Analysis of International Trade, Investment, and Finance in China

This report delves into the realm of international trade, investment, and finance, with a specific focus on the economic dynamics between the United Kingdom and China. It begins with an executive summary and an introduction that sets the stage for an in-depth analysis of the financial market...Read More

International trade
investment and finance

EXECUTIVE SUMMARY
International trade investment and finance enables expansion of process of trading in
country and enhances proposals for investment. It incorporates trading activities around globe
and enhances economic condition of nation by increasing its market share which ultimately leads
to expansion or development of nation.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................2
INTRODUCTION...........................................................................................................................1
EVALUATION OF ECONOMY OF THE CHOICE.....................................................................1
a. Background of financial market of country.............................................................................1
b. Capital allocation within domestic economy of the country...................................................1
c. Capital allocation in global market..........................................................................................2
CRITICAL EVALUATION OF CHALLENGS FACED BY THE COUNTRY DUE TO
INDUSTRIALISATION AND TRADE POLICIES.......................................................................2
Background of the financial market................................................................................................3
Shanghai Stock Exchange and Shenzhen Stock Exchange.............................................................4
Inter-Banks......................................................................................................................................6
Repo Market....................................................................................................................................7
OTC Market.....................................................................................................................................8
The Biggest Banks in China............................................................................................................8
Fiscal and Monetary Policy.............................................................................................................9
Capital Allocation within domestic and international market.......................................................11
Evaluation of challenges the selected company faces because of trade policies and
industrialisation..............................................................................................................................11
CONCLUSION..............................................................................................................................11
RECOMMENDATIONS...............................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
International trade and finance are essential drivers for growth of economy. It can be
described as market that consists trading or investment across country's border (Brini, Amara and
Jemmali, 2017). This report is based on study of international trade and investment of United
Kingdom in context to international market of China. This report covers financial market
background and capital allocation of UK in its domestic market. Further, capital allocation for
international market of china is evaluated. Along with it, challenges regarding policy
implementation for industrialization and trading is studied.
EVALUATION OF ECONOMY OF THE CHOICE
a. Background of financial market of country
Financial market is a place where investor purchase or sell securities. In case of China
this market has been divide into 2 sectors, money market and capital market.
Money market: This market is deal with short term securities which is valid for short period of
time. The liquidity of these security is high.
Capital market: This market is used for dealing with long term business securities. It is
categorised into 3 parts which define below:
Equity market: This market is dealing with equity shares related securities and bonds. It
is essential for any Chinese companies to incorporates in Shanghai stock exchange, or Shenzhen
stock exchange for dealing in equity market. This will help in issuing share specially for public
companies (Gu and Qiu, 2017).
Bond market: This is related with dealing of long term bond securities which increase
liabilities of organizations. Financial institutions, banks exchange market and OTC deal with
bond marten.
Stock Index future: Securities market is dealing with offering various kinds of securities
which include future derivates, bonds, shares, all these are traded in this market.
Any business entities to run their business in effective manner can invest money in capital as
well as money market as per their needs and business requirement.
b. Capital allocation within domestic economy of the country
Capital allocation means a process of disturbing and allocating the financial resources of
an organization for the purpose of enhancing the organization's long term financial stability. If all
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resources and capital are allocated properly then it will be opportunity for business to grow and
attain the higher profitability (Jensen, Quinn and Weymouth, 2016). This is main activity which
is required to be done by management by evaluating the activities and performance that is
required to be complete on time. In relation to trade and investment activity of United Kingdom
is required to allocation the funds and resources by employer who have established their business
for the purpose of managing their performance. It has examined that government of domestic
country has formulated different regulations and policies for allocating the funds particular
activities and also charges the tax at the fixed rate which can help to operate the business and
make the strong the economy. For instance, the allocated funds are uses to complete the task in
given period and collected funds are uses to do some social work which provide the higher
opportunities. This helps to develop the economic condition and sustainability of country.
c. Capital allocation in global market
Capital allocation is referring to how country is decides to spends that money and
distributing in investing a company and find the resources in various forms to increase the
efficiency and effectively to maximize the profit (Keller and Utar, 2016).
China allocation its capital international through analysing certain methods and its
structure is shifted with capital outflow over past decades and it is accumulated foreign exchange
reserves by central banks. There is huge domestic saving that has impacts the global financial
market as china is open capital account to increase the returns and investment. It allocates it
capital to many western and eastern countries and it is increasing day by day. Some of important
countries has been the top list in China to invest. There are many advantages that county has
played in world that it has lower human capital requirement and maintaining the whole resources
effectively (Kirchner, 2019). It has broad concept in diversification and concentrate on
investment in other countries and providing various advantages to other nation to invest and
facilitates in higher investment. It has been allocating its resource's in some different forms that
will be very useful for them in many sectors.
