Chinese Financial Markets

ChineseFinancial Markets

Challengesfaced by China during the process and the key strategies adopted todeal with the challenges

Beforeadopting economic reforms to liberalize trade, China had limiteditself to rigid policies that made the economy stagnant, weak,isolated, and inefficient. However, upon adopting the free marketreforms of 1979, the economy started growing significantly, as wellas attracting foreign investments. The country became one of theworld’s first growing economies, with the GDP growth ratesaveraging well over10 percent in 2014. Besides, China has also becomeone of the largest economies in the world in terms of manufacturing,holding foreign exchange reserves and trade merchandise (Elliott andYan 3).

However,the development process was never smooth but punctuated by economicdownturns. The 2008 economic crisis is perhaps one of the recent andmost adverse financial challenges that China’s economic reformprocess had to endure. The exports, foreign direct investment, andimports reduced significantly, while GDP also slowed down. Besides,many people lost employment.

Toaddress the resultant economic problems, the Chinese government hadresponded by initiating economic stimulus package to eliminate rigidmonetary policies and increase bank lending. Such policies createdthe allowance for China to rise above various economic problems thatfollowed from the crisis, especially the fall of demand for theChinese products. Nevertheless, the economy has been slowing downsignificantly in the recent year. The country’s GDP had fallen from10.4% in 2010 to 7.4% in 2014. Worse still, it is projected that, inthe next 60 years, the annual GDP could touch the low of 5.9 percent(Wayne3).

Besides,China has continued to face several challenges during the process ofreforming financial markets, which have compelled it to adoptdifferent critical survival and growth strategies. The most notableproblem, however, has been how to assure economic growth while takingthe necessary reforms aimed at improving the market orientations andeconomic efficiencies and maintaining stability in the financialmarkets. All these areas are critical, exacerbated by the fact thatthe China’s economic growth is slowing because of economicstructures in the domestic and global markets. In essence, thesituation calls for the need for the country to embrace new, informedpolicies. Although reforms are crucial to steer the economy towards adesirable service and consumption-based system, these have beenslowed down by vested interests. Moreover, even the processes ofsecuring financial stability have remained a significant challengebecause the stock markets have been characterized by a series ofaftershocks, as well as potential bubbles in the other markets acrossthe world (Brandtand Zhu, Xiadong 4).

ASummary of the key steps taken by China during the reform

Thekey steps taken by China to reform the economy can be traced to 1979.Starting from this period, China embarked on a process of adoptingeconomic reforms. For instance, the government began providingownership and price incentives to the farmers, which eventuallyplayed a crucial role in encouraging them to sell their products tothe liberalized market. Besides, the government also created the fourspecial economic zones in the coastal areas to boost foreigninvestments and import of sustainable technologies into China.Another significant reform was decentralizing the processes of makingpolicies in various sectors, especially trade. The task ofcontrolling the activities of small, medium, and big businesses wasdelegated to local and provincial governments. Typically, the small,medium, and big businesses were now encouraged to compete and operatebased on the principles of a liberalized market, as opposed to thetraditional models that required them to work under the direction ofthe state planning. The reforms also encouraged the citizens to beentrepreneurs. The regions lying along the costs were declared asopen development zones, serving as an opportunity to experiment theimplications of having a free market. The country offered trade andtax incentives to attract foreign investment, in addition toeliminating the price controls on a broad range of products.

Aspart of the reform process, China has continued to adopt severalsteps to improve its financial markets. The measures have includedincreasing the credit to small and medium enterprises, controllingthe risks of credit, improving the openness of the capital markets,increasing the volumes of trade within the money markets, expandingthe issuance of bonds, and improving the elements of trade volumesand rates of interest. China has also focused on strengthening itsinfrastructure, including improving RMB cross-border payment systems,macro-prudential management, clearing and forwarding, financialregulations and consumer protections (Brandtand Zhu, Xiadong 7).

Accordingto Chow, one of the key aspects of China’s modernization processwas attracting foreign direct investments in China with the aim ofboosting the growth of firms in the domestic markets. In part, thecountry restricted Chinese companies from investing abroad. It wasonly until 2000 that China started encouraging its companies to goglobal and invest in foreign markets. The primary driving force forthis investment move was the accumulate foreign exchange reserves. Inthe past, a significant part of the reserves was channeled tolow-yielding, but less risky assets such as the US .S. Treasurysecurities, but this would not be part of the new reform process. Aspart of the course of seeking profitable returns from the investedforeign exchange reserves, the country created the China InvestmentCorporations to chart the way for China to move away from US securitymarkets and focus on the local market. The government funded the CICwith at $200 billion, making it the world’s largest sovereignwealth fund. The second motivating factor for China to pursuing theinvestment in the foreign markets was the need to source rawmaterials such as minerals and oil, which the country consideredcritical for rapid economic development process (Chow 11).

