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.
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.
Government Measures to Motivate or Restrict FDI
China government appears to discourage foreign investment in sectors deemed key to social stability, sectors for which China seeks to develop domestic firms into globally competitive multinational corporations and sectors that have historically benefited 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 highly-polluting industries.
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.
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.