Abstract
The rapid rise of china as a major economic power within a very short span of 30 years is often described as one of the greatest economic success stories in modern times. This year china celebrated its 60th year anniversary and legacy of communism ideology. For the past 30 years, they have opened and strengthened diplomatic relation with US. The real gross domestic product grew at an average annual rate of 10%. Over the years china has expanded its trade with several countries. Economic reforms have transformed it in to a major trading power. Chinese exports rose from $14 billion in 1979 to $1,429 billion in 2008. It has accumulated world’s largest foreign exchange reserves, nearly $1.95 trillion. It has achieved to maintain its exchange rate with the dollar and other currencies. It has launched China Investment Corporation, one of the world’s largest sovereign wealth funds to manage its foreign exchange effectively. China has grown so fast that it has realized that it might become a global power much faster than it thought. It is treated as a de facto global power by the US, at least with regards to economic matters, with the two countries for all intents and purpose forming a G2.

After the global financial crisis China’s capital market including other countries were seriously hit. Global capital markets are now entering a new era in which the forces fueling growth have changed. Chinese banks may not be giants by any measure apart from their outsize market capitalization and Chinese policy makers may not be as powerful as their western counterpart but still they are certain to play an increasingly role in the global financial services market that may change the dimension of the global capital market. With the deepening of financial reforms and expansion of financial markets, the accumulated risks hidden in china’s financial system are gradually being exposed. China’s capital market is still not ready to meet its future economic development needs and it is still small and at an early stage with unbalanced development of bond and equity markets. Currently is facing several issues such as lack of talent, global financial know-how, little direct financing, weak market mechanism, low corporate governance and low level competitiveness. For the development and stability of the financial sector, Chinese authorities need to develop and promote the financial industry in order to reduce the financial risks.

In the first phase of 30 years, china was able to successfully strengthen its manufacturing sector. It has transformed the country from agriculture oriented to industry oriented and is being called as the global leader of manufacturing. Trade surplus made it to strengthen its foreign reserve and expand its base all over the world. To achieve the global power it should be strong in both manufacturing and financial sector. So, in the second phase it should focus on its financial sector for the long run, by doing so it can then be the global giant.

This paper will discuss about the prospects and obstacles for china to be the global leader in financial market by analyzing existing banking, capital market and foreign exchange market

Keywords: Financial Market, Global Power, Reform, Corporate Governance
1 Emeritus Professor of Economics, Ewha Womans University, Current Visiting Professor at Institute of China Studies, University of Malaya, Kuala Lumpur, email: isyoo42@gmail.com
2 Research Fellow, SK Telecom, email: saumya@sktelecom.com
I. Introduction

China celebrated its 60th year anniversary and 60th year of Mao’s legacy of communism ideology in October 1, 2009. The legacy has changed the political and economic developments of the nation. This year is also the 30th anniversary of China Reform and Opening Policy of Deng Xiaoping. Deng’s model of reform and opening-up of China, the second historical epoch of modern Chinese history. China, the once formidable empire of the mainland China was in the verge of collapse during the beginning of the 19th century. During this period several western powerful nations has strengthened their base. Corruption, poverty, and diseases were widespread making the country vulnerable to western propaganda.

Post 1945, after World War II, the country faced civil war and was torn into two fractions, the Nationalists and the Communists. The two political entities fought for control of China and eventually in 1949, the Communists party under Mao Zedong emerged victorious against the Kuomintang and claimed to be the sole legitimate government of China. With a solid historical setting and modern stewardship under current successor Mr. Hu Zintao whose ambition to make China a strong and powerful nation in the world, China has gained tremendous developments in every aspects i.e., industry, trade, diplomacy, financial, etc. Before the rise of China, there was only Pax Americana. Now, China can be Pax Sinica in the East. The country has high vision for the next 30 years. Mr. Hu not only strengthened the economy and diplomacy of China, but also strengthened the defense power in the region and in the globe.

Even though China is playing a constructive and vital role in a number of international fonts, it certainly did not achieve the global attention as much of the steps taken only for the benefit of China, not only the global community. In future the country will face several issues from internal to external issues. But the image that it would like to cultivate, as a responsible, unthreatening, emergent superpower, is constantly being undercut by its steps which are focused solely benefit for the country without considering the effect it can cause to the global community. For many Chinese daily lives remain a grim struggle and their government rapacious, arbitrary and corrupt. But on the world stage, they have never stood taller than today. China’s growing military, political and economic clout has given the country an influence of which Mao could only have dreamed, yet Chinese officials still habitually complain that the world has not accepted China’s emergence.1 Several global and Chinese scholars have debated that an infusion of grassroots democracy might ease several problems, but the issue is who will step forward. China’s 2,800 odd countries are still under the mercy of their prefectural level superiors.

After the global financial crisis, China is facing several problems internally to its economic growth and stability, millions of workers lost their jobs, manufacturing industries getting closed, pervasive government, corruption, over-dependence on exports and fixed investment for growth, widening income disparities and an inefficient banking system. These problems pose a threat to promote balanced economic growth. Since the initiation of economic reforms 30 years ago, China has become one of the world’s fastest-growing economies. The rapid rise of China as major economic power within a very short span is often described by analysts as one of the greatest economic success stories in modern times. However, the emergence of China as the major economic superpower has raised concern among many policy makers.

1http://www.economist.com/PrinterFriendly.cfm?story_id=14548871
China’s economy and its economic policies are of major concern to many countries. After the financial crisis, several countries have expressed their concern over the large and growing trade deficits with China (Table 1.0). Many analysts hope that China will make positive contributions to a global economic recovery. However, the world is yet to see such efforts.

China’s capital markets development has been closely linked to and driven by China’s economic reforms, and in return has contributed to the economic development2. Under the planned economy resources were planned by administrative means, resulting in low efficiency, with the gradual; move to a market economy, China’s capital markets have become an important platform for resource allocation. Capital market is still dominated by large scale enterprises and several reforms have been conducted in the past years aiming at improving marker regulation and supervision, strengthening the legal framework and improving market infrastructure and functionality.

With the deepening of financial reforms and expansion on financial markets, the accumulated financial risks hidden in China’s financial system are gradually being exposed. While the big four state-owned commercial banks are facing the problem of non-performing loans, some of the small and medium-sized financial institutions are running high risks because of keen competition and poor management, some have even payment crises. For the development and stability of the country, Chinese authorities need to develop and promote healthy development of the financial industry there by reducing financial risks and keeping the financial institutions sound.