Chinaremains focused on increasing its global competitiveness, and it isnow focused on helping its firms to build strong brands to becompetitive in the global markets through foreign firm alliances andacquisitions. The processes of investing in the foreign companies oracquiring them is perceived as a way of acquiring technological andmanagement skills that would enable Chinese firms to competefavorably.

Thepast and current progresses made by the reform

Thereforms have been accompanied by a myriad of developments, yet someof the developments are still underway. For instance, because ofthese reforms, RMB has become internationalized. RMB has expanded thefinancial transactions and improved offshore clearing. The rate ofRMB exchanges has also been enhanced and reduced overreliance on thedollar. The interest rates have been responding positively to themarket reforms. The deposit interest rate ceilings have also beeneliminated, paving the way for financial institutions to compete withrelative ease for deposits while meeting the interest of customers.The reforms have also instituted deposit insurance, replacing therole of the government as the main mitigators of the market risks.This step is lauded to be important in reducing implicit guaranteesfrom the government, as well as increasing the competitiveness of thebanking systems. The reforms have welcomed regulative innovationswithin the equity, stock, and future markets, resulting inmodernization of the sectors. The changes have given rise to CSIstock index futures, in addition to the crude oil, nickel, tinfutures markets. The mechanisms of supervising the private equityfunds have also been adopted, while the margin trading on thesecurities have been checked (Chow 9).

However,it seems the ongoing reform processes have not been fast enough torespond to the dynamic market conditions. For instance, the recentmarket fiascos have elicited questions on whether the stock market issufficiently modernized. The government interventions failed tointervene in the market situation and the confidence of the investorsabout the sustainability of the market reforms reduced significantly.In addition, the economy of the country is still reliant on thebanking sector that could result in nonperforming loan problems, yetthe direct financing through equity and debt is still poorlydeveloped (Wayne3).

Thechallenges to the future reform

Chinacould adopt various measures to improve the economic stature, as wellas speed up the financial restructuring processes. In one way, thegovernment could look to stabilizing the prices of the commoditiesand checking on the global economic uncertainties, especially inJapan and Eurozone, which would go a long way in reducing thepressure on the policymakers while assuring financial stability andflexibility for implementation of the critical reform processes.Secondly, having an apparent timing of the interest rates hikebenchmarks adopted by the United States and checking on the US ratehikes will also play a crucial role in soothing the jitters in themarket while reducing capital outflows. Indeed, the US rate hikeshave had a significant impact on China’s stock market. Forinstance, the 2015 US rate hike negatively affected the stock marketof China starting from December and extending to February 2016. Inthis regard, it is certainly clear that China’s financialregulators will not want to experience a repeat of the equity lossesaccompanying volatile stock movements. If they happen, they willcause detrimental market outflows that would slow down the economicgrowth and, at the same time, reducing the available stocks offoreign reserves. Thirdly, the increase in income resulting fromother sources of finance such as the rising consumer demands or theinnovative developments in the financial sectors are essentialbecause they can ease pressure for the policymakers to focus onimplementing reforms rather on growth (William and Shen 34).

Nevertheless,exploiting the opportunities resulting from the highlighted scenariosis not an easy process. Therefore, policymakers need to continuepursuing reforms by focusing on critical items on the agenda list.However, the Chinese government already has its priorities about whatneeds to be implemented to attract investors, and this is likely tocause inflexibility. It is a challenge for the policymakers to thinkabout ways to guarantee flexibility in reform implementation (Williamand Shen 34).


Brandt,Loren and Zhu, Xiadong. Redistributionof a Decentralized Economy: Growth and Inflation in China underReform.University of Toronto, 2012. Print

Chow,Gregory. Economic Planning in China. CEPS Working Paper No. 219 June 2011. Print

Elliott,Douglas and Yan, Kai TheChinese Financial System An Introduction and Overview.John L. Thornton China Center Monograph Series • Number 6 • July2013. Print

Wayne,Morrison. China’sEconomic Rise: History, Trends, Challenges, and Implications for theUnited States.Congressional Research Service, 2015. Print

WilliamTen and Han Shen. AssessingChina`s Top-Down Securities Markets.University of Chicago Press, 2015. Print