The
security market of China, as mentioned earlier, is
yet at a nascent stage of formation. Despite the high
average P/E ratio of stocks in China by international
standards, entry of corporates as well as of individuals
have been both gradual and slow. The stock index in
the two major exchanges is currently on the downtrend,
falling from 2200 in 2001 to 1200 in 2004.
A major factor behind is the recent entry of corporates
as well as a few banks, trying to sell shares in the
market. The stock market thus has few takers despite
the industrial boom in the country, which is largely
driven by FDI. Small and medium enterprises can not
access the market, a fact which further cuts down
the demand for stocks in the market. The value of
shares issued in the stock market have gone up from
6800 mn to 6428 mn between 1992 and 2003, with tradeable
shares only at around 1/3rd in both years.
Capital raised in the stock market for A (RMB) shares
has gone up from 50mn RMB to 70.0mn RMB between these
two years. Of these, IPO shares were respectively
at 50 mn and 453.5mn RMB in 1992 and 2003. As for
B (dollar denominated) shares, market capitalisaion
of B share companies rose from 70mn RMBs in 1992 to
802.5mn RMB in 2003. Of these the proportion of tradeable
shares were at 72.8% and 95.3% in the respective years.
The market capitalization of the two categories of
shares as a proportion of GDP is currently at 36.38%,
of which tradeable shares are at 11.29%. The respective
number of listed companies selling A shares, B shares
and both shares are at 1146, 87 and 24 8.
FDI flows to China, as mentioned earlier, have gone
through a dramatic increase during the 1990s. Since
1993 China had been the world's second largest recipient
of FDIs, the current flow of which exceeds $50bn.
China is also listed as number two in terms of a recent
confidence index rating of FDI flows 9.
These flows now reach not only labour-intensive industries,
as in the past, but also property development and
infrastructure. Some of China's large domestic companies
(e.g,Haier) also have turned multinational by shifting
the production base to offshore centers 10.
Tax incentives provided to FDIs by the state has also
encouraged some mainland Chinese companies to do ''round
tripping'' of funds via other neighbouring territories
like Hongkong. Investors from Taiwan, facing restrictions
on investment in China, even establish ''shell companies''
in Hongkong ''as a front for their mainland China
operations'' 11.
To enumerate the conditioning factors which explain
the surge of FDI inflows to China, one needs to mention
the low wage rate (at 1/3rd of Mexico and 1/15th of
US), the well educated (with literacy at 84.5% of
population above 15 according to World Bank's China
Data Profile) and energetic population, the state
initiatives in infrastructure and energy as well as
technology development, a political culture which
combines an authoritarian state with the market which
operates as a disciplining factor in both the labour
and capital market, a managed currency which has maintained
a stable exchange rate in dollar notwithstanding the
pressures from US to appreciate, and finally, the
very favourable investment climate in terms of infrastructural
facilities as well as tax incentives for the foreign
enterprises. In the process the Chinese diaspora has
played a major role in harnessing the flow of finance
to the mainland, both with the official appeal to
revive the Chinese ''bond'' in the Deng Xiaopeng regime
which worked to reinforce the cultural affinity and
the economic incentives offered by the state in China.
An unique institution which developed in the process
was the All China Federation of Returned Overseas
Chinese (ACFROC), a ministry-level federation which
reports directly to the Vice-President of the country.
Along with the local authorities where the investment
takes place, the ACFROC is ''…authorized to offer
tax incentives, subsidies, cheap land, supplementary
government services, and the promise of government
investment in infrastructure 12.''
China's entry into WTO in 2001 has also opened the
possibilities of an overhauling of the legal system
along with the access of FDI to new areas which include
the services sector, finance 13.
The above account of China's integration with the
rest of world leads logically to an analysis of its
external payments. The huge foreign exchange reserve
at around $400 bn as at present generates further
queries relating to the sources of the reserve accumulation.
China's balance of payments demonstrates a strong
resilience, both with the burgeoning trade surpluses
and the steady growth in the flow of direct Investments
from abroad. Trade data shows a near ten-fold rise
in the balance for goods over the decade ending 2002
when the annual trade surplus in goods amounted $44.1bn
in 2002. Current transfers record a similar surplus
at $12.9bn, largely with remittances from the overseas
Chinese population. Despite the negative services
balance (-$6.78) and the large deficit in investment
income account (-$14.94) the country's current account
maintained a surplus of $35.42bn in 2002. With services
lagging behind industry in terms of openness as well
as exportability, investment income outflows from
China had been large despite the drive for reinvestment
on part of foreign enterprises. Inflows in the capital
account were, however, substantial on a net basis,
largely due to net FDI inflows at $46.79bn. Net inflows,
however, were rather small with portfolio capital,
with liabilities (inflows) rising by as little as
$1.75bn in 2002. However, despite these shortfalls,
it was hardly a surprise that reserve accumulation
during the year went up by a sum as large as $75.21bn
14.
