Financial system of China

THE MINISTRY OF EDUCATION AND SCIENCE OF UKRAINE 

"KYIV NATIONAL ECONOMIC UNIVERSITY 
named after VADYM HETMAN"

 
International finance department 
 

 
 
Individual work  
"Financial system of China" 
 
 
 

Kasyanenko Sergey 
5 group 4 course  
 

Kyiv 2014

China, officially the People's Republic of China (PRC), is a sovereign state located in East Asia. It is the world's most populous country.The PRC is a single-party state governed by the Communist Party, with its seat of government in the capital city of Beijing. It exercises jurisdiction over 22 provinces, five autonomous regions, four direct-controlled municipalities (Beijing, Tianjin,Shanghai, and Chongqing), and two mostly self-governing special administrative regions (Hong Kong and Macau).

Total area: 9,596,960 sq km (4th place, comparison to the world), land: 9,326,410 sq km; water: 270,550 sq km

Total land boundaries - 22,457 km. Border countries: Afghanistan 91 km, Bhutan 477 km, Burma 2,129 km, India 2,659 km, Kazakhstan 1,765 km, North Korea 1,352 km, Kyrgyzstan 1,063 km, Laos 475 km, Mongolia 4,630 km, Nepal 1,389 km, Pakistan 438 km, Russia (northeast) 4,139 km, Russia (northwest) 40 km, Tajikistan 477 km, Vietnam 1,297 km

Regional borders : Hong Kong 33 km, Macau 3 km

Population: 1,355,692,576 (July 2014 est.) (1st country comparison to the world)

Total median age – 36,7 years(male – 35,8;female – 37,5)

The socialist market economy of China is the world's second largest economy by nominal GDP, and the world's largest economy by purchasing power parity according to a 2014 estimate from IMF, though the accuracy of this conclusion is controversial. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years.

China is a global hub for manufacturing, and is the largest manufacturing economy in the world as well as the largest exporter of goods in the world. China is also the world's fastest growing consumer market and second largest importer of goods.

China is the largest trading nation in the world and plays a vital role in international trade, and has increasingly engaged in trade organizations and treaties in recent years. China became a member of the World Trade Organization in 2001, and concluded a trade agreement with the ASEAN nations in 2010. China also has free trade agreements with several nations, including Switzerland and Pakistan. China has also been criticized for unfair trade practices, including artificial currency devaluation, intellectual property theft, protectionism, and local favoritism.

On a per capita income basis, China ranked 82nd by nominal GDP and 89th by GDP (PPP) in 2013, according to the International Monetary Fund (IMF). The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of the economy. Xi Jinping’s Chinese Dream is described as achieving the “Two 100s”: the material goal of China becoming a “moderately well-off society” by 2021, the 100th anniversary of the Chinese Communist Party, and the modernization goal of China becoming a fully developed nation by 2049, the 100th anniversary of the founding of the People’s Republic.

The internationalization of the Chinese economy continues to affect the standardized economic forecast officially launched in China by the Purchasing Managers Index in 2005. At the start of the 2010s, China remained the sole Asian nation to have a GDP (PPP) above the $10-trillion mark (along with the United States and the European Union).

Since 1980, China has established special economic zones that spread successful economic experiences to other areas. The development progress of China's infrastructure is documented in a 2009 report by KPMG

Budget system

The budget system of the PRC consists of five levels:

1) Central Government;

2) Provinces, autonomous regions and municipalities, which are in direct subordination to the Central Government;

3) Cities, which are composed of districts and autonomous prefectures;

4) Counties, autonomous counties, cities in which no division into districts and municipal areas;

5) Village, national villages and small towns.

The village, national village and small towns, where conditions do not allow to set the budget, may, by decision of the authorities of the respective provinces, autonomous regions or municipalities that are in the direct subordinate to the Central Government, temporarily set the budget.

Budgets of different levels should maintain a balance between income and expenditure.