After the global financial crisis, China’s capital markets including other countries’ were seriously hit. Global capital markets are now entering a new era in which the forces fuelling growth have changed. Chinese banks may not be giants by any measure apart from their outsize market capitalization and Chinese policy makers may not be as powerful as their western counterpart, but still they are certain to play an increasingly role in the global financial services markets that may change the dimension of the global capital market.

This research examines the past and the existing capital market of China and emphasizes the necessary steps it should take to become the global leader. Since the capital market and the economic development are closely linked, the authors have reviewed China’s historical, political, and economic background, reform and open policy and subsequently discussed about China’s future and conclusion.


II. Socio Political Situation of China (Reform after 1949)

1) Mao Zedong Era (1949 – 1976) People’s Republic of China: Mao’s Era:

During this era, Mao had made his socialism strategy very concrete. China saw several high level developments in agriculture and industrial sector. Mao took several measures to achieve great leap toward socio economic equity. This period is officially designated as “transition to socialism” corresponded to China’s First Five-Year Plan (1953 – 1957). Several efforts were made to achieve industrialization, collectivization of agriculture and political centralization. The Plan stressed the development of heavy industry on the Soviet model.

2 China Securities Regulatory Commission-Capital Market Development Report, 29th January 2009
Soviet economic and technical assistance played a significant part in the implementation of the plan. The government during this period nationalized banking, industry, and trade, leaving no space for private enterprise which was virtually abolished. Major political developments like centralization of party and government administration were introduced.

2) Deng Xiaoping’s Period (1981 – 1989), Era of Reconstruction: “Riding the Tiger”

After the death of Mao, the second generation Socialist Hua Guofeng, who ruled between 1976 and 1980, introduced several changed but still followed the footprints of Mao. After taking power from Hua Guofeng, Xiaoping saw the growing opportunity for the communist party to control the country. After realizing that open and reform policies are important to economic development, he started the open and reform policy in 1979. During this period, Deng made it a point that the individual farmers should own lands. Also the industrialization was liberalized. In order to improve efficiency, Deng gave more favor for industrialization. The farmers are allowed to explore know-how and machinery to improve China’s productivity.

Deng clearly communicated to the people that whether the cat is black or white, it is not an issue. It should be able to catch a mouse full and grow rapidly. This means whether the county is capitalist or a communist; it should have positive growth in industrialization and reformisation of other areas. Deng also develop special economic zone. He has given subsidiaries to develop socialism infrastructure that gained self confidence of people to move toward the economic war. After getting success in the domestic market, he opened policies outside China and thereby introduced China to the other part of the world. Although Deng was successful in developing China in view of economic development, but on the other hand, people were not satisfied as Deng did not want to accept people’s ideology of democracy.

3) Jiang Zemin’s Period (1989 – 2002) The Rising of Power

Under his leadership, China experienced substantial developmental growth with reforms, saw the peaceful Hong Kong from the United Kingdom and Macau from Portugal, and improved its relations with the outside world while the Communist Party maintained its tight control over the government. After taking power from Deng, Jiang had built a strong relationship among the military and the non conservatives. One group who openly supported for democratic faced severe massacre, several students protests were also seen during this period. Global community insisted China to follow the order of human rights liberty.

Jiang was successful in economic development and the open door policy. He had active foreign policy focusing on economic development. Chinese started working hard under three major life principles.
1. Represents advanced social productive forces (Economic production): To work hard until the incense burns to ashes.
2. Represents the progressive course of China’s advanced culture (Cultural development): To raise power it should be brighter and should lighten the rest of the world.
3. Represents the fundamental interests of the majority (Political consensus): Should stand as a strong nation in the world.
China realized that if they can achieve these then the country can be at par with the major global powers such as US and EU nations. Jiang tried to develop technology, economy and defense, and tried to strengthen country’s trade policy of trading which can strengthen China’s economic position and can drive for money reserve.

4. Hu Jintao (2002 – present) : China Today

Jiang’s policy was mainly focused on agriculture and industrial reforms. He was successful to have an economic growth of more than 10%. Hu with the same Confucian background emphasized on economic developing and rectifying the disparity in the society. He believes that the capitalization of the society should be built towards the equality based rather than society with lots of disparity. Hu tried to strengthen foreign policy in order to make China as a strong nation in the global politics. Until today, China is facing number of conflicts with ASEAN countries mainly because of the territorial disputes. The main reason for these disputes was because of possession of the island resource such as oil and gas and other minerals. Despite of several issues, Hu was able to successfully built modern China by changing the shape of skylines, successfully held the 2008 Beijing Olympics and exhibiting several exhibitions to show case China’s strong technology capability. The opening policies of Hu have both positive and negative impacts. The government has an industrialization policy which will have extensive growth, as a result will reduce the poverty gap. But this growth is not a proper development among the people. Subsequently there may be dissatisfaction and no unity among the people.

China has sought to expand its trade with countries around the world who pose threat to the global community, especially those that possess energy and raw materials and can support for its rapid economic growth i.e. Iran, Sudan, and North Korea. Chine communist rulers made it clear that China does not want to accept western democracy and will continue to rule as a communist national and will keep an open economy system. Chinese communist party is towards declaring socialism but there is no proper indication that this is possible in the near future. In another 30 years, many analysts believe that China will build Pax Sinica. Can China lead the world alone without US?. America is a polarization of sort. G-2 now stands pivot on US and China, as one being the world veteran leader and the other protégé in the making. China can have cooperation with US for long term sustainability for another thirty years to come. US and China, one with capitalist ideology and the other with communist ideology to lead the world can be a good model. Other countries can learn the development model from them especially after the collapse of communism in other smaller countries.

At this time of economic recession that was triggered by US, the global community should take in to account on how USA can handle the economic recession and how China can efficiently manage the coming crisis. China, during the convention in March 2009, it was announced that it will first focus on domestic development and to maintain the economic growth. This fulfillment of the domestic economic growth can be a solution to tackle the crisis. China has plans to provide 4 trillion yuan stimulus budget to recover its domestic economy. If China could successfully bring its own economic growth of more than 8%, it will be an indicator for China’s capability to get out of the financial crisis.

It is difficult for a socialistic country to switch over from manufacturing industrial development to banking and financial development; this is a major issue for China because in order to reach the level of financial strength with other developed countries, it should change its policy to focus more on banking sector and financial improvement in addition to industrial improvements and it can be the best way for China to achieve great leaps.
III. Current situation of Chinese Economy

Since the initiation of economic reforms 30 years ago, China has become one of the world’s fastest growing economics. In the last 5 years it has grown at an average of 10% (Table2.0). From 1979 to 2008, China’s real gross domestic product grew at an average annual rate of nearly 10%. The rapid rise of China as a major economic power within a time span of about 30 years is often described by analysts as one of the greatest economic success stories in modern times. China’s economic rise has led to a substantial increase in U.S.-China economic ties. Total trade between the two countries surged from $5 billion in 1980 to $409 billion in 2008. China also purchased large scale US securities that enable the US federal government to fund its budget deficits.

