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China
Summary
Moody’s Aa3 / S&P AA- / Fitch A+1
Economy: Agriculture 9%, Industry 41%, Services 50%
China is a large and well-diversified economy with significant credit strengths. With its impressive growth rate, it is now the second-largest economy in the world, and the largest in the world as
measured by purchasing power parity. Political stability and the current reform agenda will continue
as President Xi Jinping is expected to be reappointed General Secretary of the Communist Party
in 2017. As a result of its strong external position, China also has the largest foreign reserves in the
world, which equips it with the ability to deal with major shocks, external or domestic. However,
China’s growth model is shifting, and authorities are continuing to undertake major reforms to rebalance the economy to allow it to grow at lower, more sustainable rates. Among China’s weaknesses are
vulnerabilities associated with the shadow banking sector and the fast-growing real estate sector, both
of which the authorities are addressing. Impending demographic changes pose a longer-term concern,
which could reduce the size of the labor force and have begun to erode China’s competitiveness.
Economic Indicators
Population (Millions)
GDP per Capita (USD)
Nominal GDP (USD Billions)
2012
2013
2014
2015
2016F
2017F
1354.0
1360.7
1367.8
1374.6
1381.5
1388.3
6,256
6,995
7,626
7,990
8,240
8,833
8,471.4 9,518.6 10,430.7 10,982.8 11,383.0 12,263.4
Real GDP (%)
7.7
7.7
7.3
6.9
6.7
Year-End CPI (%)
2.5
2.5
1.5
1.6
2.0
2.2
Fiscal Balance (% of GDP)
-0.7
-0.8
-0.9
-2.7
-3.1
-3.5
Interest (% of Revenues)
1.8
1.8
2.0
1.9
2.5
3.1
FC Debt/Public Debt (%)
0.7
0.7
0.7
0.7
0.7
0.7
36.9
39.5
41.1
43.9
46.8
49.3
Government Debt (% of GDP)
Government Debt (% of Revenue)
6.5
131.5
140.7
145.1
150.5
164.9
173.9
Current Account (% of GDP)
2.5
1.6
2.1
2.7
2.4
2.2
FDI (% of GDP)
2.1
2.3
1.4
0.6
0.5
0.5
19.0
17.4
17.1
12.9
11.8
11.5
237.6
External Debt (% of GDP)
Foreign Reserves/External Debt (%)
206.7
232.2
216.8
236.3
238.2
Foreign Reserves (Mo. of imports)
18.4
19.6
18.3
16.5
16.7
16.6
Foreign Reserves (% of GDP)
39.3
40.3
37.0
30.5
28.2
27.4
As of November 2016
Forecasted or estimated results do not represent a promise or guarantee of future results and are subject
to change.
Source: IMF, Central Bank, Haver, Lazard
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Rating History
Below is a history of the country’s foreign and local currency ratings by the major agencies
dating back to 2000. We have also included a chart of the country’s hard currency external
debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison.
Rating History
Hard Currency
Local Currency
AA
AA
AA-
AA-
A+
A+
A
A
A-
A-
BBB+
BBB+
BBB
BBB
BBB-
2000
2008
Moody’s
2016
S&P
Fitch
BBB-
2000
2008
Moody’s
2016
S&P
Fitch
As of December 2016
Performance represents past performance. Past performance is not a reliable indicator of future results.
Source: Fitch, Moody’s, Standard and Poor’s, Bloomberg
Bond Spreads
1000
800
600
400
200
0
2008
China
2010
2012
2014
2016
EMBIGD
As of December 2016
Performance represents past performance. Past
performance is not a reliable indicator of future
results.
