Advanced Topics in Intl Trade and

Finance
Under Focus:
-Geopolitical and trade aspect (Shaheer
Khan)
- Financial system (Jon Wright)

Chinas Go West Policy

Eastern China saturated. Growth slowing
down.
71.6% of Chinas land area covered by western
provinces
But not much development in the west
Future Chinese economic growth to come
from the development of western China
BUT HOW TO SUPPLY ENERGY TO SUPPORT
THAT DEVELOPMENT?

Arabia Sea Gawadar Port in Pakistan

Construction started 2002
Phase 1 has been completed.
Phase 2 under construction now

Gawadar in 2002

Gawadar in 2012

Low construction cost due to the natural shape of the

land that protects ships from bad weather:

Currently a 16,000km trip for a ship (2

to 3 months) from Saudi Arabia to
Shanghai

Oil imports + Goods Exports

Oil supplies directly moving into the inner
provinces of China (2000km trip) rather than first
going to Shanghai and then moved inland
Bulk exports from inner provinces travelling south
through Pakistan, and shipped from the Gawadar
port
Very large savings in transportation costs
Risks that Chinese ships face from pirates, bad
weather and political rivalry on their way to China
eliminated

Easier to do in the Chinese system

Due to the centralized aspect of the Chinese
system, risky decisions are faster and easier to
take
Chinese government does not have to worry
as much about getting votes passed through
the Senate/Congress, a long process that can
take decades

The Financial Aspect

This is a $43 Billion project. So how does the
Chinese financial system make financing
available for such large projects? What are
the challenges being faced by the financial
system?

Bank Ownership
Pre-reform periods (1949-1978)
- Peoples Bank of China virtually
the only bank,
- merged with the Ministry of
Finance until 1978

Plural Bank system

1983 Big 4
1986 Big 5

Big 4 Division of Responsibilities

The Bank of China (BOC)
listed Dec 2005

Financing foreign trade and

investment

The China Construction

Bank (CCB)
listed June 2005

Financing construction and fixed-asset

investment

The Industrial and Commercial Bank of

China (ICBC)
listed June 2006

Financing the business activities of the

SOEs

The Agricultural Bank of China (ABC)

listed 2010

Financing the rural and agricultural

sectors

All four banks are among the largest 10 banks (by assets) in the world.

Shadow Banking

estimated 27 trillion RMB in 2013, i.e., 47% of

GDP
Share of new credit doubled 20% to 40% from
2008 to June 2013

Set rates
Interest rates (of deposits and lending) are set
administratively (net interest margin approx.
3%).
Floor on lending rates removed July 13
Banks are allowed deposit interest rate of 1.1x
base rate.

Fixed Exchange and Banks

Government must purchase foreign exchange
Excess money supply must be sterilized
Strategy 1: Banks must purchase bills at low rates
Strategy 2: raise reserve requirement ratio