The Chinese government views a growing economy as vital to maintaining social stability. But despite of the development China faces a number of significant economic challenges, including the fallout from the global financial crisis, a weak banking system, widening income gaps, growing pollution, unbalanced economic growth, and widespread economic efficiencies resulting from non-market policies.

China’s economy has suffered a sharp slow-down as a result of the global financial crisis, largely caused by a decline in foreign demand for Chinese imports.3 after experiencing double-digit growth in monthly exports from January to October 2008, Chinese monthly exports have declined. They fell by 2.2% in November 2008, 2.8% in December 2008, and 17.5% in January 2009. During the same period, China’s imports dropped even more sharply: 18.0%, 21.3%, and 43.1%, respectively. China’s FDI flows have declined as well; in January they fell by 5.7% on a year-on-year basis. Real GDP growth is slowed and many analysts predict the economy will slow even more sharply in 2009. Millions of workers have already lost their jobs. China also faces number of other challenges to its economic growth and stability, including pervasive government corruption, an inefficient banking system, over dependence on exports and fixed investment for growth, the lack of rule of law, severe pollution and widening income disparities.

Till 1979, China maintained a centrally planned, or command, economy which was mostly controlled by the state, which controlled prices, and allocated resources throughout most of the economy. As a result, by 1978 nearly three-fourths of industrial production was produced by centrally controlled state-owned enterprises according to centrally planned output targets. Private enterprises and foreign-invested firms were nearly nonexistent. Government policies kept the Chinese economy relatively stagnant and inefficient, mainly because there were few profit incentives for firms and farmers; competition was virtually nonexistent, and price and production controls caused widespread distortions in the economy. Chinese living standards were substantially lower than those of many other developing countries. Beginning in 1979, China launched several economic reforms. The central government initiated price and ownership incentives for farmers. Government established special economic zones to attract foreign investment, this boosted exports. Economic control of various enterprises was given to provincial and local governments, which were generally allowed to operate and compete on free market principles, rather than under the direction and guidance of state planning.
Since the introduction of economic reforms, China’s economy has grown substantially faster (Table 3.0).

3 Congressional Research Service Report for Congress, United States, March 2009
During the pre reform period the real GDP grew at 5.3% and during the reform period, it grew by 9.9%; economic reforms helped to increase the per capita GDP. China’s Economic Growth can be attributed to two main factors: large-scale capital investment financed by large domestic savings and foreign investment and rapid productivity growth. China has historically maintained a high rate of savings. When reforms were initiated in 1979, domestic savings as a percentage of GDP stood at 32%. Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings (these now account for half of Chinese domestic savings). As a result, China’s gross savings as a percentage of GDP has steadily risen, reaching 52% in 2008 (compared to a U.S. rate of 8%), among the world’s highest savings rates.

China’s decentralization of the economy led to the rise of non-state enterprises, which tended to pursue more productive activities than the centrally controlled SOEs. Additionally, a greater share of the economy (mainly the export sector) was exposed to competitive forces. Local and provincial governments were allowed to establish and operate various enterprises on market principles, without interference from the central government. In addition, foreign direct investment (FDI) in China brought with it new technology and processes that boosted efficiency. Economic reforms have transformed China into a major trading power. Chinese exports rose from $14 billion in 1979 to $1,429 billion in 2008, while imports over this period grew from $16 billion to $1,132 billion (Table 4.0)4. In 2004, China surpassed Japan as the world’s third-largest merchandise trading economy, after the European Union (EU) and the United States, and in 2007 it became the second largest exporter, surpassing the United States (and was the second largest in 2008). China’s exports have grown dramatically in recent years, more than doubling in size from 2003 to 2008, with an average annual growth rate of nearly 27% and Imports over this period increased by an average of 19% per year. China’s trade surplus, which totaled $32 billion in 2004, surged to $297 billion in 2008. It has accumulated the world’s largest foreign exchange reserves, nearly $1.95 trillion at the end December 2008, making it the world’s largest holder. Large trade plus, large scale foreign investment and large purchases of foreign currencies to maintain its exchange rate with dollar and other currencies have enables to achieve this. Since early 2000, Chinese government initiated a new “go global” strategy, which sought to encourage firms (especially state-owned enterprises) to invest overseas. China’s massive accumulation of foreign exchange reserves has led government officials to seek more profitable ways of investing. Many analysts believe that china will increasingly use its reserve to purchase foreign firms, or shares of foreign firms, that are perceived to be profitable. As a developing country, China has traditionally sought to attract FDI into the country in order to, through joint ventures, gain access to foreign technology and management skills to help domestic firms become more efficient and internationally competitive. Now the Chinese government is attempting to promote the development of internationally recognized Chinese brands. Even though its relatively small but quickly growing. China’s annual ODI increased from $2.9 billion in 2003 to $52.2 billion in 2008; its ODI in 2008, was nearly double 2007 levels ($26.5 billion). China’s cumulative ODI through 2008 was $170.1 billion






4 Wayne M Morrison, China’s economic conditions, March 2009
IV. Reforming Financial Sector for Future Growth and Global Leader

China has developed itself from agricultural to industrial and trade nation. It has accumulated the technology required to transform its core sector such as auto-sector, electronic, chipset technology because of huge influx of foreign direct investments (FDIs). Several reforms need to be taken in the near future for china to become an advanced nation.

After 1997 crisis, China has developed its domestic banking, money institution and foreign capital. This was the beginning of the rise in Renmibi currency in the international market. Despite of its increasing economy it still cannot be the leading currency in compared to US Dollar, Euro and Japanese Yen.