Chinese Congress of people's representatives (ZZNP) checks the draft Central and local budgets, reports on the implementation of the Central and local budgets, approve State budget reports on the implementation of the central budget, modifies or cancels the wrongful decision of the Standing Committee (ZZNP) on the budget and the final report.

Revenues include:

The decision to use the revenue of the State budget is accepted after careful analysis and drawing up a clear plan. The establishment of special funds must be approved by the State Council.

Budgeting Governments, departments and units at various levels is due to the State Council deadlines.

The State budget and the local budgets of different levels should consist of taking into account the real implementation of budget last year and estimates of income and expenses next year. Budget of the Central Government should be deficit-free.

Local budgets of different levels should be based on the principle not exceeding expenses over revenues, maintaining the balance between income and expenditure and without the deficit.

Preparation of budgetary revenues at various levels should correspond to the gross national product growth.

Execution of local budgets of different levels should be organized by the local authorities to appropriate levels. For specific work meet the financial departments of local authorities.

According to the State Council approved the rules of distribution of income tax revenues in China are divided into:

Ø National taxes:

Ø Local taxes:

Ø General taxes (shared between the Central Government and local government bodies).

Value added tax (within the country): 75% of the budget of the Central Government, the 25% of local management.

There being considerable downward pressure on our economy in the first half of 2013, the growth in government revenue slowed, falling short of the figure forecasted at the beginning of the year. As the economic situation improved in the second half of the year, the increase of revenue and in particular tax revenue picked up. That, coupled with some one-time factors contributing to revenue increases, raised revenue for the year slightly above the figure budgeted in early 2013. National revenue totaled 12.91429 trillion yuan, an increase of 10.1% over 2012 (as below). Adding the 100 billion yuan from the Central Budget Stabilization Fund and 14.974 billion yuan from local government finances, utilized revenue totaled 13.029264 trillion yuan. National expenditure amounted to 13.974426 trillion yuan, up 10.9%. Including the 116.438 billion yuan used to replenish the Central Budget Stabilization Fund and the 138.4 billion yuan used to repay the principal on local government bonds, expenditure totaled 14.229264 trillion yuan. Total national expenditure therefore exceeded total national revenue by 1.2 trillion yuan.

Central government revenue amounted to 6.017377 trillion yuan, 100.2% of the budgeted figure and an increase of 7.1%. Adding the 100 billion yuan contributed by the Central Budget Stabilization Fund, total revenue used by the central government came to 6.117377 trillion yuan. Central government expenditure amounted to 6.850939 trillion yuan, 98.5% of the budgeted figure and an increase of 6.8%. (This includes 2.047175 trillion yuan in central government spending, a rise of 9.1% year on year and 101.3% of the budgeted figure. This was mainly because we reduced the subsidies for miscellaneous local projects during execution of the budget and part of the central government transfer payments to local governments for capital construction investment and sales tax revenue on motor vehicles were reallocated for increased investment in railways, with a corresponding increase of expenditure at the central level.) Adding the 116.438 billion yuan used to replenish the Central Budget Stabilization Fund, central government expenditure totaled 6.967377 trillion yuan. Total expenditure of the central government exceeded total revenue, leaving a deficit of 850 billion yuan, the same as the budgeted figure. The outstanding balance on government bonds in the central budget was 8.675046 trillion yuan at the end of 2013, which was kept within the budgeted limit of 9.120835 trillion yuan for the year. The Central Budget Stabilization Fund had a balance of 148.308 billion yuan.

The revenue of local governments came to 6.896913 trillion yuan, an increase of 12.9%. Adding the 4.803764 trillion yuan in tax rebates and transfer payments from the central government to local governments, plus the 14.974 billion yuan transferred to the central government from local governments, local government revenue totaled 11.715651 trillion yuan. Local government expenditure amounted to 11.927251 trillion yuan, up 11.3%. Adding the 138.4 billion yuan used to repay the principal on local government bonds, local government expenditure totaled 12.065651 trillion yuan. Total expenditure of local governments exceeded total revenue by 350 billion yuan.

