Free «Financial Market Development in China» Essay Sample
Table of Contents
The essay concentrates the research perspective on the examination of the historical background of the Chinese financial market and its current position in terms of external changes. The study emphasises the role of this market in the national economy from the beginning of the 21st century. The paper assesses the instability of financial markets and regards it as a fact of the modern market development. The influence of globalisation has gripped the country since the beginning of the second millennium and changed the development of the financial relations referred to in the essay. Modern challenges connected with investing in the emerging markets of China are characterised in the work. At the same time, quantitative objectives of the study include the consideration of risks, ways of their reduction, diversification of markets and the context of the economic situation in different periods of the Chinese economy's development. The essay analyses the aspects of the Chinese stock exchange and its impact on the global economy. The essay reveals the role of China's financial market as well as circumstances and peculiarities of its development.
Emerging Market of China
Since the end of the previous century, the Chinese economy has been dominant due to effective handling market mechanisms in contrast to the command and distribution path. At that time, China's financial system provided a credit service related to cash flows and central distribution of material resources. The action and scope of all operations in the emerging financial market and its economy remain to be significantly regulated and limited by the intervention of governmental efforts. This obstacle particularly refers to the provision of a financial support to industrial enterprises that faced losses and market model of financial and credit establishments in China.
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Despite the assumptions and expectations of the market observers and analysts, the emerging financial market of China plays a significant role, while also manifesting its weaknesses. Since 2001, after joining the WTO, China has become open to the external world as well as foreign exchange transactions in China. The foreign banks are permitted to perform the operations in the Chinese currency in more than 20 cities of the country. The clients using the mentioned operations are the entities based on a foreign and Chinese capital, foreign and Chinese citizens.
In 2005, China decided to take active actions in regard to the financial market and activation of the financial system. The country gave a legal promising permission for foreign entities with capital in the participation in equity of certain governmental commercial banks (Yu, Fung & Tam 2010). The country has authorised the establishment of a system dedicated to the settlement of interest rates in the financial market. By the end of the financial year of 2005, more than 170 foreign banks from almost 40 different regions of the world and various national economies have established their representative and commercial units in China (Moshirian 2008). In its turn, China launched its commercial banks in those countries for the financial exchange and provision of international loans.
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The most essential role is the function of ambitious network of abroad branches of the Chinese Central Bank. Since China's membership at the World Bank was restored in 1980, the country joined the International Monetary Fund. After the establishment of relations with the Bank for International Settlements, the Development Banks of Africa and Asia, the country established the stock exchanges in the largest cities of the country. Since that time, the stock and exchange markets of the country have increased the volume of actions and their scope. It has followed the streamline of functional mechanism in a rapid path, exceeding the prior development of other financial markets in various countries.
The financial market of the country was the driving force and condition for the restructuring of governmental enterprises. It was due to providing them with real economic conditions for the transformation of the mechanism of functioning and the transition to a market system of the national economy. The financial market has also provided an essential opportunity for ordinary citizens. Along with the reservation of savings in the bank and accumulation of their personal funds, they were encouraged to multiply a personal property.
The technical support of financial exchanges within the country continues to improve. Thus, the electronic system of settlements and transactions has connected them with the central financial nodes in Shenzhen and Shanghai. It should be noted that all operations for sale and issue of securities are carried out completely through computer networks. In terms of the technical equipment, the Chinese financial market is globally developed.
According to the above information, it is essential to note that the economy of China has been rapidly developing during the last 10 years. However, at this precise moment, it experiences the slowdown of the national economy, and it is now associated with the structural variables, since the country is in the process of transition from an unsustainable economic growth model to a more sustainable and stable. Thus, there is a reorientation of the economy (particularly in the services market). The China's GDP in 2015 reached the range of 6,8-7% and 6.4-6.6% in 2016. These figures are primarily related to the reduction of investments in the country, especially in the real estate. One of the reasons for this slowing is a change of the economic model. Previously, the emphasis in the development of the economy has been on the industrial production; in recent years, China's leadership is betting on the development of services and domestic consumption. In addition, with the aim of stimulating the economic growth in 2016, the Chinese authorities are going to expense the sales growth in the property market, deleveraging the balance sheets of companies to improve the production efficiency and promote the innovation.
Challenges of the Financial Market
Banking and financial systems of China that remained underdeveloped along with active functioning of the Chinese market were the reason for a significant capital outflow. Moreover, the coming severe collapse is accompanied by social consequences related to inevitable protests of private domestic investors (Berger, Hasan & Zhou 2009). The external financial crisis was the main challenge occurred in past years. The large financial market of the national economy may reflect ambiguously to major financial problems at the global level (Shenkar 2006).