China has gradually replaced the U.S. as the main export market for Southeast Asian countries and now has trade deficits of tens of billions of US dollars with neighboring countries and regions. It is for this reason that the process of RMB regionalization has started with the ASEAN members adjoining the PRC. China has started to use RMB in cross-border trade settlement and has signed bilateral currency swap deals with several countries and regions around the world since the beginning of 2009. However, the regionalization of the RMB requires several steps. The first is implementing RMB settlements within surrounding countries, then a gradual move to broader regionalization. Chinese government has already taken major steps, at the end of 2008; the Chinese government declared that Guangdong, the Yangtze River Delta Area, Hong Kong, Macao, Guangxi Zhuang Autonomous Region and Yunnan Province would begin quoting prices and settling accounts in RMB in trade with ASEAN. Moreover, the People's Bank of China has signed a currency swap agreement valued at RMB 650 billion with monetary authorities in Hong Kong, the ROK, Malaysia, Indonesia, Belarus and Argentina.5

This is the beginning of the rise in Renminbi currency for International leading currency.
The strong foreign reserves balance is a major advantage for China to advance into the financial world.
After the global crisis China’s reserve is facing problems because of the drying western liquidity. US dollar currency is losing its value in the global market. So it’s good chance for China to progress by guaranteeing global finance and then Renminbi will be inevitable in the future. For this China should develop its financial market as well as foreign currency market. There should be rightfully inward development before moving out to open China’s financial market.

At a recent convention meeting of Chinese Central Committee, China has made several commitments: an innovation of its industry, a diversification of its trade. China has also stressed that instead of exports, they should stimulate the development of high technical industry sectors i.e. auto, space, and medicine sector. These products which are of better prospects will change China’s basic economic front from labor oriented to capital and technological oriented sectors. Until now, Chinese economy has been dependent on FDI financing and technology transfer from advanced economies. Once China becomes an export country, it needs more external finance rather than relying on the country’s banking institutions.

5 Gu Xin, China Triws RMB Regioalization, http://www.chinatoday.com.cn/ctenglish/se/txt/2009-06/19/content_203295.htm
However, banking institutions in China are owned by the government. In this regard, the banking sector in the domestic market should be liberalized to market-based. The major problem is that the system is still under the government system. The Chinese government needs to reduce their stake in banks

After the global crisis, the global financial market has suffered a lot. Even though Management and bureaucracy system is not very efficient, china should start solving the major issues and need to take major role in IMF. This is important for china in order to enhance its power over other emerging and developed countries.

The following three major areas analyze Chinas financial market:

4.1 Banking Sector:

The financial system in China is quite different from that of major financial giant countries. With the deepening of financial reforms and expansion of financial markets, the accumulated financial risks hidden in China’s financial system are gradually being exposed. Increasing the operating efficiency of China’s financial institutions and improving the mix of financing vehicle would boost GDP by $62 billion a year (Figure 1.0). In addition, reforms that enabled a larger share of funding to go to more productive enterprise would increase investment efficiency raise GDP by up to $259 billion.

The People's Bank of China (PBOC) is China’s central bank, which formulates and implements monetary policy. PBOC plays a critical role to the Chinese economy as it
Supplies capital to the economy, inspects the market, monitors the market and stabilize foreign exchange rate. This is the main body to determine supply and demand of money and interest rates. This is very superior compared to other banks, it has control over the price of foreign exchanges and it supervises other state owned banks. In 2003, to improve the efficiency of bank supervision Chinese government launched China Banking Regulatory Commission (CBRC). In 1995, the Chinese Government introduced the Commercial Bank Law to commercialize the operations of the four state-owned banks (Big Four), 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). These banks employ more than 1.4 million workers across China. While their market share has declined, these banks still account for nearly 75 per cent of all bank assets. However, due to their planned economy legacy, the Non performing loans (NPLs) of the Big Four are much higher

Among them ICBC is the largest bank. The BOC specializes in foreign-exchange transactions and trade finance. In 2002, it was listed in Hong Kong Stock Exchange and the initial offering of USD2.8 billion was over-subscribed by 7.5 times. This deal brought changes several reforms to the Chinese banking industry. The CCB specializes in medium to long-term credit for long term specialized projects, such as infrastructure projects and urban housing development. The ABC specializes in providing financing to China's agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises and other rural institutions. In china only few banks are owned by private investors and these days the commercial banks are getting more liberalized and getting more open to foreign investors. These banks are also slowly expanding their business portfolios. Mostly these banks support Chinese businesses.

In addition to the big four state-owned commercial banks, there are several smaller second tier commercial banks i.e., Bank of Communications, CITIC Industrial Bank etc., these banks are generally healthier in terms of asset quality and profitability and have much lower non-performing loan ratios than the big four. While the big four state-owned commercial banks are facing the problem of non-performing loans, some of the small and medium-sized financial institutions are running high risks because of keen competition and poor management. Some have even suffered payment crises.

During the reform period, the government established several new investment banks that engaged in various forms of merchant and investment banking activities. However, many of international trust and investment corporations established by government agencies and provincial authorities experienced severe liquidity problems after the bankruptcy in late 1998.
One of the major inefficiency of the Chinese banking system is the Non Performing Loans (NPL). Their propagation was favored by the fact that state-owned banks believed they would always get the help from government in case in financial distress.
The Chinese government has now addressed the problem among others by transferring more than 150 billion USD worth of NPLs on state-owned asset management companies. However, the problem of NPL is not going to disappear until Chinese financial actors improve their credit rating system and the Chinese government assures that there will be no bailout for state-owned banks. The new Bankruptcy Law, passed by the National People’s Congress in 2007, will hopefully improve the situation by ensuring the better respect of creditor rights.

Chinese financial sector is of interest of several nations because of China’s world trade organization (WTO) commitment to open its financial sector more fully to foreign investment at the end of 2006. China should improve the bank loans. China is allocating capital ineffectively for two related reasons. First, Chinas operationally weak banking sector plays an unusually large role in its financial system. Chinas bank have also difficult in lending to private companies because it is difficult to get good quality information’s on borrowers credit histories and financial performances. Bank themselves have not rigorously collected such information in the past, nor is there extensive coverage by private rating agencies. Allocation of capital to the most productive investment opportunities has been weakened as state-owned enterprises have absorbed most of the resources. Private companies produce 52% of GDP but account for 27% of outstanding loans. The pattern of lending has lowered overall productivity in the economy. The dominance of state ownership in banking as well as in the corporate sector has been a major issue. The legacy of policy lending has manifested in high Non performing loans (NPLs) in China, and while the stock problems are being addressed, current lending practices continues to be largely based on non-commercial basis. Consequently, the cost of massive inefficient allocation of capital ultimately will be borne by depositors through low and still regulated interest rates on their savings.