2014 is the first year for us to thoroughly put into practice the guiding principles of the Third Plenary Session of the Eighteenth CPC Central Committee and to comprehensively deepen reforms. This is also an important year for meeting the targets set in the Twelfth Five-Year Plan. Well formulated 2014 budgets enable public finance to play a key role, and this has important implications for carrying out all the reform plans of the Party Central Committee and the State Council, accelerating the transformation of government functions, letting the market play a decisive role in allocating resources, and promoting modernization of the country's governance system and capability.

This year, the economic development environment in China remain complex. Fiscally, there is be a serious imbalance between government revenue and expenditure. As the country's potential economic growth slows down and we advance reform of the tax system, influencing factors such as those will likely lead to the slowdown in revenue growth. In addition, initiatives to deepen reform in an all-around way, adjust and optimize the economic structure, and promote development of social programs will require even more investment. Given the fiscal and economic situation, in doing the public finance work and preparing the budgets for 2014, we need to fully implement the decisions and plans of the Party Central Committee and the State Council, make progress while ensuring stability, carry out reforms and innovations, and continue to implement a proactive fiscal policy. We need to deepen reform of the fiscal and tax systems and advance reform in relevant sectors so that reform of the fiscal and tax systems will underpin the country's overall reform efforts, accelerate the change of the growth model, and raise the quality and returns of economic growth. We need to optimize the structure of government expenditures, make good use of both existing and additional monetary and financial resources in order to help improve the basic public services system, promote development of social programs, and emphatically improve the people's well-being. We need to tighten up financial discipline and strictly limit spending on official overseas visits, official vehicles, and official hospitality, as well as other regular expenditures. We also need to make budgetary work more open and transparent, strengthen local government debt management, and promote sustained, sound economic growth and social harmony and stability.

China would double its military spending to $238.2 billion by 2015, surpassing the combined defence budgets of India, Japan and 10 other countries in the Asia-Pacific a global research group has claimed, prompting defence scholars here to dismiss the report as an attempt to play up the country's military threat. 
 
China's military spending will reach $238.2 billion in 2015 compared with 119.8 billion in 2011.

Tax System

The Chinese tax administration has at the top the Ministry of Finance and the SAT (State Administration of Taxation). Three levels of taxation: customs, local and central.

STATE TAX: taxes that generate revenue for the central Government which collects them..

LOCAL TAX: taxes that generate revenue from the local Government which collects them.

With its transition to a market economy, China has bought market-based approaches. 

Into force from January 1st 2008 the Enterprise Income Tax Law (CIT): it is a law that combines two schemes of tax on business income, namely that for companies based on domestic capital - Domestic Invested Enterprises (DIE) - and one for companies based on foreign capital - Foreign Invested Enterprises (FIE). Tax incentives were high while the average EIT rate was decreased.

From January 1st 2009 we are witnessing the transformation of the production-oriented VAT system to the consumption-oriented VAT system. The Chinese tax law is not codified in a single document but scattered in different instruments referring to different taxes.

The National People's Congress and its Standing Committee, the State Council, the Ministry of Finance (MOF), the State Administration of Taxation (SAT), the Tariff and Classification Committee at the Council of State and the General Administration of customs are state bodies with power to issue tax Laws or fiscal policies. The S.A.T. is the highest tax authority in China. Because of revenue sharing, the tax authorities at the provincial and local offices are divided into the SAT and branch offices of taxes. The S.A.T. has a vertical leadership towards its field offices as regards the organization, size, staff, budgets; it assists local Governments in a sort of parallel supervision of the tax branch offices.

The "Tax System" is divided into two kinds of taxes: 

Direct Taxes:

• Income taxes for physical persons (IIT).
• Inome taxes for legal entities (CIT).

  2.  Non-Direct Taxes, including for example:

• Enterprise Income Tax (CIT).
• Business Tax (BT).
• Value Added Tax (VAT).
• Import Duties.
• Duty on real estate properties.
• Duty on revalutation of land.
• Stamp tax.