Source: JP Morgan
20
China
Strengths
Growth and Size
China has a large and diversified economy that has been growing at an impressive rate since
1991, averaging 9.8% during the 25-year period, although the economy is expected to slow
down to a “new normal” more moderate and sustainable growth rate of at least 6.5% in
the period 2016–2020. As a result of its fast growth rate, China is now the second-largest
world economy, with estimated GDP of US$11.4 trillion in 2016. In terms of purchasing
power parity, the International Monetary Fund estimates that China is now the world’s
largest economy, with 2016 output of US$21.3 trillion compared to US$18.6 trillion for
the United States.² China’s sheer size gives the country significant leverage in global trade
and capital flows, and it is a major driver of world economic growth. It is the largest market
in the world for many goods and services, and despite rising wages and energy costs, it
remains one of the most competitive manufacturing powerhouses among major exporting
economies.3 Over the past several decades, China has built up a solid manufacturing base
and world-class infrastructure, particularly in major cities and key export hubs. The World
Economic Forum Global Competitiveness Index 2015–2016 ranks China 28th out of 140
countries, leading most emerging markets by a wide margin.4 China’s competitive advantage
extends to its educated workforce. The literacy rate in China is 96.4%, compared to 92.6%
for Brazil and 71.2% for India.5 With export and investment-driven growth diminishing and
creating significant vulnerabilities, Chinese authorities have recognized the need to implement a series of sweeping economic reforms intended to avert economic dislocations. As the
economy rebalances toward a more sustainable model relying on internal consumption and
services, economic growth is likely to remain around 6.5%–7%. President Xi Jinping and the
Communist Party’s goal is to double China’s 2010 GDP and GDP per capita by 2020.6
Political Stability
China’s political system gives the government enormous control over policy, with direct
elections held only at the local level for the People’s Congresses. The current administration,
under President Xi Jinping since March 2013, has overwhelming control over the party, the
military, and the government. Many political analysts view Xi Jinping's leadership as the most
powerful since Deng Xiaoping, who is credited with China’s market-oriented reforms starting
in 1978, which fostered three decades of high economic growth. President Xi Jinping's consolidation of power is partly the result of a successful anti-corruption campaign,7 which has
been an important hallmark of his mandate, but also reflects his style, with little power sharing.8 In 2017, the Communist Party will hold its 19th Party Congress. President Xi Jinping
is expected to be appointed for a second term as General Secretary,9 allowing him to continue
pursuing his agenda.
Economic Reforms
China has embarked on a comprehensive reform agenda intended to facilitate the transition from an export, investment and credit-driven growth model to a more balanced and
sustainable framework. At the Third Plenum held in 2013 and the Fourth Plenum in 2014,
the administration announced ambitious reform programs, which were reaffirmed in the
Fifth Plenum of 2015. The underlying premise is to allow markets to have a greater role in
the economy to more efficiently allocate resources. The reforms span many areas of China’s
economic and social structure and are considered among the most comprehensive in China’s
history. Key reforms to increase household income and encourage consumption include the
expansion of social services, deposit interest-rate liberalization, loosening of the one-child
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policy—which has been officially eliminated and allows for two children—and the relaxation
of the hukou registration system in order to allow migrants to urban areas to benefit from
social services. Other reforms are intended to encourage more efficient allocation of capital
and enhance investment. These include the removal of approvals for corporate investments;
a host of initiatives intended to render state-owned enterprises (SOEs) more efficient, ranging from likely higher input costs as a result of energy and resource price reforms; higher
dividend payments; and the gradual liberalization of the capital account, which should lead
to greater outward investment and external borrowing by Chinese corporates. Successful
implementation of SOE reforms will be critical for China’s economic future given their
large influence on the economy. Equally important, the Fifth Plenum reaffirmed China’s
commitment to innovation in science and technology and fostering a more entrepreneurial
environment.10 One of the major outcomes of the last Plenum of 2016 was the elevation of
President Xi Jinping to the “core” leadership, which will allow him to consolidate power and
carry forward his vision for China.