China doesn’t allow its currency to float in the market making the currency policy as inflexible, for which it must make large-scale purchases of dollars to keep the exchange rate within certain target levels. After the reforms the yuan has appreciated but still it remains highly undervalued against dollar. Economists warn that China’s currency policy has made the economy overly dependent on exports and fixed investment for growth and has promoted easy credit policies by the banks. These policies may undermine long-term economic stability by causing overproduction in various sectors, increasing the level of non-performing loans held by the banks and boosting inflationary pressures

Chinas state owned enterprises (SOEs) account nearly one third of the industrial production of the country. More than half of them lose money and they must be supported by subsidies, mainly through state banks. Support of Chinese government on these unprofitable SOEs diverts resources away from potentially more efficient and profitable enterprises. In addition, the poor financial condition of many SOEs makes it difficult for the government to reduce trade barriers out of fear that doing so would lead to widespread bankruptcies among many SOEs and unemployment. The banking system faces several major difficulties due to its financial support of SOEs and its failure to operate solely on market-based principles. China’s banking system is regulated and controlled by the central government, which sets interest rates and attempts to allocate credit to certain Chinese firms. The central government has used the banking system to keep afloat money-losing SOEs by pressuring state banks to provide low-interest loans, without which a large number of the SOEs would likely go bankrupt. According to some estimates, over 50% of state-owned bank loans go to the SOEs, even though a large share of loans are not likely to be repaid. The precarious financial state of the Chinese banking system has made Chinese reformers reluctant to open the banking sector to foreign competition. Corruption poses another problem for China’s banking system because loans are often made on the basis of political connections. This system promotes widespread inefficiency in the economy because savings are generally not allocated on the basis of obtaining the highest possible returns. Many private companies in China find it difficult to borrow from state banks

China has a very small bond market. Commercial banks dominate the bond market. Commercial banks are the major investors in the bond market, holding up to 79% of the total bonds outstanding. The low liquidity and the weak price discovery in the secondary market due to the market segmentation are aggravated by the dominance of commercial banks in the bond market

China has allowed many foreign banks to operate in china and liberalized certain policies. More than 170 foreign banks have also been permitted to enter the Chinese market, but they represent only 1 per cent of outstanding loans. Previously, foreign banks operating in China focused on its own country’s business activities. But now, the foreign banks are allowed to work with the Chinese people and companies. Chinese business can learn a lot from these foreign banks. They can be more competitive and more liberalized in order to compete with foreign commercial banks in Chinese domestic market. The liberalization of the Chinese banks in domestic market, will give more chance to enhance its competitiveness outside China borders. China has concentrated to take over other foreign banks. Among the ten largest banks in the world, four of them belong to China. This growing tendency has made the Chinese foreign reserve increase every year, amounting to 1.9 trillion USD in 2008. This shows that there is huge reserve which can be supplied to the domestic market. Chinese RMB has also appreciated and has becomes stronger, which allows China’s bank sector to grow in the future.

Chinese banking industry have taken several positive and constructive development in the past few years. These development have strengthen the industry However, there is a large necessity to improve manpower, social and market infrastructures in the sector. Since 2006, Chinese banks have been pursuing larger, more ambitious M&A deals many have involved taking stakes in foreign institutions and in near future several more deals are expected. Chinese banks are just beginning to use cross border M&A to grow (Figure 2.0). They own about US$ 273 billion foreign banking assets.6 As a percentage of total banking assets, this is relatively low. To equal the proportion of foreign banking assets held by banks in developed markets, Chinese banks would need to triple their foreign banking assets. Because of the several reasons Chinese banks cannot expect success in their country. The banks still need to develop core skills and capabilities to succeed in foreign markets. They also need to build strong reputations and navigate complex and legal regulatory frameworks. Cross border M&A can gave Chinese banks a global profile, opening up new sources of growth and allowing the bank to follow its local customers overseas. As Chinese companies expand into new markets, they will look for opportunities to continue their relationships with Chinese banks. But if the overseas offerings from Chinese banks are inadequate, these companies will ultimately seek alternatives. Several Chinese banks are opening their office aboard. Recently china construction bank has opened offices in Sydney and the Middle East, and has approval to open branches in the United States.

Over the past 5 years Chinese banks have taken in far more money than they have disbursed through loans. From 2003 to 2007, deposits grew at a CAGR of 16%, to about RMB 40 trillion (Figure 3.0). Over the same period loans grew by an average of 13 percent per year, to about RMB 28 trillion (Figure 4.0). In 2007 the total deposits were 30 percent higher than total loans.

Chinese government must encourage banks to diversify their portfolios by increasing their services to the private sector and individual consumers. Recently the central government has allowed several small banks to raise capital through bonds or stock issues. Some private banks were listed on the Shanghai Stock Exchange (A-Share*).

The number of financial asset millionaire households in China is growing faster than any other country (Figure 5.0). From 2002 to 2006 it grew at 19 percent CAGR and it grew at 34 percent from 2006 to 2007. Consequently china has become increasingly important to international private banks. China is currently fifth in the world in terms of millionaires, ahead of many of the worlds developed countries. Chinese per capita growth income is also increasing (Figure 6.0). Even several analysts have predicted that china will have more than 4 million wealthy households by 2015 (Figure 7.0). Many commercial banks that have built business in the wealth management area have benefited from the growth of the wealth market.
Until recently the Chinese market was still immature and it posed a significant hurdle for the growth of wealth management business. Foreign players have been constrained by strict regulations. Many international banks have used traditionally offshore private banking centers, where regulatory constraints are significant easier, to serve Chinese wealth held outside of china. Chinese government has recently allowed foreign banks to be local incorporated. And since investors are allowed to invest in equities, investments for international markets are expected to gradually grow over time.


6 Frankie Leung, Holger Michaelis, Tjun Tang (September 2008). Venturing abroad: Chinese Banks and cross border M&A
* A share: companies incorporated in mainland China and are traded in the mainland A-share markets. The prices of A shares are quoted in Renminbi, and currently only mainlanders and selected foreign institutional investors are allowed to trade A shares.
B shares: companies incorporated in mainland China and are traded in the mainland B-share markets (Shanghai and Shenzhen). B shares are quoted in foreign currencies.
H shares: companies incorporated in mainland China and are listed on the Hong Kong Stock Exchange and other foreign stock exchanges

The "big four" Chinese commercial banks should lower their bad debt ratio to sharpen their competitive edge against foreign counterparts. It is necessary for Chinese government to restructure the organization and bring more efficiency. The government needs to focus on building core financial skills and also need to give banks more autonomy.

