China and Its Impact on Global Economy

Topics: Economics, Inflation, Currency Pages: 5 (1698 words) Published: January 25, 2013
Corporate Finance

EMBA Monthly – Class of 2013

Individual Assignment
“China and its impact on Global Economy”

Submitted by: Muhammad Shahir Ejaz

China and its impact on Global Economy
China’s Rise and its current economic outlook:
China’s rise as the world’s second largest economic power started from the Industrial boom brought in by the Communist Government’s realization of the relaxation of trade policies about 30 years ago. The main focus of the government was to bring social stability into the lives of a generally poor nation. Majority of the population were inhabitants of farms and were living below poverty line. The governments focus on building industries has brought the opportunity for individuals to move from their farm lands into cities and improve their individual economic status. As per IMF’s Feb 2012, report for China’s Economic Outlook, the current economic conditions are stated as follows: China’s economy is slowing, but remains a bright spot in an unpredictable global economy * Growth is expected to stay above 8 percent in 2012-13

* Inflation is coming down to more comfortable levels
* The real estate market is deflating
A storm emanating from Europe would hit China hard
* China’s growth rate would drop abruptly if the Euro area experiences a sharp recession * But China has room for a countervailing fiscal response, and should use that space * Unlike 2009–10, any stimulus should be executed through the budget rather than the banking system The weak global outlook reinforces the importance of rebalancing China’s economy * This means more private consumption and a diminishing reliance on investment * Financial and corporate sector reforms will be critical to achieving this economic transformation [1]

Demand analysis:
China’s demand can be broken down into 2 major sectors:
1. Domestic demand for social stability:
The demand in this sector is mainly related to housing and construction of the logistics as well as utility system for creating a better social environment. This sector has induced an increased demand of Copper, Cement and Food, to name only the top few. 2. Industrial demand for manufacturing and exports:

Demand is mainly for raw material and supplementary items for relevant manufacturing industries, which includes the following, as top 3[2]: * Electrical machinery and equipment
* Mineral fuel and oil
* Power generation equipment
The major destinations that China imports from, are Japan, South Korea and Hong Kong and their largest trade partners are, United States, Japan and Hong Kong. China has in the past had a fairly balanced outcome of their Demand and supply as well as trade (Export and Import) figures. The Balance has been always tilted towards higher exports with a difference of approx 189 Billion USD between Exports and Imports in 2010. China’s ownership of US Treasury Bonds:

As mentioned earlier, China’s Export ratio being higher than their import ratio, causes huge amounts of USD reserves in their foreign exchange. To avoid the devaluation of their foreign exchange assets, China invests these foreign reserves, mostly in buying treasury bonds of different economies. The highest investment that China has made in this respect are in the US treasury bonds (as of data from Sept 2011, China owns approx 25% of the US foreign Debt[3]). The other major contributor to US foreign debt lending, is Japan, which owns approx 21% of US foreign debt[3]. This can be viewed conversely from a different angle, when you ask the question, “why is China doing so?” Following are a few more factors[4], which can help in answering this: * 23% of China’s exports are to US and the trend has been growing YoY * In times of Financial crisis, the returns over investments are not the most compelling factor, rather the security of the investment is, and T-Bonds are viewed as the safest investment in US economy * China’s stimulus to the US debt...

References: [1] Source for IMFs report on China 's economic Outlook:
[2] The US-China Business Council:
[3] The Guradian:
[4] Article: Why China keeps increasing US debt holdings, By Yi Xianrong (Beijing Times). August 19, 2011:
[5] Economy of the People 's Republic of China: 's_Republic_of_China#cite_note-85
[6] Article - The Wall Street Journal| The Outlook, 11th April, 2011:
[7] Blog - Rediff Business - Why China keeps its currency undervalued:
[8] Blog - Rediff Business -
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