Critical Thinking

number left local governments with fewer sources of

number of revaluations to the currency in order to bring it
closer to it market value. 

While the Chinese yuan is freely convertible under the current account, it
remains strictly regulated in the capital account. Chinese authorities
expressed their willingness to allow the yuan to be fully convertible in the
near future. 

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Chinese authorities are gradually enhancing the use of the currency in other
parts of the world in order to promote the yuan as a global reserve currency.
Although the process is far from being completed, China has already established
trade settlements with selected countries and launched a series of currency
swap agreements with more than 20 central banks. In addition, China is rapidly
expanding the yuan’s offshore market. The opening up of the country’s capital
market will be a crucial step in the yuan’s journey to becoming a major reserve
currency. Risks: Government Measures to Motivate
or Restrict FDIChinese government discourages foreign investors willing to
invest in which China seeks to develop their domestic firms into global multinational
corporations and sectors that has benefited in the past from State-sanctioned
monopolies or a legacy of State investment. The Government also
discourages investments intended to profit from speculation (currency, real
estate, or asset). Moreover, the Government has indicated that it plans to
restrict foreign investment in resource-intensive and non-environment friendly with
highly-polluting industries. High debt
In 2016, China grew at its slowest pace since 1990, as its manufacturing and
construction industries slowed and fears abounded about its debt levels.
According to the Bank of International Settlements, China’s total debt has
grown from $6tn at the end of the financial crisis to almost $28tn at the end
of 2016. This means its total debt is equivalent to 260 per cent of its GDP,
while the debts of Chinese companies are about 170 per cent of GDP. The new Monetary system left local governments with fewer
sources of revenue. As a result, they had to rely on land sales and indirect
borrowing (mostly so-called “shadow banking”) to finance their activity. In
addition, local governments put in place off-budget local government financing
vehicles to raise funds and finance investment projects. 

Although debt is still at manageable levels, an increase in the
reliance on shadow banking and the rapid pace of debt accumulation is
worrisome. In an effort to increase revenue sources for local governments, in
August 2014, the National People’s Congress passed amendments to the budget
law, allowing provincial government to issue bonds directly and increase
transparency. This move paves the way for local governments to raise debt in
the bond market. 

China’s government debt is almost entirely denominated in local currency and
owned by domestic institutions. In addition, the government has cash savings
equivalent to 6% of GDP in the People’s Bank of China. This situation shields
the economy against government debt crises. In 2015, public debt amounted to
15.6% of GDP. 

Conclusion China exited the financial crisis in good shape, with GDP
growing above 9%, low inflation and a sound fiscal position. China economy will
remain the major driver of global growth for the foreseeable future. All these
in directors show us that China is a good market for our company to do the new
investment.  China’s growth has long been
driven by capital accumulation, supported by high savings. Financial risks are
mounting on the back of high and rising enterprise debt, expanding non-bank
activities and enormous over-capacity in some sectors. A burst of the housing
bubble would hurt the real estate, construction and several manufacturing
industries. However, household indebtedness remains moderate and prudential
regulations for mortgage loans are stringent, so the financial sector could
likely absorb the shock. Social safety net coverage has improved over the past
decade, contributing to reduce poverty. Nevertheless, income inequality remains
high. Social infrastructure needs to be further developed, especially for rural
citizens, and the tax and transfer system made more progressive.   

 

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