In China companies operating on the territory are classified into two categories:

Resident Companies or business that, legally established in China or abroad, carry out their activities of administration and control on the Chinese territory, such as companies totally based on foreign capital (Wholly Foreign Owned Enterprise - WFOE), Joint Venture (JV) and trading companies.

Non-resident Companies, i.e. companies, which, despite having income in China or abroad, do not have an office or a seat on the Chinese territory.

TAX ON THE INCOME OF PHYSICAL PERSONS - (IIT)

The tax on the income of physical persons is characterized by progressive taxation on income brackets, with increasing rates. The following categories of income make up your taxable income:

• From employee.
• From self-employment.
• From royalties.
• From income from interests and dividends.
• From rental of real estate properties.
• From the proceeds coming from the sale of real estate properties.

The Tax rates are between 5% and 45%.

Under current Chinese law, people who have domicile in China or individuals who do not have a domicile in China but live in China for a year or more, are subject to the payment of the tax on the income of physical persons in connection with the their global income, while people who do not have a domicile in China but reside in China for less than one year must pay the tax on the income of physical persons only in relation to the income generated in China.

The income earned in China by individuals who are not domiciled in China and who receive income from a foreign employer without a permanent establishment in China are excluded from the tax on the income of physical persons as long as they are not physically present in China consecutively or cumulatively for more than 90 days in a calendar year or 183 days in the case of the existence of a treaty on double taxation.

A special rule is applied to expatriates who hold the office of director, representative in representative offices of foreign companies or general manager or senior management in companies with foreign participation.

TAX ON THE INCOME OF LEGAL ENTITIES - (CIT)

The main legislation on the taxation of legal entities is represented by the Law on the taxation of corporate income, or the Enterprise Income Tax Law which came into force on January 1st 2008.

This legislation represents an important innovation for the Chinese tax system as a process of standardization of the tax treatment for the domestic-owned companies and those companies invested in by foreign entities, providing for the application of the unified rate of 25%. There are reduced rates for particular categories of companies: in particular, 15% and 20%, respectively, for companies operating in the high technology sector and for smaller companies with low profits. A subsidized style” is intended also to the businesses belonging to the fields of environmental protection and energy saving. Resident companies are taxed on worldwide income products.

The tax base follows, in general terms, the principle of derivation from the accounting records. The losses in a given tax year can be deducted for a maximum period of five years. Non-resident companies are taxed only on income earned in China.

The foreign-owned companies must register with the relevant tax offices. There will be a quarterly tax returns, in addition to the annual year-end tax returns. The related payments should be carried out on a quarterly basis, based on the corresponding declarations, and is then expected an adjustment following the submission of the Annual Statement.

The Corporate Income Tax (CIT) belongs to the category of taxes on corporate profits and is applied to the taxable income of the company which is the gross income earned in the tax year in which you deducted the tax-free income, other deductions permitted and the amount of the losses of the previous five years. Resident companies are taxed on total income received in the fiscal year, the non-resident enterprises incorporated in China are taxed on income in China or abroad directly connected to their constitution. The non-resident enterprises and unincorporated in China are taxed only on income earned in China during the same period. 

The tax rate of the tax on the income of local companies and foreign-invested firms is unified at 25%. Its payment must be made at the place where the company is registered. For companies incorporated outside China, the payment must be made in the Chinese city in which business activities are carried out.

The Value Added Tax (VAT) which is the value added tax is a consumption tax charged on the value added during the production of goods, sale and supply of taxable services. In China, VAT payers (VAT) are divided into two types according to the system of accounting and control systems and their functioning:

Small-sized contributors: those without a complex system of accounting and auditing, whose taxable value of sales is less than 500 thousand RMB to taxpayers engaged in the production of goods or the provision of services, or 800 thousand RMB to those who are engaged in the retail or wholesale.

