounted to USD18.2 billion.
Meanwhile, Chinas surplus under the capital and financial account (including net errors
and omissions) totaled USD49.9 billion. In particular, net inflows of direct investments
amounted to USD44.1 billion. International reserve assets posted an increase of
USD74.6 billion. Specifically, transactions in foreign exchange reserve assets registered
an increase of USD74.8 billion (exclusive of the influence of non-transaction changes in
value such as exchange rates and prices), the reserve position in the IMF registered a
drop of USD400 million, and special drawing rights registered a rise of USD200 million.
Below is the current account balance:
Due to factors including insufficient channels for the capital outflow, inadequate policy
support and the low public outbound investment level, especially financial investment
level, China is still unable to fully digest its favorite balance of current account, which
objectively leads to the ―double surplus‖ of international payments and the increasing of
the foreign exchange reserves.
In 2011, China's total balance of payments surplus was 422.8 billion U.S. dollars, down
19 percent compared to that of 2010 and lower than the average level of 468.6 billion
U.S. dollars between 2007 and 2010.
The report predicts that, China will still have a balances of payments surplus in 2012,
but the surplus will greatly decrease. Since developed countries' structural problems will
hardly be solved in a short period and the international financial and economic situations
will keep turbulent, China may face the risk of repeated fluctuations of cross-border
capital flows. As the supply-and-demand relation of the foreign exchange is tending to a

15. balance and the expectation on the yuan exchange rate is differentiating, the trend of
the exchange rate in the whole year may show a double-way fluctuation situation.