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The financial market of the country was also challenged by the significant devaluation of the yuan that was overcome successfully enough. The emerged problems in the modern world financial market are the potential threats to active and open Chinese market. The ways of prevention of external challenges of the financial default in other national financial markets are of paramount economic and political significance for China. Regarding internal challenges, the currency is the factor that may change its stability and sustainability and affect all the national currencies in the neighbouring countries and the status of the Chinese exporters all over the world.
However, the Chinese currency was maintained stable to increase the power of financial instruments in the appropriate market. Therefore, the country obtained a modern regional support and financial market sustainability contributing to the expense of short-term financial losses. Such small concessions, but substantial payoffs presented the opportunity to support international relations with WTO. However, internal Yuen and Hong Kong dollar are internal challenges that may change the path of historical dynamics of the Chinese financial market.
Despite the beneficial membership in WTO, China is still challenged by the potential inability to coincide with their standards to quality. The orientation on mass production that does not always meet the quality standards complicates and inhibits the progressive movement of financial flows guiding the financial market of the country, especially its function of support of flows of goods and services. This aspect is crucial as the membership in WTO connects with expectations to gain an additional growth in exports.
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Consequences of the prior financial crisis questioned the long-term sustainability of the Chinese financial market. It was concluded that it should be reformed in order to eliminate unexpected risks and failures (Lardy 2008). In addition, the role of the Chinese financial market became clear as it is open and sensitive to external risks of the financial crisis. On the other hand, the Chinese financial market should have a certain degree of the economic openness and freedom to perceive irregular inflows of foreign financial investments.
The financial market of China should be strengthened to withstand an external crisis, threats and challenges. The banking sector of the national economy should play a crucial role in such development (Chan, Fung & Thapa 2007). Therefore, constructive reforms inherent to modern China are focused on the tasks aimed at strengthening the financial market and banking sector, liberalising inner connections of the financial market actors and setting the consistency between the financial market and the real sector of the Chinese economy.
The best performance of the Chinese financial market may be ensured by the collaboration of the Central Bank of China and commercial banks. It is believed that the Central Bank can be successful in terms of the coordination of financial instruments through the linkage with commercial operations of both foreign and domestic convenient banks. The main goals of the Central Bank performance are the efficient implementation of financial regulation policy and establishment of reasonable interest rates as the landmarks for business investors and regulators of the financial market.
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The excess liquidity in 2008 has led to the economic overheating and inflation jump. If previous years were characterised by a high international market situation and China's financial market following restrictive policies and continuing with accelerating the chosen course, a combination of external and internal factors was challenged in the opposite direction (Zhenquan, Zhen & Miao 2007; Internationalisation 2008).
Investing in the emerging markets of China is another critical aspect that has to be discussed. The main challenges include the volatile economic situation of China connected with the development of investing policy that can lead to the situation, where an investor will lose a substantial amount of the invested money. Moreover, it is essential to note that the regulation of the financial market is constantly changing, which results in creating of another aspect that can negatively affect the investment policy. The government’s policy concerning the property of international bodies is also strict enough and creates a lot of challenges that decrease the attractiveness of China in terms of investing.
Risks and Their Reduction
Major risks of the Chinese financial market are associated with the following economic phenomenon: stagnation of the stock market due to freezing growth in the prices on energy, risks of the foreign investment outflow, devaluation of currency, faster rates of growth of external borrowing in banking and non-financial sectors, increase of trading operations in the market of futures in the conditions of a low-level security, low growth in the number and activity of financial intermediaries, dependence of the financial market on oil prices, and other aspects (Ye & Guo 2008). This price indicates the global economy condition, stability of the financial market, and cash liquidity in both national and international economies.
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The risk-related phenomenon emerged in the financial markets due to the globalised processes, while the market by itself is a harbinger of future financial and market difficulties. In the last three years, China tried several times to cut the credit expansion and limit the growth of shadow banking affecting the financial market. Along with these changes, it is believed to start the yuan devaluation. Allegedly, it is caused by the necessity to restrict hot money influx, while it is made to assist domestic exporters and reduce the international and financial risks. In the future, it will also reduce economic systemic risks (Wang, Sewon & Claiborne 2008). However, this market landing may result in an essential decline in GDP and stock of assets available in the majority of financial markets throughout the world. Nevertheless, this step will be accompanied with a positive short term outcome. Financial assets are expected to experience the overall growth, along with GDP.
