1. China Reform
China has lots of political reform in its model in the past 20 to 30 years. Due to its
highly unperfected diversity, China can’t have a fixed model. Instead, its central bank
needs to have the ability to pick certain cities for implementing special reform. For
instance, more freedom on academic and speech areas in Hong Kong, shorter income
gap in Chengdu, and the financial reform of Wenzhou.
Chinese market is expanding; and almost everybody is interested in entering into
Chinese market. However, the local government is stronger and becoming more
complicated. The international companies need to understand the government before
they take actions.
The transition of China reform still has a long way to go. The country needs to deal with
increasing moral education, disclosure, and opening society, and reducing corruption.
Even though the corruption is a key issue about this country, it’s still a better situation
than those countries such as Russian.
The financial system reform in China currently is functional. Its issue is the imbalance
of low share of consumption GDP and high share investment GDP, which involves
majorly real estate investments. The reasons may be as follows: First, negative deposit
rate causes too saving of household. Second, negative real interest rate lead to the
transferring capital flow from households to investors. As a result of this, China needs
financial reform to increase deposit rate to rebalancing by reduce household saving and
increasing consumption.
In addition, price bubble in real estate is driven by subsidies of construction and lending
rate; and it respond to Chinese financial system. The shadow banking system is an
alternative way to high interest rate and domestic saving. This underground
networkreduces bank’s income. Household is protected by low loan-to-value ratio. And
the shadow banking offers high interest rate to household by investingtheir capital into
real estate. After the Second World War, China offers direct lending with interest rate
control. Both of the lending rate and net interest margin in bank are fixed and stable. As
a result of this, certain extent of exchange rate and capital control are needed. China
banks need to think about controlling interest rate and direct lending when
implementing the internationalization of RMB. They as stable and highly regulated
financial system; but it faces deregulation pressure and the competition of shadow
banking. There is no easy way to rebalancing the conflicting issue. The country has no
capital flows, fixed interest rate, fixed direct lending rate and relay on exports; and it
needs to rebalance by increasing consumption.
China has over capacity in buildings, cheap labor, and low interest rate. It has 5-6%
mortgage rate; and its property non- tradable price is going up currently. The average
property return is 10% in normal cities or 15% in large cities. The government has

2. restriction on how much property one people can buy; after that, people tried to become
single so that they can buy one more house by divorcing; then the government started to
restrict those people who tried to buy more house by divorcing.
Generally speaking, the transfer of China modelis becoming more rebalancing and
improving. China’s growth potential drops to 6-8% from 10%. The government policy
is adjusting and aiming at a minimum wage growth rate of 13% and lowing investment
efficiency because of labor shortage problem and imbalance of wealth distribution.
The government also set up a quota to limit property growth not higher than real
income growth. As a result of this, the whole Chinese economy will drop down in
certain extent to 7.4% or maybe more further. The rise of wage will lead to more
inflation. As we know, high- income household rely on investment income; while the
wages are increased, the capital will flow to low-income household. However, we
cannot be too pessimistic. After 2008, the official data ignored the increasing economic
activities in both service consumption and high-income household consumption. These
activities are becoming more and more important to the growth of the whole economy.
The Chinese market is becoming the global manufacture factory; and China has
become the major importer of commodities and consumer.
The transition of China model with lower growth will face inflation pressure, have
more rebalanced structure and income distribution, industry acceleration, and more
dramatic volatility to its economy cycle.