It remains to point out, at this point, that the above
account underplays the role of capital exports from
the country. These include overseas portfolio investments
by the Chinese ($12.09bn in 2002) and errors and omissions
the negative balance of which was around $11bn over
1999-2001. With large official reserves the major
part of which was regularly invested in US Treasury
bonds, China in effect is investing substantial sums
abroad, an aspect which is inconsistent to the otherwise
favourable investment climate within the country,
especially in terms of mobilising domestic savings
by the resident Chinese 15.
China's economy has of late shown signs of overheating,
registering a year-on –year increase of 5.3% in consumer
prices in August 2004. This has put pressures on the
PoBC to devise additional measures (like raising the
interest rate) to supplement the steps already instituted
to control credit supply in the economy. Growth in
M2 has been at 13.6% on a year-to year basis by end-August
as compared to the higher rate of 16.2% at end of
June this year. Investments in specific industries
are experiencing over-production. These include steel,
aluminium and cement, further expansions in which
are sought to be restrained by controlling credit
flows in these directions. Measures as above may dampen
the overall growth rate in the economy which during
the first half of this year has grown at 9.7%
16.
Outstanding loans (denominated in both local and foreign
currencies) as are advanced by the financial institutions
including the foreign-funded ones increased by 14.5
percent to RMB18.22 trillion on an year-on-year basis
at end-August, a rate which is 1.4% lower than the
growth recorded at end-July. Outstanding RMB loans
alone reached RMB17.1 trillion, increasing year-on-year
by 14.1%, a drop of 1.4% from end-July. By end-August,
outstanding foreign currency loans increased year-on-year
by 20.3% to $134.4 billion, which is 2.5% lower as
compared to end-July. Growth of deposits in financial
institutions has also dropped with savings deposits
of households falling for seven months in a row
17.
On the whole monetary authorities in China seem to
be in good command over the economy in monitoring
the inflationary potential of the rising monetary
reserves in foreign exchange in a high growth economy.
The dampening effect, if any , on real activities,
however, may generate a deflationary impact for the
rest of the world as well.
Integrated with the rest of world, the high-growth
Chinese economy today works as a propelling factor
for growth elsewhere. Concerns expressed by China's
trade partners on the trade-displacing effects of
the cheap exports, however, appear exaggerated if
we remember that China is also a large importer, a
role much of which is facilitated by the export expansions,
often generated from the subsidiaries of foreign firms
in China. Growth in China, is not just a case of a
typical export-led process as happened elsewhere in
Asia. It is an instance of a state-led industrialisation
along with the opening up of large domestic as well
as external markets. Industrialisation in China has
not remained confined to an export enclave, especially
with its vast territory and the swarming population
providing the base for economic expansion from within.
State directives to banks in the disbursement of credit
and the initiatives offered by the state to provide
facilities for industry in China have worked as an
incentive to foreign investors. A large part of these
FDI inflows is related to the success of China in
having a ''guided financial market''. Benefits of
these inflows, in the process, are reaped by both
industry and finance, as opposed to a situation of
finance-led growth alone, where speculation dominates
the financial flows. In China the regulatory institutions
in the area of banking, securities and insurance are
given wide-ranging powers; keeping a close vigil on
the functioning of both finance and industry. The
state committee, in addition, regularly intervenes
on matters which are of national importance to the
economy. While the security market is officially encouraged
, at least in principle, little of the transactions
are in the area of speculation, a fact which is evident
from the small size of portfolio finance transacted
in the market. The bifurcated stock market in terms
of the RMB (A) and Dollar (B) category of shares,
and the limited proportion of shares having access
to the secondary market where those can be treated
as tradeables, provide further hurdles as well as
surveillance in terms of the security market. Banks,
a few of which can float equities in the market, are
also forbidden to enter as buyers of stocks, a practice
which reminds us of the norms of segregated banking
and the Glass-Stegall Act of USA. Universal banking,
the much acclaimed practice of financial markets in
the era of global finance, while creating opportunities
for profitable speculation, can dominate the real
sphere of the economy with opportunities rife for
speculation.
The Chinese economy today is a model to discuss and
discern. Limitations however, remain in failing to
address the question of distribution, especially with
rising inequalities affecting large sections of people.
These are issues which do matter, especially if situated
in the context of the socialist past for the country.
The success, achieved by far, in taming the financial
flows and gearing these in the direction of the real
economy indicates the exemplary ability of the state
to keep in control the speculatory advances in the
era of financial globalisation. The process, however,
may have to face formidable hurdles if China has to
fulfill its obligations as a WTO member, especially
in terms of further liberalizations of the financial
sector.
For China, the fact that finance lends a supportive
role to industry may, however, generate a unique lobby,
which will be in the mutual interest of both sectors,
from within the country and also from overseas, and
demanding a continuation of the current policies.
The eventuality will probably be determined by the
relative weight, of footloose finance as compared
to finance which is entrenched in productive operations.