External Position
China’s external position remains strong, with foreign currency (FX) reserves reaching US$3.1
trillion as of September 2016, representing 28.6% of global reserves.11 This is the result of
years of current account surpluses and large capital account inflows, of which net foreign direct
investment (FDI) constitutes over half. Along with one of the world’s highest national savings
rates, the FX reserve buffer provides China with significant flexibility to deal with a number of
major shocks, whether external or domestic. China’s capital account is becoming increasingly
open, consistent with the government’s reform agenda, although the pace of reform has been
gradual, with capital constraints loosened selectively. Frameworks allowing for capital inflows
include the Qualified Foreign Institutional Investor Scheme. China has implemented the
Qualified Domestic Institutional Investor Scheme, which allows Chinese financial institutions
to invest abroad and to facilitate capital outflows. Recent initiatives such as Shanghai-Hong
Kong Stock Connect will allow for two-way flows of capital.12 The current account surplus,
led by a decline in the goods trade surplus, has experienced a sharp reduction from a peak of
10.6% of GDP in the third quarter of 2007 to 2.4% of GDP as of the third quarter of 2016.13
We anticipate that China’s external position will remain strong in the coming years, although
a return to double-digit current account surpluses is unlikely.
Weaknesses
Financial Sector
China’s shadow banking system has become a recent concern, with the IMF indicating that
its rapid growth could pose a threat to global financial stability.14 Estimates of the shadow
banking sector’s size vary depending on the definition of shadow banking; the IMF estimates
the sector at 32.2% of GDP as of the first quarter of 2016, but estimates range as high as
50% of GDP in terms of assets.15 The shadow banking sector is composed of bank and nonbank financial institutions, such as asset managers, guarantors, and brokers, who borrow in
the financial markets via short-term funding and lend via trust vehicles, entrusted loans, and
guarantees. The majority of lending goes to local governments and property developers, and
with the recent slowdown in the economy and property sector, the level of nonperforming
loans (NPLs) is an important metric to monitor. Although 70% of shadow banking is tied
to the formal banking system and subject to similar regulations, enforcement is weak since
local governments and SOEs are generally the beneficiaries of credit. This in turn creates
the perception that these loans have an implicit government guarantee. The China Banking
Regulatory Commission has taken steps to mitigate risks arising from shadow banking activi22
China
ties, drafting rules aimed at tightening control on wealth management products16 and stating
that it wants to eliminate the perception of an implicit guarantee.17
Off-Budget Expenditures
China’s local government expenditures are off-budget and sizable, and have served as
important counter-cyclical policy tools to stimulate the economy. Because local governments cannot borrow directly unless authorized by the state council, they have relied on
financing through the use of local government finance vehicles (LGFVs) and land sales to
finance social and infrastructure spending. The IMF estimates that once these liabilities are
included, the size of China’s public debt rises to 64.5% of GDP, compared to the estimated
public-sector debt ratio of 17.2% of GDP in 2017.18 There are other larger estimates. The
Chinese Academy of Social Science estimated that contingent liabilities, i.e., debt of nonfinancial SOEs, public bank debt, NPLs, and pension fund liabilities, represent more than
100% of GDP. The 2017 public-sector deficit, once the expenditures of local governments
are included by the IMF, total around 80% of GDP, versus 3.1% if LGFVs are excluded.19
The concern is the ability of local governments to service this debt going forward, particularly
since income from taxation for local government revenues is relatively low, and sale of land,
which is ultimately a limited resource, has been a major source of income. In an effort to
contain this risk, the Central Administration has imposed a hard limit of US$2.5 trillion on
local government borrowing,20 and the IMF in its 2016 Article IV notes that implementation
of the new budget law of 2014 in on track.