General contributors: businesses with a rateable value of annual sales in excess of the taxpayers of small size.

The VAT is 3% for small-sized taxpayers, 13% for the general taxpayers who sell or import cereals, gas, oil, newspapers, books and agricultural products and 17% for other general taxpayers. Only the general taxpayer must issue invoices, which are prepared in accordance with pre-established forms printed by the tax from which they must be purchased.

The taxpayer is required to pay the VAT, from which, however, it is necessary to deduct the so-called: Recover Input Tax (RIT), which is the VAT paid on the purchase of raw materials and on certain fixed costs (machinery, transport vehicles and other instruments and appliances associated with the production and activity of the business). Real estate properties, houses and buildings are excluded.

The reference period of the VAT may vary from one, three, five, ten, fifteen days, a month or a quarter, and is determined by the tax according to the amount due.

The 2009 reform abolished the exemption of VAT (Free Policy), for import of equipment from abroad and the return of VAT (Returning Policy) for purchases of plants in China by the companies based on foreign capital - Foreign Invested Enterprises (FIE).

The Act states that the VAT on the export products is refundable in whole or in part. The rules vary depending on the trends of economic politics.

Since August 2008, the Central Government has revised the rates of refunds of VAT on the export of many products. The main changes regarded labour-intensive sectors such as textiles, clothing, toys and goods with high added value and technology. The rates of refund of VAT increased by:

• Textile and clothing (16%).
• Some plastic products and glass and ceramics (13%).
• Some medicines, mechanical and electrical products, optical components, bags, shoes and hats, umbrellas, furniture and toys (15%).
• Signalling equipment used for TV and sewing machines (17%).
• Some metal products, scissors, fans, some books and other goods (9%, 11% o 13%).

The Business Tax (BT) is an indirect tax complementary to VAT. It applies to those services excluded from payment of VAT, transfers of real estate and sale of intangible assets. BT is calculated on the company turnover with percentages varying from 3% to 20% depending on the type of service: 

• Transport, building, post and telecommunications, culture and sport - 3%.
• Insurance, finance, services, land transfer and sale of intangible assets - 5%.
• Entertainment and show business - from 5% to 20%.

Similarly to what reported about the VAT, the reference period can vary from five, ten, fifteen days a month or a quarter, and is determined by the tax according to the amount of BT due. Payment must be made at the place where the service provider or its receiver are. As a result, the services provided abroad in favour of individuals or Chinese companies are subject to the payment of BT.

There are special exemptions for technology transfer, technology development, for technical advisory services. These exemptions, however, are subject to assessment and authorization of the competent authorities.

The VAT and BT are mirror applying, first, to supplies of goods carried out on the territory of China and a burden, the second, on procurement of services excluded from the VAT scheme and on the transfer of real estate or intellectual property rights. The fundamental difference between the VAT and the BT is that the VAT can be deducted (compensating for the amount paid to purchase the tax rate applied to sales tax) while BT does not provide a similar mechanism resulting in only an additional cost burden on the final consumer and slows the development of the service. 
REFORM OF INDIRECT TAXES

On January 1st, 2012 only for the municipality of Shanghai has entered into force, the reform of indirect taxes which involves subjecting certain types of services, previously subject to BT, only to VAT. The reform applies to the transport sector and the services that are defined modern (i.e. research and development, information, cultural activities, activities auxiliary to logistics, certification and consulting). The goal is to unify the BT with VAT thus standardizing the Chinese system to the international one. The Reform has been hampered by local authorities to who remains the 25% of the revenue produced by the VAT, while remained 100% of BT. The Municipality of Shanghai is very sensitive to industry services and is willing to act as a pioneer in the reform process.