CRITICAL EVALUATION OF CHALLENGS FACED BY THE COUNTRY
DUE TO INDUSTRIALISATION AND TRADE POLICIES
As industrialisation is the period of economic and social change which transforms the
group from a society into an industrial society. It consists and involves the extensive re-
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organisation of the economy for the purpose of manufacturing and trade. It can be evaluated that
due to industrialisation and trade policies different countries are facing challenges and problems
of trade and exports and imports of the country 's goods (Latief and Lefen, 2018). The different
challenges and problems that are faced by China due to industrialisation and different trade
policies are as follows:
 There is a continuous fall in the economic growth rate in the Chinese products. As their
growth rate has been unprecedented for the countries.
 There are regional imbalances that the country is facing which from the coastal to the
internal levels of the country 's products and services in trade.
 The country is facing the high tax revenues and expenses on the trade of the products and
services in different countries in import and export of goods.
 China is facing the problems of the export driven economy to the consumption driven
economy in different countries.
 The country is facing the problems in manufacturing the and the banking viability in the
trade policies of the goods in imports and exports to the different countries (Rodrik,
2018).
 The country is facing the slow economic growth due to industrialisation and tax policies
as the China is facing different issues in importing and exporting the goods to other
different countries in the world.
 China is facing the high risk of new round of the deflation which can be proved to be a
disadvantage in the country 's economic growth.
Background of the financial market
This section will examine the role of China’s financial market and the role it plays.
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Figure 1.0
Shanghai Stock Exchange and Shenzhen Stock Exchange
They are two main stock exchanges in china one of them is Shanghai Stock Exchange
(SSE) which is the largest stock market in China, in terms of overall market capitalization and
trading volume. It’s total market capitalization was $4.1 trillion in 2016. The second one is
Shenzhen Stock Exchange (SZSE) which is a smaller exchange than SSE under the supervision
of the China Securities Regulatory Commission the main function of SZSE is to overview
securities trading and operational rules. Its market capitalization was $3 trillion in April 2015.
On the SSE they are two main classes of stock for every listed company, A shares or B shares. A
share. A share is quoted in Renminbi (RMB) and was only available for mainland citizens and B
shares is quoted in foreign currencies such as US dollars for foreign investors (Investopedia,
2020). Previously foreign investors had trouble obtaining A-share because of the Chinese
government regulations, and Chinese investors also had trouble navigating B-share, particularly
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for currency exchange reasons. As China expands from a developing market to a developed
economy there is a large demand for Chinese equity. Though foreign investors may now invest
in A share there is 20% limit on the return of funds to foreign countries on a monthly basis
(World bank, 2020).
Figure 1.1
At end-2018, the SSE ended on 2494, falling by 813 points year-on-year, while the SZSE closed
at 7240, reduced by 3800 points year-on-year. The revenue on the Shanghai and Shenzhen Stock
Exchanges averaged RMB 90.3 trillion for the full year, reduced by 19.9% year-on-year.
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Figure 1.2
Inter-Banks
China's bond market is the second largest in the world (USD 13.9 trillion in Q3 2019).
The China Interbank Bond Market (CIBM) was founded in June 1997 when the People's Bank of
China (PBOC) required all commercial banks to transfer their repo and bond trading out the of
stock exchanges in an interbank market that functions through an electronic trading system. The
main debt instruments exchanged in the CIBM include government bonds, PBOC bills and other
financial debts. Interbank bond market participants are all big institutional investors, such as
commercial banks, credit unions, security firms, insurance companies and fund institutions
(Clear stream, 2020). China's bond markets were separated directly after the development of the
interbank market. Bond markets were established on the Shanghai and Shenzhen stock
exchanges in 1990 and 1991. These modern exchanges were the key to the growth of the bond
markets for key problems, secondary trading and repurchase transactions. Even so, after the
equity and real estate peaks of the early 1990s, the PBC established an interbank government
bond market in 1997 to enable commercial banks and other qualifying participants to trade
bonds, as the banks were no longer able to engage in trading on the exchanges.
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Figure 1.3
In 2018 the repo trades and credit lending totalled RMB 862 trillion raising by 24% year on year.
The total of interbank lending achieved RMB 139.3 trillion raising up by 76% year on year.