Revaluation of the Chinese Yuan by 2.2% against US
dollar, announced on 21st July brings to an end the
decade-long dollar exchange rate regime by replacing
it with a trade weighted four currency basket. The
latter include, in addition to Euro, Yen and the dollar,
the currency of Korea which is currently the 2nd largest
provider of imports and 4th largest destination of
exports for China. Consistent with the new arrangement,
ICBC, a major state owned Bank has been permitted
to deal in the Korean currency.
RMB's fixed rate, as claimed by US manufactures, was
undervalued by 40%. According to IIE, the think-tank
in Washington, the margin was around 15-20%. Defying
the repeated pressures from the State Department of
US for a substantial revaluation to correct the current
$152bn US trade deficit with China and the recent
recommendations by EU trade chief Mendelson to introduce
a currency basket which includes British Pound, China
has chosen to adjust its currency in a manner which
suits it. The growing reliance on Asia as provider
of intermediates and raw materials and also on Hongkong
and Korea as major sources of investments gels well
with this induction of an Asian currency in its composite
currency basket. Responding to speculation which was
rife on a possible revaluation of the Yuan, Vice Premier
Zeng Peyian made it clear that ''…China will act on
Yuan but at its own terms''. Similarly Premier Wen
told a delegation of US Chamber of Commerce that his
country would not bow to foreign and speculatory pressures
on exchange rate of the Yuan ''..which remains a sovereign
affair''. Guarded statements followed from the Vice
Governor of the PoBC that the government will not
tolerate sharp changes and volatility in the exchange
rate of RMB. Announcements as above from the highest
public authorities in the country have been effective
to steer clear possibilities of volatility in RMB's
exchange rate. The package reflects, once again, China's
demonstrated ability to steer a path of autonomous
state policy in the process of opening up.
Section
III China's Growth vis a vis China's Development:
Some Observations:
Success, in gearing finance to industry to achieve
record growth in GDP, however is hardly in step with
the failure of state capitalism in China to redress
the growing inequalities within relating to the rural
population as well as the urban poor. As for the countryside
where 2/3rd of the 1.2 bn Chinese people lives, only
360mn are engaged in traditional agriculture. According
to unofficial estimates, 210mn out of these can be
treated as 'surplus' and be removed without affecting
the current agricultural output. Disparities loom
large between per capita incomes of rural and urban
areas, with rural per capita at around 2254 RMB and
only one-third of urban per capita income. Agricultural
prices and land yield are dampening factors in terms
of incentives to cultivate which explain the desertions
of arable land, especially in the backdrop of the
dazzling big cities. At least 80bn or more in China
are in the rank of 'floating population' having no
'permanent resident status' in urban areas or even
a personal ID card which in turn is tightly controlled
by local authorities who tune the flow of migrants
as and when they need them 18.
Social security for poor, both in rural and urban
areas are almost non-existent, thus leaving far behind
the socialist legacy of the pre-reform years. It does
not take much to identify the poor in the heart of
cities like Shanghai, where prosperity is the buzzword!
A visit to a MNC run electronics unit in Tianjin,
the famous export processing zone, revealed that wages
paid to a group of girls, all between 16-18 years
of age, and working 10 hourly shifts , are even less
than $2 dollars a day! It is indeed an irony of the
typical export-led growth which China is experiencing
that a rise in wages is considered a hindrance to
a continuing boom in exports, thus denying the country
the possibilities of an alternative path with home
market led growth.
The Chinese economy today is a model to discuss and
discern. Success of China's state capitalism in gearing
finance to industry, in avoiding the risk hazards
of footloose mobile capital and above all, in entering
the global market at its own terms should not, however
lead us to forget its policy failures to address issues
of internal distribution, especially with rising inequalities
and discontent affecting large sections of people.
Parallels are not too hard to find as one recalls
the stories of the Brazilian miracle of the seventies
or even the 'shining India' campaigns a year back!
China today is caught up in the typical dilemma of
growth sans development, which is rather unfortunate
in the context of its socialist legacies of the past!
[8] CSRC, China's Securities and Futures
Markets. Beijing April 2004. pp 4,9,11
[9] ''FDI Confidence Index ''The Economist
, February 17, 2001.
[10] James Angresano, Zhang Bo, Zhang
Muhan, ''China's Rapid Transformation: The Role of
FDI'' (mimeo) 2003
[11] ibid ,citing Economic Intelligence
Unit, ''China Hand'' April 2002
[12] Angresano et al, op cit
[13] Time ''Global Business'' October
2001 B16;Meng Van, ''FDI increases after China's WTO
entry'' China Daily ay 16, 2002
Both cited in Angresano et al,op cit
[14] IMF, Balance of Payments Year
Book 2004
[15] Greenfoeld op.cit
[16] China Daily September 14, 2004
[17] www.pbc.cn
[18] See for the facts and the argument,
Huang Ping, China: Rural Problems and Uneven Development
in Recent Years'' in China Reflected Asian Regional
Exchange for New Alternatives (ARENA) HongKong 2003.pp12-33.