Major new features:

• Transaction of the companies operating in the sectors covered by a reform scheme from BT to VAT rules.
• Introduction of two new levels for VAT rates: 11% for transport rates; 6% of modern facilities.
• VAT proceeds for 100% of responsibility of the local authorities with the result that current incentives or tax benefits granted to companies will be maintained after consultation with the local Authorities.
• Issues and influence on the company, are the change from BT regime to a VAT regime due to an increase in the rate that from 5% of BT rise to 11% or 6%.
• Tax advice aimed at a useful study to identify the most advantageous tax planning (selecting the mode of business, the corporate structures and markets where you can reduce the tax burden) è is what should be done to legitimize the profits. A customized study  to specific areas of activity and according to the different local tax laws is helpful in planning: to this purpose Bright Business Consulting LLP provides the necessary support to achieve this goal.

Banking system

China's banking system has undergone significant changes in the last two decades:Banks are now functioning more like western banks than before. Nevertheless, China's banking industry has remained in the government's hands even though banks have gained more autonomy. WTO has accepted China. The central bank of China is the People's Bank of China.

The "big four" state-owned commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China.

People’s Bank of China:

The People's Bank of China (PBOC) is China’s central bank, which formulates and implements monetary policy. The PBOC maintains the banking sector's payment, clearing and settlement systems, and manages official foreign exchange and gold reserves. It oversees the State Administration of Foreign Exchange (SAFE) for setting foreign-exchange policies.

According to the 1995 Central Bank law, PBOC has full autonomy in applying the monetary instruments, including setting interest rate for commercial banks and trading ingovernment bonds. The State Council maintains oversight of PBOC policies.

China Banking Regulatory Commission (CBRC) was officially launched on April 28, 2003, to take over the supervisory role of the PBOC. The goal of the landmark reform is to improve the efficiency of bank supervision and to help the PBOC to further focus on the macro economy and currency policy.

According to the official Announcement by CBRC posted on its website, the CBRC is responsible for "the regulation and supervision of banks, asset management companies, trust and investment companies as well as other deposit-taking financial institutions. Its mission is to maintain a safe and sound banking system in China.

China Central Bank Balance Sheet 

Central Bank Balance Sheet in China increased to 336261.61 CNY Hundred Millions in September of 2014 from 330634.21 CNY Hundred Millions in August of 2014. Central Bank Balance Sheet in China averaged 163999.21 CNY Hundred Millions from 1999 until 2014, reaching an all time high of 336261.61 CNY Hundred Millions in September of 2014 and a record low of 34443.90 CNY Hundred Millions in February of 2000. Central Bank Balance Sheet in China is reported by the People's Bank of China.

Domestic key players:

In 1995, the Chinese Government introduced the Commercial Bank Law to commercialize the operations of the four state-owned banks, the Bank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC).

The Industrial & Commercial Bank of China (ICBC) is the largest bank in China by total assets, total employees and total customers. ICBC differentiates itself from the other State Owned Commercial Banks by being second in foreign exchange business and 1st in RMB clearing business. It used to be the major supplier of funds to China's urban areas andmanufacturing sector.

The Bank of China (BOC) specializes in foreign-exchange transactions and trade finance. In 2002, BOC Hong Kong (Holdings) was successfully listed on the Hong Kong Stock Exchange. The USD2.8 billion offering was over-subscribed by 7.5 times. The deal was a significant move in the reform of China’s banking industry.

The China Construction Bank (CCB) specializes in medium to long-term credit for long term specialized projects, such as infrastructure projects and urban housing development.

The Agriculture Bank of China (ABC) specializes in providing financing to China's agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises (TVEs) and other rural institutions.

Policy banks

Three new "policy" banks, the Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim), were established in 1994 to take over the government-directed spending functions of the four state-owned commercial banks. These banks are responsible for financing economic and trade development and state-invested projects.

ADBC provides funds for agricultural development projects in rural areas; the CDB specializes in infrastructure financing, and Chexim specializes in trade financing.

Second tier commercial banks

In addition to the big four state-owned commercial banks, there are smaller commercial banks. The largest ones in this group include the Bank of Communications, China CITIC Bank, China Everbright Bank, Hua Xia Bank, China Minsheng Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong Development Bank and Industrial Bank. The second tier banks are generally healthier in terms of asset quality and profitability and have much lower non-performing loan ratios than the big four.