4.2. The Capital and Stock Market

China’s Capital and Stock Market are underdeveloped in comparison with western countries mainly due to the socialist capital market system. The average incomes of people are very low for which, they do not have enough money for capital investment in the stock market and the bond market cannot function efficiently. During the cold war time, Hong Kong and Singapore made their countries as financial hubs of Asia. Hong Kong was the gateway of financial supply for the Chinese industry. After the handover of Hong Kong, Shanghai and Tianjin assume the financial role of the China. Chinese government has announced its commitment to stimulate the economy, by building Shanghai into an international financial centre and maintain the growth which may stabilize the capital market. This will be the future for china as well as in the Asia pacific region similar to other international financial hubs like New York, London and Frankfurt. Even though China is enthusiastic to develop this sector, it needs to reform the industry in several ways to reach at par with other hubs. In comparison to
London for example, China is very small in size and the business environment is not good. There are not many companies in manufacturing or in banking that are registered and traded in Shanghai stock market. Once it establish as a global hub, global resources through FDI and other ways will inflow to china which it can utilize for local developments.

Chinas capital market development is closely linked to the Chinas economic reforms which also have contributed to the economic development7. Capital Market has a short history in China: the Shanghai and Shenzhen Stock Exchanges were established in 1990. The China Securities Regulatory Commission was established in 1992. But after the establishment the growth of the capital market has been very impressive (Table 5.0). Under the planned economy resources were allocated by administrative means, resulting in low efficiency, with the gradual; move to a market economy, Chinas capital markets have become an important platform for resource allocation. But still Chinas Capital market is dominated by large scale enterprises such as Baosteel, Sinopec, ICBC etc.,7 Corporate Scandals highlight the Importance of Corporate Governance Reform in China. Recently China had experienced several frauds; especially in forging customs receipts and made up profit figures to support their high and rising stock price.

These activities greatly damaged investor confidence and cause the market to collapse. The current financial crisis has halted global expansion capital markets. From 1980 through 2007, the world’s financial assets nearly quadrupled in size relative to global GDP. Global capital flows similarly surged. This growth reflected numerous interrelated trends, including advances in information and communication technology, financial market liberalization, and innovations in financial products and services. Global capital markets are entering a new era in which the forces fuelling growth have changed. For the past 30 years, most of the overall increase in financial depth the ratio of assets to GDP was driven by the rapid growth of equities and private debt in mature markets.


7 China Capital Market development Report, www.csrc.gov.cn/n575458/n4001948/n4002030/n9434750.files/n9434747.pdf
Chinas capital market is still small, with an imbalanced development of bond and equity markets: at the end of 2006 the total value of the securities assets constituted only 22% of Chinas total financial assets, whereas in the US, UK, Japan and Korea, the proportion was 82%, 71%, 62% and 75% respectively.

China needs to liberalize its bond market and speed up the development. It has a very small bond market. By the end of 2006, the total outstanding of bond market was 0.8 trillion USD, accounting only 28.7% of the years GDP. Lagging behind mature, overseas markets and also lower than those of emerging markets such as Korea and India. By the end of 2007, Chinas bond market has increased to US 1.16 trillion in total outstanding, but treasury bonds, and financial bonds accounted for 90.3% of the total, while enterprise bonds amounted to only US 50.3 billion dollar or 5.2% of the market. Corporate bond market is still small, accounting for no more than 2% of GDP by the end of 2006.

Commercial banks dominate the bond market. Commercial banks are the major investors in the bond market, holding up to 79% of the total bonds outstanding. The low liquidity and the weak price discovery in the secondary market due to the market segmentation are aggravated by the dominance of commercial banks in the bond market.

China’s capital markets including other countries are seriously hit by the global financial crisis. In Greater china area there were only 157 IPOs (Figure 8.0) with total funds raised to US$ 23.9 Billion compared to 242 IPOs with US$ 104 Billion in 2007 (Figure 9.0). Mega size companies were neither listed in the Shanghai stock market nor in the Hong Kong stock market. Also, the average size of the deal reduced from US$ 0.44 Billion to US$ 0.15 Billion. The Shanghai stock exchange composite index dropped 70%, last year it went down to 1,670 points from 5,500 point. Because of these reasons many companies have accepted lower price earnings multiple for their IPOs and many companies postponed their IPOs to wait for better market conditions. The Value of equity trading in greater china area has decreased a lot compared to past years (Figure 10.0). In 2008, the value of equity trading in greater china decreased by 31% while there was a growth of 22% in the US. The volume of trading in stock market is increasing every year. In the near future, the Chinese stock market has positive development to become one of the biggest exchange markets. China can make use of the current financial slowdown and can make RMB as a strong currency. China is aware that by developing capital market it can further develop its industries. These financial sectors need huge amount of capital and China has the ability to supply. China is aware that development in capital market is important for China’s future industry because Chinese huge industry needs huge capital for further development. This can also cater for the industrial demand for countries who are striving for their economic development.

Among the capital market development plan in China, the bond market should be developed because its development is important as a pillar to capital market. When stock market is developed, the bond market is also improved because of the synergy effect. The Chinese government should provide new rescue plans to stimulate the development and recovering the economy in 2009-10. It needs several billions of dollars for this and this money should be financed by a well functioned capital market. It can raise this money from bond market. Chinese government has budget surplus for which it can develop the market in the near future. When the demand for bond market increases in the region, it can expand its market very quickly. Besides the American bonds, China could also source for neighboring countries as the best alternatives to lend money. Otherwise, China also has a huge trade surplus which can be used for purchasing US national treasury bonds. Because China has many reasons to buy US bonds. Because even China has more opportunity to invest in other countries but they have invested heavily in US bonds market. China still fears whether the US can pay back. Even though the US President Mr. Obama has declared that the US is able to pay back the bonds. These reasons bring several complexities to the system. Similar cases have been seen in the past, for example during the cold war Russia shifted its deposit to European countries instead of US. Chinese government also need to allow more foreign companies to issue yuan-denominated bonds on the mainland, as it increasingly opens and internationalizes Chinas capital and financial markets. China has the vision to make Shanghai an international financial center by 2020, Shanghai has gained basic elements to be a global financial hub, yet, is still distance away from leading international financial centers in terms of market openness and capital liberalization.

Chinas capital market have gone through three phases of development, in the 1st phase (1979 – 1992) the capital market began to emerge along with the incorporation of Chinese enterprises. In the 2nd phase (1993 – 1998) China consolidated its capital market and regulations by establishing China securities regulatory commission (CSRC). In the 3rd phase (1998 – 2008) China strengthened its legal status of the capital market by taking series of reforms and changing securities law to facilitate further development.