Real Estate
The real estate sector has grown significantly in recent years, currently representing 15% of
China’s GDP and accounting for 15% of total urban employment and 20% of bank loans.21
At the national level, the price of residential buildings has increased over the past few years,
but has moderated since 2014 due to a combination of slower economic growth and an
increase in housing inventory, particularly in Tier 3 and Tier 4 cities, which have an average
of more than three years of unsold supply.22 Demographic trends are also contributing to
slower growth in the sector, as it is estimated that the number of Chinese aged 25–49, the
prime age for real estate purchases, plateaued in 2015.23 The challenge for the government
will be tightening policies to curb speculative demand while ensuring that this does not
negatively impact overall economic growth. Some recently implemented measures include
decreasing the amount of land supply in cities where there is large oversupply of real estate,
increasing the loan-to-value ratio for second mortgages, and restricting new housing starts in
lower-tier cities.24
Demographic Changes
China is likely to experience severe demographic challenges in the coming years that, according to some analysts, could shave as much as 3% off of GDP growth.25 China’s working-age
population (15- to 64-year-olds) is projected to fall within the next two decades due to
declining fertility, in part due to the one-child policy. The IMF projects the dependency ratio
will increase from 13.5% in 2010 to 30% by 2030, which has negative implications for the
supply of labor. In response, the government relaxed the one-child policy to two children in
2015, which will add an average of 2.3 million newborns annually and result in an additional
consumption of US$11.8 billion. In terms of overall economic impact, this decision will add
0.07% to GDP growth between 2016–2025, with an additional 1.5% by 2045–2055 and
1.7% by 2065–2075.26 However, there is skepticism as to the effectiveness of this decision,
and critics point out that urban couples are less inclined to have more babies; as a result, this
policy change is unlikely to lead to a baby boom.27
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Monetary and Exchange Rate Policy
Inflation and Monetary Policy
The People’s Bank of China (PBoC) has a dual mandate: to maintain currency stability and
to promote economic growth. The stable value of the currency objective in practice implies
two goals—price stability and exchange-rate management. In addition to these monetarypolicy objectives, the PBoC is tasked with maintaining financial stability and regulatory
oversight of financial markets, with particular emphasis on the interbank lending market,
interbank bond market, foreign exchange market, and gold reserves.
The PBoC has several instruments for achieving its monetary-policy objectives. These include:
1) the reserve requirement ratio (RRR) for banks; 2) open-market operations (reverse repurchase, or repo, rate); 3) central bank 1-year benchmark lending interest rate; and 4) foreign
exchange market intervention28. This toolkit has been evolving in recent years, in line with
the intended gradual shift toward a less managed currency and liberalized local interest rates.
The steps in this evolution include:
1.The complete liberalization of interest rates. Remaining controls on deposit rates were
removed in 2015 while controls on lending rates were fully removed in 2013;
2.The gradual shift toward a more market-based interest-rate transmission, through the
increasing use of the reverse repo rate as the benchmark funding rate, instead of the benchmark 1-year PBoC lending rate;
3.The convergence of the renminbi fixing rate with the onshore market renminbi rate,
which, along with other measures to internationalize the renminbi, led to the decision by
the IMF, in November 2015, to include the currency in the Special Drawing Right (SDR)
basket, effective October 1. 2016.
4.The announcement, in December 2015, that the exchange rate will be managed against
a trade-weighted basket of currencies (CFETS basket) rather than the bilateral US dollar
rate.
PBoC’s policies at the beginning of 2016 had a slight easing bias, which turned neutral in the
second half of the year. The PBoC cut RRR in March to 17% (from 17.5%). This marked
a pause in the RRR cutting cycle that started in February 2015 and brought the RRR down
by 300 basis points. The PBoC left the 1-year benchmark lending rate on hold throughout
the year, after cutting to 4.35% in the fourth quarter of 2015, from 6% in the fourth quarter
of 2014. The PBoC maintained the 7-day repo interest rate—which the PBoC is working
toward making into the new benchmark rate—roughly steady at around 2.4%. The PBoC’s
decision to maintain stability in the RRR, the benchmark lending rate, and the 7-day repo
rate suggests a neutral monetary policy stance in the second half of 2016.
Inflation in China remained subdued in 2016. Consumer price inflation (CPI) has been contained in recent years, averaging 2.0% since 2013. Core inflation (excluding food and energy)
has been lower during the same period, at 1.6% on average. Producer price inflation began
recovering in October 2016, finally breaking out of five years of deflation (on a year-on-year
basis) that began in February 2012. The move out of deflation was driven by a combination
of stronger-than-anticipated demand, a major inventory destocking, and some constraints on
production, including limited reduction of industrial overcapacity.