City commercial banks

The third significant group in Chinese banking market is the city commercial banks. Many of them were founded on the basis of urban credit cooperatives. The first one was Shenzhen City Commercial Bank in 1995. In 1998, PBOC announced that all urban cooperative banks change their name to city commercial bank. This number has increased through additional transformations to 140 in 2009. Most city commercial banks have strong ties to their local government and are majority or wholly state owned. Since 2005 some city commercial banks diversify their shareholders, inviting Chinese and international private companies to take minority shares, merging and cross-shareholding. Some of the banks have listed their shares. The city commercial banks market orientation is towards supporting the regional economy, but also towards financing local infrastructure and other government projects. Since 2008 a strong trend has emerged for city commercial banks to extend business beyond their home region. They are also often the main shareholder behind village and township banks (VTB). Some have founded so called small loans units to serve smaller business clients better. Taizhou City Commercial Bank, Bank of Beijing and Bank of Ningbo are examples for city commercial banks.

Trust and investment corporations

In the midst of the reforms of the 1980s, the government established some new investment banks that engaged in various forms of merchant and investment banking activities. However, many of the 240 or so international trust and investment corporations (ITICs) established by government agencies and provincial authorities experienced severeliquidity problems after the bankruptcy of the Guangdong International Trust and Investment Corporation (GITIC) in late 1998. The largest surviving ITIC is China International Trust and Investment Corporation (CITIC), which has a banking subsidiary known as China CITIC Bank.

Company’s finances

When asking people to name multinational companies (MNCs) from Asia, the first examples that come to mind are numerous Japanese companies such as Toyota, Honda, Sony, Toshiba, Panasonic, Nintendo, etc. These Japanese MNCs are  well-known worldwide since they all produce products for end-consumers. Many people also think of MNCs from South Korea such as the huge conglomerates Samsung, Hyundai, and LG. Taiwanese MNCs, though to a lesser extent, are also mentioned in relation to the country’s famous high-tech and IT sectors. Examples include Asus, Acer, and HTC. Large suppliers such as Foxconn are also based in Taiwan but are not as well-known since they primarily supply the B2B markets. Japanese MNCs are older than MNCs from South Korea and Taiwan.

However, MNCs from all three nations are major competitors of those “old” MNCs which have their origins in the industrial revolution of the late 19th century and first half of the 20th century and are based in comparatively developed countries. We just have to look at the rapid success and increased competitiveness of South Korea’s Hyundai in the automotive sector or Taiwan’s HTC in the smartphone industry.

At the moment, China is home to less well-known MNCs than the other nations mentioned above. Of course, there are people who name Lenovo or Huawei as renowned global players but the level of awareness for Chinese MNCs is low compared to MNCs from Japan, South Korea or Taiwan. This has various reasons including the following points:

The majority of products exported from China (more than 50%) is produced by foreign invested companies and not by Chinese enterprises themselves. The goal of every company is the maximization of profits – a process which entails the reduction of total costs. China has historically had comparatively low wages and  many companies therefore invested in China leading to this high proportion of exports from foreign invested companies.

China’s MNCs operate within industries in which there is high competition from “old” MNCs. There is, for example, an overlap of some core industries of Germany and China. More people in Europe are familiar with Volkswagen rather than Geely or with Bosch and Siemens rather than Haier. Many Chinese MNCs are also in the B2B sector, therefore less prominent among the general public but more so among those experts within the respective industries.

Chinese companies started to internationalize later than MNCs from South Korea or Taiwan. This process of internationalization of Chinese companies has just begun and is far from over. In our recent article about Chinese OFDI we saw that Chinese OFDI was almost nonexistent until the beginning of the 21st century and experienced a boom during the financial crisis of 2007/2008.

