Financial Market of China: Allocation, Challenges, and Evaluation

This report provides a detailed analysis of China's financial market, examining its capital allocation mechanisms within both the domestic and international economies. It begins with an overview of the financial market's background and its importance to emerging economies, followed by an exploration of how capital is distributed. The report then evaluates the challenges China faces due to industrialization and trade policies. It covers the role of financial markets, including stock and bond markets, in facilitating capital raising and the influence of the People's Bank of China. The analysis highlights the inefficiencies in China's capital allocation, the impact of the global financial system, and the country's economic growth and development, including its transition towards new models. The report also touches upon the economic slowdown, external and internal factors, and the impact of government spending and industrialization on poverty reduction. The report concludes by discussing the challenges related to economic growth constraints.

Running head: FINANCIAL MARKET OF CHINA
Financial market of China
Name of the student
Name of the university
Author note

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Table of Contents
Executive summary....................................................................................................................2
Background of the financial market...........................................................................................2
Capital allocation in domestic economy....................................................................................4
Capital allocation within international economy.......................................................................5
Challenges faced by China due to industrialization and trade policies .....................................8
Conclusion................................................................................................................................10

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Executive summary
The report states how the financial markets allocate capital within the domestic economy. It
also states how the financial markets does its capital allocation within the international
markets. As finance is considered the life blood for the engine of growth for the international
trade and development. In this paper the emerging economy of china is critically evaluated.
The first part of the report states about the background of the financial markets. It states how
the financial markets are important for the emerging economies. The second part of the paper
shows how the capital is allocated within the domestic economy as well as within the
international economy. The next part of the paper shows how the emerging economies are
evaluated. It also states the challenges which China faces as a result of huge industrialization
along with the trade policies. In this part it states what kind of challenges does china graces as
a result of massive industrialization and trade policies. In the background of the financial
markets it is shown that the financial markets are of two types. The financial markets of
China have also been discussed in the report.
Background of the financial market
The financial market is a kind of market where people can trade the financial
securities like futures at a very low transaction costs. The financial markets refers to those
markets which are usually used for raising finance. The financial markets always create a
regulated system for the companies in order to achieve a huge amount of capital. Since the
financial markets are public, they open a transparent way for setting the prices for trading
everything. The financial markets are used for raising finance in the long term which are
known as the capital markets and for short term finance, through the money markets (Costich,
Scutchfield and Ingram 2015). The capital markets consists of the stock markets and the bond

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markets there are also presence of the money markets, future markets, cryptocurrencies,
commodity markets and future markets. The stock market is a series of exchanges where the
corporations which are successful go to raise huge amount of cash in order to expand.
However the mutual funds provides the ability for buying a huge amount of stocks at once.
With the help of bond markets, organizations can obtain huge amount of bonds. When the
price of stock goes up, the bond prices will be going down. The commodities market is a
place where the organizations can offset their future risks while selling or buying the natural
resources. One of the significant function of the financial market is opening and regulating
the various systems for the organizations in order to get huge amount of capital which will be
done through the stock and the bond markets (Rodríguez-Pose and Wilkie 2016). The
financial markets usually attracts funds from the investors. Without the presence of the
financial market, it would have been difficult for the borrowers to find lenders themselves.
The economy of China is going strong every day. The strong economic system have
also brought a strong inflation around. The market is a place where both the buyers and the
sellers will be exchanging goods and services. The accessibility of the financial markets of
China will be strongly linked to the efficiency and the liquidity. The currency of China is
referred with various kinds of names such as yuan, renminbi, CNY and RMB where Yuan is
known as the primary unit of the currency (Yi and Liu 2015). The central bank of China is
being referred as the People’s Bank of China. The People’s Bank of China will be influencing
the financial markets with various kind of instruments. The financial sector of china is
divided in to three types of segments which comprises of the banking, insurance and the
securities. The China Banking Regulatory Commission, China insurance Regulatory
Commission and the China Securities Regulatory Commission controls and regulates the
segments. It have been seen that most of the trading of the money market of China is done
through the interbank markets. Although most of them takes place in the Shenzhen and