Looking to 2017, we believe policy will remain neutral, but with potential for monetary
policy tightening to preempt financial stability risks posed by ongoing fiscal and quasi-fiscal
(credit) expansion. As fiscal and credit easing picked up toward the end of 2015 and through24
China
out 2016—aggregate credit grew 8.75% on average in the 12 months through September
2016 versus a decline of 4.8% in the same period in 2015—the PBoC shifted from monetary
easing to a neutral stance. Looking ahead, we expect authorities to maintain fiscal and credit
expansion, with the exception of the housing sector in Tier 1 cities where we expect tighter
policies introduced in early October to be maintained for most of 2017. In this context, and
in light of rising wholesale funding in the banking system (via so-called wealth management
products, or WMPs), we expect the PBoC to maintain a neutral policy stance, with the risks
skewed toward policy tightening, particularly via macroprudential and/or regulatory measures.
Inflation
USD/CNY
9
10
8
8
6
4
7
2
0
-2
2000
2008
Inflation
2016
6
2000
2008
2016
Reference Rate
As of December 2016
Source: Bloomberg
Exchange Rate Policy and Outlook
The Chinese Yuan (CNY) is a nonconvertible managed floating currency with significant
restrictions on the cross-border flow of capital. The PBoC actively uses international reserves
and capital controls to manage the exchange rate.
The exchange rate policy has undergone several import regime shifts in the past few years. In
July 2005, the PBOC revalued the CNY 2% to CNY8.11 versus the US dollar and shifted
from a fixed exchange-rate regime to a crawling peg (de facto operated bilaterally versus the
USD). Since that date, and over the following 10 years, the CNY appreciated 47% in nominal effective terms and 50% in real effective terms. In March 2014, the PBoC took steps to
widen the renminbi’s daily trading band around the central CNY parity from ±1% to ±2%
in order to “give markets a bigger role in exchange rate pricing.” The move was interpreted
by the markets as intended to engineer a weaker currency in response to weak export data,
leading to currency depreciation. But the market stabilized later in the year, helped by PBoC
intervention and a significant improvement in China’s trade balance. In August 2015, the
PBoC unexpectedly devalued the fixing rate by a cumulative 4.5%, with the stated policy
intention of bringing about the convergence of the fixing rate and the market renminbi rate.
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The decision led to market panic. To contain the panic, the PBoC engaged in heavy FX intervention and capital control tightening.
There were two big changes in exchange-rate policy over the past year. First, the PBoC
announced in December 2015 that they would manage the currency against a trade weighted
basket (CFETS Basket) rather than the bilateral US dollar exchange rate. However, during
the first half of 2016, both the CFETS basket and the bilateral US dollar exchange rate
depreciated in tandem. Next, starting in July 2016, the PBoC appears to have shifted toward
maintaining stability of the exchange-rate basket, while allowing the bilateral US dollar
exchange rate to adjust accordingly. This policy was tested during September and October,
when the US dollar appreciated approximately 2.5% against other major currencies, although
the peak-to-trough appreciation was a much larger 4.3%. The PBoC kept the CFETS basket
stable, while allowing the bilateral exchange rate to depreciate by 1.5%.
Looking ahead to 2017, we expect authorities to resume a depreciation bias for the CFETS
basket. The jury is still out on whether we have witnessed a sustained policy shift toward
managing the currency to the CFETS basket. However, it does appear that the PBoC
exchange-rate policy stance is going to be expressed via the basket, rather than the bilateral
US dollar exchange rate. We continue to expect some additional depreciation of the CFETS
basket as authorities seek to ease financial conditions to fully offset the tightening that was
induced by the broad US dollar strength starting in July 2014. In this context, we expect the
PBoC to depreciate the CFETS basket by an additional 4.0%–4.5% over the course of 2017.