Another risk that has emerged in the financial market of China is its correlation with the depressive real sector. Depression in the real sector of the national economy poses a significant threat and risk to the financial market. The ratio of capital adequacy of the Chinese commercial banks was 13 per cent higher than its international standard, while the ratio of reserve coverage reached almost 180 per cent that was 20 per cent higher than its planned and expected level. Such financial opportunities encourage China to reduce the debt of enterprises by means of the financial market (Girardin & Zhenya 2007).
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Price risks are related to risks in the financial market of China and are associated with market price shifts regarding financial assets. All Chinese financial institutions, including banks, pension funds and insurance companies, perform their activities mostly at the expense of appropriate contributions and premiums. The obtained funds are invested by institutional investors in stock, commodity markets, government securities, and other spheres. Market fluctuations of the financial asset value may change it to an unfavourable side for an institutional investor and lead to the complicated implementation of current obligations.
The credit risk relates to a complete or partial insolvency of the borrowing party. This risk of the Chinese market is inherent to corporate bonds. The currency risk is associated with exchange rate changes in Chinese exchanges that are active figurants of the financial markets. This risk arises when foreign financial assets are invested, and foreign currency is converted in the national currency of investors.
The inflation risk in the financial market of China is associated with the macroeconomic conditions and changes within the country and its participation in the international economy. The inflation increase causes a risk of reduction of a real income belonging to an institutional investor due to the high rate of inflation, although the gross profit can be earned. However, a part of it can cover the spiral of inflation. This type of risk affects all institutional investors of the Chinese financial market, while conducting operations in countries during high rates of inflation.
Despite the fact that the government of China is intensively involved in the stabilising of its financial market, the volatility of the latter is still being at risk for the investors. Although the Chinese economy is currently in the transition position, the government has failed to regulate the country’s markets to decrease the volatility rate that negatively affects the development of the country by increasing international risks and limiting the international diversification. As it has been discussed above, the closeness of the country creates a number of challenges that increase the international risks for the both companies that want to operate in the Chinese market and Chinese companies expending their performance abroad. The international risks are highly connected with the possibility of losing the operations of businesses because of the change in the governmental politics. The Chinese government has tried to make its international policy more stable than it was before, but the shifts in regulations and fluctuations in volatility rates make the decisions unstable and constantly changing. Moreover, the international diversification of the Chinese financial market continues to be rather closed due to the protection policy that the government has adopted.
Differentiation and Fluctuations
Since the beginning of 2016, China's stock market has been reeling: on the first trading day of January of the Shanghai Stock Exchange, the index fell by more than 14%, the Shenzhen Stock Exchange index lost more than 18%. Since these trading platforms are among the ten largest financial centres in the world, the echo of the collapse of the Chinese indices spread throughout the planet and made some pessimists talk about the proximity of a new global financial crisis. However, what is happening in China has an obvious negative impact on the global financial markets, and in the long-term, the consequences for the world economy may be even more serious. Despite the isolation of China's financial sector from the rest of the world, China's entry into the global economy and trade is rather considerable. At the moment, the country accounts for 11% of global GDP, 12% of the world oil consumption (the second only in terms of the consumer resource, while the US is the first) and half of the metal consumption. Through a growing merchandise exports in recent years, China has increased its presence in the record world market. Thus, any slowdown in the Chinese economy, any challenge in the financial markets, and a weakening currency are fraught with serious consequences for China's trading partners. Any slowdown in demand for raw materials from China instantly pushes oil prices lower, and this, in turn, hurts the budgets of the hydrocarbon-exporting countries. Thus, at this stage, it is too early to talk about forming a full-fledged crisis in China, which can lead to a new world financial crisis, similar to that of 2008.
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The shifts of the Chinese stock exchanges are other challenges of the financial market. The first week in 2016 was characterized by the compelled stopping due to the fall of stock prices. Fluctuations of the indices in stock markets by 7 per cent caused an automatic termination of quotations. Commonly, the Index of Shanghai Composite lost almost 10 per cent, while the Shenzhen Component lost almost 14 per cent. These indicators represented a domestic business activity in China.
China always pays attention to the preservation of a moderate money supply. Financial institutions make efforts to support the real sector of the national economy, especially micro and small enterprises. Extraordinary fluctuations of the stock market in China in 2015 caused the necessity to promote legalisation and marketisation of the financial market, including the bond, stock and currency market. The authorities have confirmed the need to improve, reform the financial control and strengthen the coordination in the financial market (Lin & Zhang 2009).