Advanced Topics in Intl Trade and Finance

Under Focus: -Geopolitical and trade aspect (Shaheer Khan) - Financial system (Jon Wright)

Chinas Go West Policy

Eastern China saturated. Growth slowing down.

71.6% of Chinas land area covered by western provinces

But not much development in the west

Future Chinese economic growth to come from the development of western China

BUT HOW TO SUPPLY ENERGY TO SUPPORT THAT DEVELOPMENT?

Arabia Sea Gawadar Port in Pakistan

Construction started 2002

Phase 1 has been completed.

Phase 2 under construction now

Gawadar in 2002

Gawadar in 2012

Low construction cost due to the natural shape of the land that protects ships from bad weather:

Currently a 16,000km trip for a ship (2 to 3 months) from Saudi Arabia to

Shanghai

Oil imports + Goods Exports

Oil supplies directly moving into the inner provinces of China (2000km trip) rather than first going to Shanghai and then moved inland

Bulk exports from inner provinces travelling south through Pakistan, and shipped from the Gawadar port

Very large savings in transportation costs

Risks that Chinese ships face from pirates, bad weather and political rivalry on their way to China eliminated

Easier to do in the Chinese system

Due to the centralized aspect of the Chinese system, risky decisions are faster and easier to take

Chinese government does not have to worry as much about getting votes passed through the Senate/Congress, a long process that can take decades

The Financial Aspect

This is a $43 Billion project. So how does the Chinese financial system make financing

available for such large projects? What are the challenges being faced by the financial

system?

Pre-reform periods (1949-1978) - Peoples Bank of China virtually the only bank, - merged with the Ministry of Finance until 1978

Bank Ownership

Plural Bank system

1983 Big 4

1986 Big 5

Big 4 Division of Responsibilities

The Bank of China (BOC) listed Dec 2005

Financing foreign trade and investment

The China Construction Bank (CCB) listed June 2005

Financing construction and fixed-asset investment

The Industrial and Commercial Bank of China (ICBC) listed June 2006

Financing the business activities of the SOEs

The Agricultural Bank of China (ABC) listed 2010

Financing the rural and agricultural sectors

All four banks are among the largest 10 banks (by assets) in the world.

Shadow Banking

estimated 27 trillion RMB in 2013, i.e., 47% of GDP

Share of new credit doubled 20% to 40% from 2008 to June 2013

Set rates

Interest rates (of deposits and lending) are set administratively (net interest margin approx. 3%).

Floor on lending rates removed July 13

Banks are allowed deposit interest rate of 1.1x base rate.

Fixed Exchange and Banks

Government must purchase foreign exchange

Excess money supply must be sterilized

Strategy 1: Banks must purchase bills at low rates

Strategy 2: raise reserve requirement ratio