Repo Market
The repo market is a central component of the new global financial system. There are two
forms of interbank lending, one on credit and the other on the repo market, which has been the
most significant, this type of lending is normally short term amongst banks, non-bank financial
institution, and investors. It also serves as a major platform for the central bank’s open market
operations, the major commercial banks being the significant supplier in the repo market. Fan
and Zang studied the connection between china’s inter-banks and repo market using data weekly
from January 2000 to December 2005. The study potrayed the exchange repo rates were notably
greater than the interbank repo rates, mainly during the period 2000-2002. While these studies
explored the factors of interbank repo rates and the segmentation of the two repo markets, they
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were more focused on the earlier time when China's repo market was still in its infancy.
However, during the last 10 years study shows a massive growth from 2007 to 2016. The annual
trading volume of repos in China increased 12 times to 564 Trillion RMB in the interbank repo
market, and by 116 times to 211 Trillion RMB in the exchange repo market (FMA Conference,
2018).
Figure 1.4
OTC Market
OTC (Over The Counter) is a type of transaction that varies from the exchange of
securities. OTC is a market which trades stocks, services, currencies, or other instruments solely
between both parties without a central exchange or broker. Most of the products are widely
traded Over The Counter include bonds, stocks, structured products and currencies. Due to the
security, over the counter often lacks buyers and sellers due to the market stock is being traded
(Investopedia, 2020).
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The Biggest Banks in China
The 21st century has found China to hold an extremely high position in global finance, in
fact the 4 biggest banks in the world are all Chinese banks in order of assets (Investopedia,
2020).
The Industrial and Commercial Bank of China (ICBC) is the biggest global bank in the
world, estimated by assets over $4 trillion in 2019. The bank was founded in 1984 as a limited
company operating in business loans to manufacturers, retailers, power companies as well as
other companies (Investopedia, 2020). ICBC was listed on the Shanghai Stock Exchange and
Hong Kong Stock Exchange in October 2006. ICBC was ranked 1st place amongst the 1000
world banks (IBCB, 2020)
The China Construction Bank (CCB) is one of the oldest bank in China it was founded in
1954 it has $3.38 billion assests in 2019. It was listed in the Shanghai Stock Exchange in
September 2007. CCB offers their client extensive financial services, including personal
banking, corporate banking, investment and asset management (CCB, 2020).
Agricultural Bank of China Limited (ABC) is one of the leading financial services
providers in China holding $3.29 trillion in assests. In July 2010, the bank was listed on both the
Shanghai Stock Exchange and the Hong Kong Stock Exchange. Since 2014, the Financial
Stability Board also included the Bank in the list of Global Systemically Important Banks for 3
years (ABC, 2020).
The Bank of China (BOC) was founded in 1917 in Hong Kong it is the oldest bank in
existence in the mainland. In 2009, the bank was listed as China's second-largest provider of
loans, a role it currently holds. Its total assets amount to $3.092 trillion. For more than 40 years
BOC has been the country’s foreign exchange specialist and has made it to the country’s largest
international bank (BOCHK, 2020).
Fiscal and Monetary Policy
As most countries regulate their money supply through their central banks. The People
Bank of China (PBOC) controls the money supplied in China. Due to its peculiar export-
dependent economic structure, China's money supply policies differ from approaches used by
other nations.
Money supply is the total amount of money circulating at a given time. Money supply
effects a countries inflation rate, price levels, availability of capital, the general market and
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economic cycle. High pace of circulation leads to more spending and lower interest rates
increasing the amount of funds available for business and investment. One way China controls
its money supply is by the forex rate one key task of PBOC is to manage massive inflows of
foreign capital from China's trade surplus. PBOC buys foreign currency from suppliers and sells
foreign currency in local yuan currency. PBOC are able to publish any amount of local currency
and to exchange it for forex, this publish makes sure forex rate stays fixed which means the
Chinese exports stays affordable and China holds it’s advantage of manufacturing exports
oriented economy (Investopedia, 2020).
Another way China controls its money supply is by printing more money. This can be a
disadvantage because the more money you print the higher the inflation rate would be. Higher
inflation means prices of goods increasing which is disadvantage for the economy. That being
said, China has strong state-dominated controls on its economy, allowing it to control inflation
significantly from other countries. Inflation rate is calculated by the formula (1+i) = (1+r) (1+π).
This is known as the Fishers equation which is a theory in economics that explains the
relationship between nominal and actual interest rates under inflation. The concept implies that
the nominal interest rate is equal to the amount of the actual interest rate plus inflation. the
current inflation rate of China is 1.582, however due to Covid-19 this is due to increase (World
bank, 2020).
