by: Amanda Casey & Colin Whitaker
Since the Chinese industrial revolution, the People's Bank of China has enforced strict expansionary monetary policy. Key features of this were capital controls which placed cash outflow and investment restrictions on individuals and corporations. Currently individuals cannot move more than $50,000 out of the country per year, and businesses need special permission to invest outside of China. These policies served to keep money cheap and depreciate the value of CNY in order to encourage growth and exports. However, China has started to move towards a more market driven economy.
China announced on 9/29/2013 that they would be establishing a 29 km free trade zone (FTZ). On 12/2/2013 a detailed report of economic reforms in the FTZ was released. In the FTZ, foreign companies will be allowed to sell yuan denominated bonds, foreigners can buy and sell Chinese bonds and equities directly, Chinese investors can buy overseas financial products without going through the QDII, and the capital account will be deregulated. Furthermore, restrictions on social media will be lifted and foreign communications companies will be allowed to get service licenses. All of this comes on top of news that Chinese IPO laws will also be reformed which will end the 13 month moratorium on IPO's and get rid of the restrictions on foreign investment. The announcement of the reform came with an 8.3% drop in the Shanghai Composite Index. This may have been caused by worries of oversupply amongst investors. Despite the short run drop, economists believe that the reform will cause enhanced long-run expectations.
The FTZ is an experiment by the Chinese and as such will most likely not have a major effect to the Chinese economy on a large scale. However, residency is not required to set up an account within FTZ and could therefore become used much more than authorities intended. But the expectations is that there will be large economic growth within the FTZ which after some time may spread to the surrounding areas. Despite this, there is still the possibility of macroeconomic effects.
China wants to continue expanding its economy, to do this they need to keep investment and exports high, seeing as they are an export economy. The negative outcomes of deregulation include a drop in the money supply, a drop in domestic investment, and then a reduction in GDP. There is also concern over what will happen to the value of the CNY. The Chinese want to keep the CNY depreciated to make Chinese goods cheaper to foreign consumers. If the value of the CNY increases, Chinese exports would drop. Despite these risks there is still good reason for China to open up its markets.
Currently China is experiencing a credit crunch. Rapid growth has led to bad loans, white elephant projects, and large amounts of debt held by the government, companies, and lenders. Even with the large money supply, it has become very difficult in the last year to get loans from Chinese banks. The reforms may provide new and much needed financing options for Chinese companies.
References:
Chinese Credit Binge
Chinese IPO Reforms
South China Morning Post
New Geography Article on FTZ
Bloomberg FTZ analysis
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