To be the global leader China in the next phase needs several major reforms aiming at improving market infrastructure and functionality, improving market regulation and supervision, and strengthening the legal framework. It needs to increase the level of competitiveness among financial institutions, improve its market mechanism and corporate governance. It needs to develop corporate bonds, asset backed securities, foreign currency bonds, derivative products based on stock indices, it need to introduce commodity futures trading for energy and metals, expand the industry coverage and scale of listed companies, nurture all kinds of institutional investors such as securities investment funds and insurance funds, allow gradually foreign investors to participate in Shanghai’s financial market, expand the issuance of RMB-denominated bonds by international development organizations, and allow foreign companies to issue RMB-denominated bonds, develop a reinsurance market.

If China more emphasize on developing the financial market in order to modernize, the government need to restructure the organization and bring transparency and modern financial infrastructure and skilled people to the sector in order to enhance their financial sector. The country need to shift its focus from SOE’s to private organization. These financial companies should be more liberal and internationalize and then china can come with par with the global financial giants.

4.3. Foreign exchange market:

Foreign exchange market is the growth engine of economic activities of any country as the foreign exchange rate is one mirror of a sound economic from outside. Besides the banking industry, the capital market should include functional exchange market for the sound economic growth. While price in domestic market is one parameter of its economic activities in a country, the foreign exchange currency is also a signal of the economy from outside. That means domestic price is also for the stability of the exchange rate. China does not have a history of experience of an open economy due to a socialist system, for which is the foreign exchange market is not developed. Before the reform and open policy in 1979, China was not able to attract foreign investors and capital flows. Chinese currency could not work and the use for international currency which is based on three different criteria’s i.e. exchangeable, convertibility, confidence in currency and transparency. These conditions are not suitable for RMB. It will be a major problem if Chinese RMB is not recognized for convertibility.

Chinese foreign exchange system has begun with an US-RMB fixed exchange system. In early 1980s, China started with fixed rate at 1 USD at 8.60 RMB and now 1 USD is at 6.90 RMB, which is at appropriately 20-30% appreciation. That means that RMB should be continued on fixed rate to USD but now on market system due to the trade surplus, US government demanded that China should appreciate RMB more against USD. This appreciation of RMB is necessary for trade balance. But China is reluctant to appreciate RMB against USD because it should create more jobs and export at a lower price for the world market. Chinese will gradually reduce the equivalent of surplus against the US deficit.

The international fund and other agencies have upped the pressure on china to allow its currency to appreciate in order to help rebalance the world economy. China has an interest in reorienting towards domestic demand and if it does this, it has to lower external demand. The way to do this is to change its exchange rate. Chinese government does not want their currency to fluctuate on the market based. Since last several years the Renminbi is nearly fixed. They have tried to make it fixed. They do not want to change as it might impact to the labor market because of unemployment issues. This issue might play a important role in the Chinese politics and export market so the leaders do not want to change the system, even though the IMF and other organization urge China to appreciate its currency,

Many believe that does not allow its currency to float and therefore must make large-scale purchases of dollars to keep the exchange rate within certain target levels. Although the yuan has appreciated someone since reforms were introduced in July 2005, it still remains highly undervalued against the dollar. China’s currency policy has made the economy overly dependent on exports and fixed investment for growth and has promoted easy credit policies by the banks. These policies may undermine long-term economic stability by causing overproduction in various sectors, increasing the level of non-performing loans held by the banks and boosting inflationary pressures. The Reason why US government criticized Chinese exchange rates was because of the negative trade balance with China. US could not push strongly further as China has bought huge US bonds. It is right time for China to negotiate for G2. They can also discuss other global issues such as diplomacy and military. Despite of this the US is pushing china to open its market and impose flexible exchange rate.

It is not very easy to internationalize the yuan. China has already taken initiatives to change its exchange rate system. China at certain level can intervene in its own economic growth. For the time being temporary average market rate for a small period may be appropriate and once the domestic market is stable they can follow step by step approach to achieve a free flexible exchange system. It is understood that a country cannot fully manage its free flexible system and the government still have to intervene in the exchange market. In the long term, Chinese exchange market should have substantial trade and then it can stabilize financial market. This is a basis for a capital market as well as foreign exchange market. China cannot change its exchange rate because of US demand, it should rather think of its economy. It should go for flexible system when RMB becomes the key currency in the form of a transaction currency, and then regional currency, and the global currency against the US dollar. There should be an open exchange market and liberalized RMB for key currency.
V. Possibilities and Obstacles for china on the way for Financial Giant:

China has grown so fast that it has realized that it might become a global power much faster than it thought. It is treated as a de facto global power by the US, at least with regard to economic matters, with the two countries for all intents and purposes forming a 'G2'. After 10 years china role in the global community will change. It is now a strong trading country, and should be a strong financial country in the near future. This is the best time for China to change its policy to rise and become a strong financial country in accordance with the position as a G-2 country.

China can promote and can build a strong financial nation. For this, the government needs to overcome the obstacles.


Possibilities:

After the economic reform and open-door policy, China has transformed the country in just 30 years. We can say it has changed from nothing to one of the major economic power of the century in 30 years. It has achieved success in trade and industry. The next step for China is to become a strong financial nation in the next few years.

China has a vast territory, with abundant natural resources and diverse types of land resources that can supply to the global demand. It has huge minerals, metals and other resources required to sustain the growth.

The banks of China have gained impressive momentum in Venturing abroad through M&As. Also, though its sovereign wealth fund it has started investing in other emerging countries to make its base. Chinese government has the world’s largest foreign reserve with as excess of 2.132 Trillion US Dollar by June 2009 which was 33% more than the previous year. These reserves can be used to strengthen its internal demand during the course of time.

If Chinas mainland owned large corporations gradually play major role in making exports as less important as a percentage of turnover then in return yuan can compete with US dollar and Euros and can ultimately become the major currency.

China in terms of its financial institutions, the structure and operational is not well organized and developed in comparison to the Western institutions. However, by reforming its banking and financial sector it can be more competitive.