This would also imply additional USD/CNY bilateral exchange rate depreciation in 2017.
REER
130
120
110
100
90
80
2000
2008
2016
REER
Median since Dec 2000
Median last 5 yrs
Median last 10 yrs
As of December 2016
Source: JP Morgan, Lazard
26
China
Country Background
Size
9,596,961 KM2 (4th)
Capital
Beijing
Population
1.4 Billion
Ethnic Groups
Han 92%, Rest 8%
Religion
Buddhist 18.2%, Christian 5.1%, Muslim 1.8%,
Folk Religion 21.9%
Median Age
37.1 Years
Literacy Rate
96.4%
Independence
October 1949
Political System
Communist State
Head of State
President Xi Jinping
Legislative Elections
2018
Legislative Branch
National People’s Congress 2,987 Seats
Economy
Agriculture 8.9%, Industry 40.9%, Service 50.2%
Labor Force
Agriculture 33.6%, Industry 30.3%, Service 36.1%
Merchandise Exports
Electrical and Other Machinery, Apparel, Furniture,
Textiles, Integrated Circuits
Export Partners
United States 18%, Hong Kong 14.6%, Japan 6%,
Korea 4.5%
Currency
Chinese yuan (CNY) or Chinese renminbi (RMB)
As of November 2016
Source: CIA
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Country Timeline
1972
US President Richard Nixon visits. Both countries declare a desire to normalise relations.
1976
Mao dies. "Gang of Four", including Mao's widow, jockey for power but are arrested and
convicted of crimes against the state. From 1977 Deng Xiaoping emerges as the dominant
figure among pragmatists in the leadership. Under him, China undertakes far-reaching
economic reforms.
1979
Diplomatic relations established with the US. Government imposes one-child policy in effort
to curb population growth.
1986-90 China's "Open-door policy" opens the country to foreign investment and encourages development of a market economy and private sector.
1989
Troops open fire on demonstrators who have camped for weeks in Tiananmen Square initially to
demand the posthumous rehabilitation of former CCP General Secretary Hu Yaobang, who was
forced to resign in 1987. The official death toll is 200. International outrage leads to sanctions.
1989
Jiang Zemin takes over as Chinese Communist Party general secretary from Zhao Ziyang,
who refused to support martial law during the Tiananmen demonstrations. Stockmarkets
open in Shanghai and Shenzhen.
1992
Russia and China sign declaration restoring friendly ties. The International Monetary Fund
(IMF) ranks China's economy as third largest in the world after the US and Japan.
Three Gorges project
1993
Jiang Zemin officially replaces Yang Shangkun as president.Preliminary construction work on
the Three Gorges dam begins. It will create a lake almost 600 kilometres (375 miles) long and
submerge dozens of cultural heritage sites by the time it is completed in 2009.
1994
China abolishes the official renminbi (RMB) currency exchange rate and fixes its first floating
rate since 1949.
1995
China tests missiles and holds military exercises in the Taiwan Strait, apparently to intimidate
Taiwan during its presidential elections.
1996
China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan - dubbed the Shanghai Five - meet in
Shanghai and agree to cooperate to combat ethnic and religious tensions in each others'
countries.
1997
Deng Xiaoping dies, aged 92. Rioting erupts in Yining, Xinjiang and on day of Deng's funeral
Xinjiang separatists plant three bombs on buses in Urumqi, Xinjiang, killing nine and injuring
74. Hong Kong reverts to Chinese control.
1998
Zhu Rongji succeeds Li Peng as premier, announces reforms in the wake of the Asian financial crisis and continued deceleration of the economy. Thousands of state-owned enterprises
are to be restructured through amalgamations, share flotations and bankruptcies. About
four million civil service jobs to be axed. Large-scale flooding of the Yangtse, Songhua and
Nenjiang rivers.
50th anniversary
28
1999
Nato bombs the Chinese embassy in Belgrade, Yugoslavia, souring Sino-US relations. Falun
Gong, a quasi-religious sect, outlawed as a threat to stability. Fiftieth anniversary of People's
Republic of China on 1st October. Macao reverts to Chinese rule.