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Shanghai stock exchanges. The industry of the funds of China ids usually dominated by the
domestic institutions. Huge amount of the Chinese funds are invested in the stock exchanges.
The secondary markets liquidity should be taken into consideration when the financial market
of China is been analysed (Leydesdorff and Zhou 2014).
Capital allocation in domestic economy
The financial markets appears to improve the capital allocation across the countries.
The efficiency of the capital allocation have been negatively correlated to the degree of firm
specific movement. Capital allocation is a kind of system of distributing financial resources
to the different sectors in order to increase efficiency. Therefore, it can be said that the
fundamental nob of the economy to allocate resources efficiently in the market. However, it
have been found out that the capita allocation of China is found to be highly inefficient in the
market. The credit allocation process of china have changes the overall economic growth for
the Chinese consumers and businesses. The equilibrium level of the financial resource
allocation of China usually experiences many phases which took place in the recent decade.
The narrowing wage gap which is present between the high and the low skilled workers of
China suggested government intervention in the economy (Ademola, Bankole and Adewuyi
2016). The fundamental job of the economy is allocating the capital efficiently. In order to
achieve this the capital is supposed to get invested in those sectors from which they can
expect to get a huge return. In the financial system, the funds flow to those who have surplus
funds for those who have shortage of funds. The finance growth relationship is also quite
important in nature. When there is presence of any gap, the financial system is linked to the
performance of the economy. The financial system is also significant for allocating the capital
and also provide the basis for restructuring the economy. The lack of a well-developed stock
market is a serious disadvantage to any kind of the economy. The equity financing is also
advantageous for the companies. The bank based finance also have a special role to play in

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many companies in the need of funds. The banking sector have an important role to play with
respect to the allocation of funds in case of some of the most profitable investment
opportunities. Banks are therefore known as the financial intermediaries which adds cost for
the allocation of capital (Costich, Scutchfield and Ingram 2015).. For making the banks
survive in the market economy, they should be provided with huge benefits. It is however
quite difficult to compete with the market of the debt securities.
Capital allocation within international economy
Financial markets appears to change the allocation of capital. The efficiency of the
capital allocation is indirectly related with the state ownership in the economy and is directly
correlated with the firm specific information. The fundamental job of the economy is
allocating the scarce capital efficiently. The capital is usually allocated in sectors in order to
gain high returns. The global financial system increases economic growth with the help of
creating money, promoting trade, facilitating risk management and by mobilizing resources.
globally. The global financial system is also known to be highly connected to each other.
The firms also use the financial markets globally for raising the capital. The global financial
system will also increase the global trade with the help of financing mechanism outside the
banking system. The capital market globally involves stocks around $54 trillion. The
international financial system will be promoting the economic growth by creating more
money and facilitating the risk management. The capital allocation can be stated a system
which will be used for distributing the financial resources in various sectors for increasing
efficiency and maximizing profits. Allocation of capital is quit a complicated process which
requires a complicated process. The first phase which experienced the resource allocation is
before 1990 where the financial resources are known to be allocated equally among the
provinces. From the year 1991 to 2000, there had been unequal allocation of the resource

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which led to expanding gaps. After the year 2000, there had been present of slow adjustment
in as of equilibrium allocation.
Evaluation of emerging economy of China
The gross domestic product of China increased to 45% from 2013 to 2017. China also
ranks 91 for the ease of doing business. When China entered the world trade organizations, it
has become one of the most powerful engines in the world. The emergence of China in the
economy have provided huge benefits to the global economy. The economy of china is
known to be now slowing down and are also in the process of moving towards the different
models of growth and development. China also continue to attract a high level of inward
foreign direct investment. Although China have known to achieve prominent success in the
economic sphere. The slowdown of the Chinese economy is mainly due to both factors. One
is the eternal factor and the other is the internal factor. The external factor which is behind the
slowdown of China is due to the worldwide economic slowdown. The Chinese economy is
also known to be the socialist market economy. China is also known to be the world’s second
largest economy in terms of gross domestic product. The economy of china have enjoyed
thirty years of the explosive growth which makes China the world’s largest economy. The
success of China therefore was based on the mixed economy which was incorporated with
capitalism and command economy. The growth of the gross domestic products in the year
2017 was $23.12 trillion. However, the growth rate of this country have started to decline
since 2013. With the help of massive spending by the government, China has become one of
the industrialized economy. The massive growth of china have reduced the rate of poverty
where only 3.3 percent of the population lives below the poverty line. According to the

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research twenty percent of the population lives below the line of poverty. China is also
known to be the world’s biggest producer of the aluminium and steel. One of the main reason
for the high rate of growth of the economy of China is the massive rate of capital
accumulation as a result of the advancement of the technological structure. The improvement
of the gross domestic along with the national income have increased the domestic demand
which will also help in promoting the development of the tourism industry. The recent
economic situation of China is a downward trend of the growth of the economy. Both the
import and export growth remained at the low levels. The rapidly developing economy of
china is mainly due to the socio economic culture which comprises of industrial structure,
exchange structure, consumption structure and the technical structure. The improvement of
the gross domestic product of China have increased the demand which will promote the
development of the tourism industry. The reform of China is one of the most fundamental,
motivation for the economy development of China. The current economic situation of China
will a downward trend of the economic growth rate. Both the import and export growth
remained at much low levels. The shrinking of the external demand, sluggishness of the
foreign trade and the economic growth constraints are some of the major hindrance of the
economic growth. The market based economic system of China have made a huge change in
the economy of china. The trade agreements with China and the other countries which will
change the structure of the foreign trade (Gaur, Kumar and Singh 2014). China have also
transferred from closed and a semi closed society to a market based economic system. An
emerging economy is the one which has low to middle per capita income. As the income is
quite low, it is known as the emerging economy. The economy of china have an explosive
growth for the past thirty years. The success of china was mainly because of the capitalism
resent within the command economy. The government sending of china had been one of the
main reasons for the growth of china. With massive spending by the government, China have