Japan who is the world’s second largest economy ($4.8 trillion in GDP) failed to be the main reserve currency. In the 1980’s Japan began to internationalize its currency in an effort to make it a reserve currency and make Tokyo an international financial center. But, after 20 years when growth was at its best, Yen had declined and foreign companies listed in Tokyo stock exchange also declined. Japan has also the leader of global manufacturing. It has tried to shift its focus from manufacturing to Financial but it failed because of the interruption of western countries. They do not want to give the power to Asian country in the financial sector, as they thought financial sector should be dominated by them. In the same fashion Japan tried to dominate in Asia first and then global but they failed. Japan through its monetary organizations tried to make its currency as the main currency of the Asian region which was not suitable for The US. The US was worried about the influence of Japanese Yen in the Asian market which can build the Asian currency and reduce the influence of US dollar in the Asian market. During late 1990’s after the formation of euro, US lost its influence in the Europe and If Japanese yen would become the Asian currency then US would lost the power in the global market. Therefore, they tried not to make Japanese yen as the major currency in the Asian; this led to the 1998 Asian financial crisis. This is the reason why the Asian countries after suffering from the crisis have tried to integrate each other during the chiang mai initiative to grow the stability of their countries in terms of foreign exchange. This was the beginning of Asian integration in the monetary sector. To build of the Asian monetary union, many Asian countries are now joining each other. ASEAN+3 can be one of the best examples. They can learn a lot from the European experience. Many people believe that Asian case is different from the EMU (European monetary union). In the EU case the countries have tried first to strengthen the trade relationship eith each other and then latter monetary but in the Asian case the countries have tried to cooperate strengthen in the monetary sector first and then the trade among the nations. This is totally different from the EU case. However, Asian monetary cooperation is essential for the growth of the region and integration of the community in the region.

China is going through the same phase with the exception that it is in the process of making the country as the financial power and Yuan as the global reserve. It can learn many lessons why Japan was unsuccessful and can gradually resolve them.

European Union is the largest economy in the world accounting for 30% of world GDP. Although EU was formed in 1957, the euro was introduced to world financial markets as an accounting currency on 1999 and its currency notes were issued in 2002. It took more than 40 years for EU to establish their currency. In the 1980s the European monetary system was failed. They have experienced several forms of currency arrangements before euro, they had several discussion, treaties etc., and in just few years of euro being introduced it became one of the reserve currency of the world. At the first quarter of 2009, out of $6.4 trillion of global official foreign exchange reserves but $4.1 trillion of identified reserves, the US dollar accounted for 64.1% and the euro 26.3%, the sterling 4.4% and the yen 2.5%. China can learn major lessons from the emergence of euro.

Chinese currency has become more and more attractive to many of its Asian trading partners. If china loosens its foreign exchange system then there are high chances of making yuan as a powerful currency. Authorities need to liberalize the currency regulations.

Yuna related trade is growing at a very fast rate. Many market analysts believe that from near zero to half of Chinese trade within few years is plausible. They have also suggested that yuan denominated trade could hit $2 trillion by 2012

China needs to develop skills required for financial industries. It lacks huge pool of talented financial people. It also needs to train them to learn English that way they can make a good reputation in the global market. The government should encourage qualified personnel to learn English and follow global business etiquette. The government also needs to develop its financial infrastructure; by this they can attract several major players of the industry. By solving all these issues which may not take much time unless the government emphasizes, China can easily achieve the goal to become the global financial giants.

Obstacles:

Even though China has achieved succeess in transformation from socialism to capitalism, it is still on the midst, the transformation is still not complete. China needs efforts and time to complete this transition. China faces several obstacles on its way in becoming a strong financial nation.

The history of banking and financial system is not long. But during the socialist time many countries use them on their own ways. Under socialist system it dint work, but china now with its open policy can make a strong sustainable system. To realize and make it possible china need to solve its problems systematically. It faces several problems from superior level to grass root level.

China is has three major obstacles which are the key elements to be global leader in financial sector. First, it needs to protect its property rights. China needs to accept common law accepted globally and need to have excellent judiciary. Secondly, it needs to lower the transaction cost. No country can make itself a financial giant unless they provide low regulatory cost and convenient in doing business. Thirdly, China doesn’t have high transparency. Investors sometime face difficulties in protecting their funds. Obtaining information is very difficult and transparency is very low.

One of the major pre-condition of any reserve currency is the ability of the issuing central bank to control the value of the reserve currency through appropriate monetary policy. Chinese monetary policies are still problematic in several areas.

China itself is a huge country and faces several political issues internally and externally. It is still ruled by single party system which may not be effective. It restricts competitive growth of the country. Political instability may threaten the growth and many western investors may exit from the market so it needs to solve its domestic problems

It needs to build strong social and physical infrastructure. It needs to educate its citizens and improve the wages of labors. Comparison to western nation’s china’s banking system is not exposed to many people. This non banking attitude might handicap further development in the financial market development.

China needs to develop financial infrastructure and provide efficient networking among cities. It should develop its underdeveloped domestic banking, financial and capital market system. It should also develop and expand its relationship in terms of financial market with other neighboring countries like ASEAN and Shanghai cooperation, in the regional and global context.

Chinas nature of trade creates a major hurdle for it to internationalize its currency. It is mostly based on exports which require importing materials and components from other countries. Exports mostly go to countries in the West. They generally expect imports to be priced in their currencies.

Large proportion of Chinas exports are by foreign invested companies which sell internally and use dollar for internal accounting and thus would be reluctant to switch to yuan,

There is a huge digital divide among normal citizens. The government need to literate citizens on how to use modern equipments such as computer etc., that way citizens can become more Knowledgeous and can contribute in a bigger way for the growth of the country.

China still does not have any experience of global power. Countries like US, UK who already have gone through several phases have played significant role in global geo politics. They have donated funds to third world countries, taken lead role in global threats or other environmental or terrorist issues. China needs to learn their activities and should slowly start to participate in taking lead role in global issues.

VI. Conclusion

The paper have discussed about Chinese growth model in the modern era. However, the future direction and strategy is still a difficult task. In the past we have seen several different countries models and each of them are different from that of China. The downfall of Russia after the cold war is a best example to study. The global communities still have limited understanding on Chinese sustainability.

China in order to internationalize Renminbi should learn from both EU model and Japanese model. Chinese case is worth to investigate and research. Authors have observed that most of the time China has resolved its obstacles and always strive forward for the success. They have hardly affected by the external shock or pressure from international watch dogs. During the cold war ere there were not many external shocks compared to the present days, yet from a multilateral angle unlike today China faces more obstacles than it has faced ever. In the olden days, China was safe under the protection of socialist block like that of U.S.S.R. but now in this globalization period, this kind of protection no longer exist and it is left with several confrontation with major Global powers like the US. Currently there are several sectors where China is at par with the US, it is on the way to catch up US in terms of advance technology, capital, human resource and military power. China should be ready to handle the pressure of criticism on its aggressiveness and assertiveness in world agenda. Now it is not a competition of materialism but more of competition of intellectualism. The world now is constantly competing with lasting interest with limited resources.

To be a global giant from trade to financial sector, China needs to follow in certain extent the same way as it has followed for its success in manufacturing. It should improve its underdeveloped banking system and should urgently initiate a momentous structural adjustment to balance the economy by taking necessary major steps. It should also learn important lessons from the current global financial crisis in order to build a strong financial system.










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