2000
Crackdown on official corruption intensifies, with the execution for bribe taking of a former
deputy chairman of the National People's Congress. Bomb explosion kills up to 60 in Urumqi,
Xinjiang.
2001
April—Diplomatic stand-off over the detention of an American spy plane and crew after a
mid-air collision with a Chinese fighter jet.
2001
June—Leaders of China, Russia and four Central Asian states launch the Shanghai
Cooperation Organisation (SCO) andsign an agreement to fight ethnic and religious militancy
while promoting trade and investment. The group emerges when the Shanghai Five - China,
Russia, Kazakhstan, Kyrgyzstan and Tajikistan - are joined by Uzbekistan.
China
2001
June—China carries out military exercises simulating an invasion of Taiwan, at the same time
as the island's armed forces test their capability to defend Taiwan against a missile attack
from China.
2001
November—China joins the World Trade Organisation.
2002
February—US President George W Bush visits, on the 30th anniversary of President Nixon's
visit to China - the first by a US president.
2002
July—The US says China is modernising its military to make possible a forcible reunification
with Taiwan. Beijing says its policy remains defensive.
2002
November—Vice-President Hu Jintao is named head of the ruling Communist Party, replacing Jiang Zemin, the outgoing president. Jiang is re-elected head of the influential Central
Military Commission, which oversees the armed forces.
2003
March—National People's Congress elects Hu Jintao as president. He replaces Jiang Zemin,
who steps down after 10 years in the post.
SARS virus outbreak
2003
March-April—China and Hong Kong are hit by the pneumonia-like SARS virus, thought to
have originated in Guangdong province in November 2002. Strict quarantine measures are
enforced to stop the disease spreading.
2003
June—Sluice gates on Three Gorges Dam, the world's largest hydropower scheme, are
closed to allow the reservoir to fill up.
2003
June—Hong Kong is declared free of SARS. Days later the World Health Organization lifts its
SARS-related travel warning for Beijing.
2003
June—China, India reach de facto agreement over status of Tibet and Sikkim in landmark
cross-border trade agreement.
2003
July-August—Some 500,000 people march in Hong Kong against Article 23, a controversial
anti-subversion bill. Two key Hong Kong government officials resign. The government
shelves the bill.
China in space
2003
October—Launch of China's first manned spacecraft: Astronaut Yang Liwei is sent into space
by a Long March 2F rocket.
2004
September—Former president Jiang Zemin stands down as army chief, three years ahead of
schedule.
2004
November—China signs a landmark trade agreement with 10 south-east Asian countries; the
accord could eventually unite 25% of the world's population in a free-trade zone.
2005
January—Former reformist leader Zhao Ziyang dies. He opposed violent measures to end
1989's student protests and spent his last years under virtual house arrest. Aircraft chartered
for the Lunar New Year holiday make the first direct flights between China and Taiwan since
1949.
2005
March—Hong Kong Chief Executive Tung Chee-hwa resigns. He is succeeded in June by
Donald Tsang. New law on Taiwan calls for use of force should Taipei declare independence
from mainland China.
Tensions with Japan
2005
April—Relations with Japan deteriorate amid sometimes-violent anti-Japanese protests in
Chinese cities, sparked by a Japanese textbook which China says glosses over Japan's World
War II record. Taiwan's National Party leader Lien Chan visits China for the first meeting
between Nationalist and Communist Party leaders since 1949.
2005
August—China and Russia hold their first joint military exercises.
2005
October—China conducts its second manned space flight, with two astronauts circling Earth
in the Shenzhou VI capsule.
2005
November—Explosion at a chemical plant poisons the Songhua river, cutting off water supplies to millions of people.
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Lazard Emerging Markets Debt
2006
May—Work on the structure of the Three Gorges Dam, the world's largest hydropower
project, is completed.
2006
July—New China-Tibet railway line, the world's highest train route, begins operating.