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reached its growth. The leaders of China have also taken huge steps in order to boost the
domestic demand from more than one billion people. A strong market of the consumer will
allow China to rely very less on the exports. In order to increase the growth, Chia will be
needing more innovative companies which will be coming from entrepreneurship.
Figure 1 Growth rate of GDP in China
Challenges faced by China due to industrialization and trade policies
The twelfth five year plan will be the significant period for china for realizing the
strategic goal of the basic industrialization. Industrialization faces many challenges such as
the fast economic growth of china will be restrained by the rising demand in energy. China
also have to rely heavily on the export of the oil from the other countries which is one of the
major challenge (Ademola, Bankole and Adewuyi 2016). China also had to adopt an
environment friendly policy by reducing the emissions of the carbon di oxide and the energy

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consumption. The industrialization of china is also under the administration of the central and
the local governments which has resulted in regional protectionism.
The technological sources of the industrialization is dependent on the foreign nations.
However the self-innovative capacity of the Chinese technology is quite weak. One of the
biggest challenge is that more than fifty percent of the technology on which China relies is
basically foreign.
There is also a presence of contradiction between the natural resources and the
industrialization (Lai and Xia 2016). The industrialization of china have also resulted to huge
problems which includes high energy consumption which resulted to environmental
degradation such as worsening the quality of water, air pollution along with land
contamination. China is known to be at the middle stage of the industrialization. Although
China had gained rapid economic growth with the help of industrialization, it had negatively
affected in many parts. The environmental degradation of china have been getting worse day
by day resulted in huge economic loss which also posed severe environmental health risks.
The ration of energy efficiency of this country is also known to be thirty to forty percent
lower than the rest of the developed countries. The massive energy consumption also
exhausted the natural resources and brought huge environmental problems.
China is also a challenging pace for doing any kind of business. Some of the
challenges which the economy of China faces is the falling growth rate of China. The growth
of China was planned by the government as it have the command economic system. A falling
gross domestic product also means that tax revenue are also falling For the Chinese
government. The economic boom have led to huge development all cross China which have
risen as result of exports. As domestic consumption is the key factor, China will need to focus
in the underdeveloped internal areas. However, the interior China is still in the third world

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country mainly with very low standards of living (Gaur, Kumar and Singh 2014). His can be
challenging issue since minting a high growth rate with such poor infrastructure is known to
be quite difficult. With the fall in the revenues along with increase in the expenditures, it have
created shortfalls which will be filled with the help of borrowing money. The central
planning made by the Chinese government have also led to a massive rate of mal investment.
In future therefor, the industrialization of China will be facing hg problems such as lack of
capability to self-innovate the industrial technologies, limitations in the natural resources,
heavy pressure from employment and also imbalance in the development (Chen 2015). The
industrialization of China can be divided in to three main stages which comprises of the first
stage from the year 1953 to 1978. The second stage started from 1979 to 1999 And third
stage starts from the year 2000 when there will be reappearance of heavy industrialization in
china. The industrial structure of china is also not very well coordinated and the organization
is not rational enough in nature where in the share of the gross domestic product the ration
between the share of industry and the service sector is quite low.
Conclusion
The emerging economy of china have resulted due to the mixed economy. The strong
financial sector of China have recently evolved to meet the need of the modern economy. the
large population of china can also be seen as the greatest opportunity. However, there have
been a lot of risks in doing business in china. However, China have faced a lot of challenges
as a result of industrialization and trade policies. The financial markets also creates an open
and regulated system for the companies in order to get large amounts of capital which is done
with the help of stock and bond markets. China have experienced a huge shift from the
society which used to revolve around the sustenance in the agricultural industry into the
society which used to revolve around socialism. The changes in the economy of China
developed when there is change in the politics of China. The transition of the Chinese

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economy from the centrally planned economy helped the Chinese economy to expand.
Economic growth of a country have been regarded as an increment to the productive
capacity. China is therefore no more regarded as an underdeveloped country which had been
associated with poverty as a result of the closet door policy. The economic growth of China
regarded as the increment of the productive capacity. When the economy is strong, it will
help to improve the purchasing power of the people. China is also known as the fastest
growing economies in the world. China have also achieved as the second largest economy in
the world as well as the largest economy present among the developing nations.

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