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Figure 1.5
Capital Allocation within domestic and international market
 The important document which shows that the private sector outward FDI of china
have been increase in last few years from 10 % in 2010 to 45% in 2018. It helps in
determining the case that china private firms will converts all the external liabilities
situations in a balanced circumstance where as a results the government sectors will
lower the net assets status respectively in the context of the country GDP.
 It is observed that the capital has been increased by making a document for the
Ministry of Finance bond in which the total amount of 150 RMB billion that help in
maintain a decent moment in market condition. The subsidiary company, Central
Huijan mainly operates in equity investment which is a primary state owned lending
organisation within China. The value of US dollar is equivalent to the calculation at
the end of the calendar year where the exchange rate is 6.876 RMB, thus the bond
values are calculated are not included in the annual report of companies dealing in
the international markets.
 The holding of the US trading equities and securities are basically centred by filling
the form 13F with securities and commission of exchange. It is observed that in
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February 2019 there have been 123 companies dealing in fund management which
are register through the platform of CSRC and the total capital of RMB 3.6 million.
 From the database of CPIS, USA and Hong Kong combined together a total of 70%
of Chinese IIs in year 2017 as well as all the primary 20 locations nations in 2017
that are reported as per the data factsheet or CPIS information.
Evaluation of challenges the selected company faces because of trade policies
and industrialisation.
Incomplete transition to a market economy:
As per the views of Chinese authorities the respective country is “socialist market economy that
indicate that ruling parties allow and accepts the use of free market variables in different field
and aspects that directly support to grow and expand the country which can have a negative
impact over the entire Chinese economy. Problems have been increased in last few years over the
effect of due to increased international steel production despite reducing the steel demand all
over the world. Due to unplanned growth in china steel making ability as well as the
international steel overburden have badly influence the US market as a results of decrease in
price, downfall of profitability and also a major proportion of job loss (13000).
State of dominated banking firms, credit risk and increasing of debts.
As per the published report of 2019 Chinese economy it has been determined that around 85% of
SOEs have a major debt of ($1.4 million) which gives clear idea that these firms do not pay their
debts or loans and as a result most of the top bank of china have a larger proportion of non
performing loans.
CONCLUSION
After a brief analysis of above report, it has been concluded that international trade has
been rising with evolution of time. In this competitive era, it has been examined that it is
critically important to have relevant information regarding this international trade as well as
finance so that it is easy to access to positive output. Further, businesses need to scan market &
environment so that decision making is being carried out in effective manner. With this
competitive era, trade war has been increasing due to motive of earning more benefits in
international countries. So, it is essential to have appropriate information regarding way of doing
business internationally.
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RECOMMENDATIONS
To economy of China, it has been recommended that effective policies must be adopted
so to improve trade as well as performances within domestic and international market. Practices
of governance should be increased in China so that better economic stability in investment and
trade can be fostered. Moreover, it is also recommended to put focus on trade agreements of the
country with other nations so that importing and exporting are increased and better capital flows
are ensured from international markets.
As Brexit have impacted drastically in UK because of which trade in China and
international market is becoming critical. For this, it is recommended to join contractual hands
with neighbouring nations by signing bilateral trade agreements with effective tariff rates for
further expansion of economic corporation.
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REFERENCES
Books and Journals:
Brini, R., Amara, M. and Jemmali, H., 2017. Renewable energy consumption, International
trade, oil price and economic growth inter-linkages: The case of Tunisia. Renewable
and Sustainable Energy Reviews. 76. pp.620-627.
Gu, Y. and Qiu, B., 2017. Foreign student education in China and China outward direct
investment—Empirical evidence from the countries along “One Belt One Road”.
Journal of International Trade. 4. pp.84-95.
Jensen, J. B., Quinn, D. P. and Weymouth, S., 2016. Winners and losers in international trade:
The effects on US presidential voting (No. w21899). National Bureau of Economic
Research.
Keller, W. and Utar, H., 2016. International trade and job polarization: Evidence at the worker-
level (No. w22315). National Bureau of Economic Research.
Kirchner, S., 2019. State of confusion: Economic policy uncertainty and international trade and
investment. Australian Economic Review. 52(2). pp.178-199.
Latief, R. and Lefen, L., 2018. The effect of exchange rate volatility on international trade and
foreign direct investment (FDI) in developing countries along “one belt and one road”.
International Journal of Financial Studies. 6(4). p.86.
Rodrik, D., 2018. What do trade agreements really do?. Journal of economic perspectives. 32(2).
pp.73-90.
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