MNCs from Asia can be grouped into three separate cycles or waves. The first wave includes the Japanese MNCs. In the second wave there are South Korean and Taiwanese MNCs. The third and last wave includes those relatively new Emerging Multinational Companies (EMNCs) from China.

Source: Bruche, Gert (2013): Chinese Emerging Multinationals. Lecture at Berlin School of Economics and Law

The reasons for these three cycles lie, amongst others, in economic policies. South Korea, Taiwan but also Hong Kong and Singapore form the group of so called Asian Tigers. Japan is left out of this group because it emerged earlier than the other four nations and the term was coined later on after the Japanese economy had already developed. However, in another such paradigm, the so-called flying geese paradigm as coined by the Japanese author Kaname Akamatsu, Japan is seen as the lead goose followed by the four Asian Tigers. In this paradigm the Asian Tigers are followed by the main ASEAN countries Indonesia, Thailand as well as Malaysia and finally by other fast developing nations in the region: China, Vietnam, Philippines etc.

China has always avoided a current account deficit and significant sovereign debt, just as the Asian Tigers have. Chinese exports were viewed as necessary because exporting was  an important way to pay for imports and so China adopted selective measures of export promotion, just as South Korea and Taiwan had exemplified before. The Chinese EMNCs, although currently less well-known, are well positioned to forge waves of economic growth in decades to come.

Household finance

Population of China 2014

Based on the total number of births, total number of deaths, net migration rates, and the population of 2013, the current population of the People’s Republic of China is estimated to be about 1,390,510,630. China’s population makes up around 19.3% of the world’s population. The current estimated population indicates a growth of 36,510,630 people or a population growth of 2.7% during 2013. As a result of the current population of China, it remains the most populous country in the entire world. China has about 130 million more people than the second largest country in the world, India. Based on the population and the total area of the country, the population density of China in 2014 is estimated to be about 145 people per square kilometer or 375 people per square mile.

One-Child Policy in China 2014

As a result of the continuously growing population of China, the government enacted a form of population control, officially known as the Family Planning Policy, otherwise known as the One-Child Policy. In 1979, the Chinese government introduced the policy as a response to the growing social, economic, and environmental issues that came due to the high population of the country. The premise of the policy is to discourage (and even sometimes prevent) families from having more than one child. There are some exceptions to the policy, however. If the first child is a girl or is disabled, the family can have another child. Also, if neither parent has siblings, two children are allowed. In fact, as of November 2014, the policy was updated to allow for a family to have two children if one of the parents is an only child. Some controversies surrounding the policy, both in China and throughout the rest of the world, include the increase in forced abortions, female infanticide, and an increased imbalance among the sexes in China.

Education in China 2014

It is required that children in China attend school for at least nine years. The nine years of required schooling is completely free to the students. They start school around the age of six in a primary school system and then move to a junior middle school around age eleven. As of 2011, over 81% of Chinese students continued their education to receive a secondary education degree. In order to enter into a secondary institution, a student must take the Gaokao, which is China’s national university entrance exam. Each province determines the Gaokao, but there are three standard subjects on every test: Chinese, Mathematics, and a foreign language (typically English). Some other common subjects offered are Physics, Chemistry Biology, History, Geography, and Political Education. Also, teachers must go through a significant level of training before actually teaching in the classroom in order to uphold the high standards of education in China.

Health Care in China 2014

Beginning in the 1950s, the Chinese government worked to establish a public health program in order to combat the growing health concerns in the country. Over the years since the 1950s, most of the health care in China became mostly privatized, which, in return, resulted in an increase in the quality of the education as well. In 2009, China invested around $125 billion in a 3-year health care initiative. By 2011, as a result of the initiative, around 95% of the country has health insurance. Also, it has become the world’s third largest supplier of pharmaceuticals. Some health concerns in China include respiratory problems that come as a result of the air pollution, which caused 1.2 million premature deaths in 2010, a high portion of cigarette smokers, and lastly obesity among the youth in the urban parts of China. The average life expectancy in China is about 75 years and infant mortality is 12 infants per 1000 births.