2006
August—Official news agency says 18 million people are affected by what it describes as the
country's worst drought in 50 years.
2006
November—African heads of state gather for a China-Africa summit in Beijing. Business
deals worth nearly $2B are signed and China promises billions of dollars in loans and credits.
Government says pollution has degraded China's environment to a critical level, threatening
health and social stability.
Missile test
2007
January—Reports say China has carried out a missile test in space, shooting down an old
weather satellite. The US, Japan and others express concern at China's military build-up.
2007
February—President Hu Jintao tours eight African countries to boost trade and investment.
Western rights groups criticise China for dealing with corrupt or abusive regimes.
2007
April—During a landmark visit, Wen Jiabao becomes the first Chinese prime minister to
address Japan's parliament. Both sides agree to try to iron out differences over their shared
history.
2007
June—New labour law introduced after hundreds of men and boys were found working as
slaves in brick factories.
2007
July—China's food and drug agency chief is executed for taking bribes. Food and drug
scandals have sparked international fears about the safety of Chinese exports.
2007
September—A new Roman Catholic bishop of Beijing is consecrated - the first for over 50
years to have the tacit approval of the Pope.
2007
October—China launches its first moon orbiter.
2008
January—The worst snowstorms in decades are reported to have affected up to 100 million
people.
Tibet unrest
2008
March—Anti-China protests escalate into the worst violence Tibet has seen in 20 years, five
months before Beijing hosts the Olympic Games. Pro-Tibet activists in several countries
focus world attention on the region by disrupting progress of the Olympic torch relay.
2008
May—A massive earthquake hits Sichuan province, killing tens of thousands.
2008
June—China and Taiwan agree to set up offices in each other's territory at the first formal
bilateral talks since 1999. Japan and China reach a deal for the joint development of a gas field
in the East China Sea, resolving a four-year-old dispute. The US calls on Beijing to investigate
the cyber attacks, saying China has tightened censorship. China condemns US criticism of its
internet controls.
2010
March—The web giant Google ends its compliance with Chinese internet censorship and
starts re-directing web searches to a Hong Kong, in response to cyber attacks on e-mail
accounts of human rights activists.
2010
September—Diplomatic row erupts over Japan's arrest of Chinese trawler crew in disputed
waters in East China Sea. Japan later frees the crew but rejects Chinese demands for an
apology.
2010
October—Jailed Chinese dissident Liu Xiaobo is awarded Nobel Peace Prize, prompting
official protests from Beijing. Vice-President Xi Jinping named vice-chairman of powerful
Central Military Commission, in a move widely seen as a step towards succeeding President
Hu Jintao.
No. 2 world economy
30
2011
February—China formally overtakes Japan to become the world's second-largest economy
after Tokyo published figures showing a Japanese GDP rise of only four per cent in 2010.
2011
April—Arrest of Chinese artist and activist Ai Weiwei for "economc crimes" sparks international campaign for his release. He is freed after more than two months' detention.
China
2011
July-August—Police kill seven Uighurs suspected of being behind separate attacks in the
towns of Horan and Kashgar blamed on separatists.
2011
November—Authorities present outspoken artist Ai Weiwei with $2.3M tax demand, which
is paid by donations from his supporters.
2011
December—Southern fishing village of Wukan comes to international attention after violent
protests by locals against land seizures by officials. Authorities respond by sacking two local
officials and agreeing to villagers' key demands. China issues new rules requiring users of
microblogs to register personal details.
2012
January—Official figures suggest city dwellers outnumber China's rural population for the
first time. Both imports and exports dip, raising concern that the global economic slowdown
could be acting as a drag on growth.
2012
April—China ups the limit within which the yuan currency can fluctuate to 1% in trading
against the US dollar, from 0.5%. The US welcomes the move, as it has been pressing China
to let the yuan appreciate.
2012
May—Philippines and Chinese naval vessels confront one another off the Scarborough
Shoal reef in the South China Sea. Both countries claim the reef, which may have significant
reserves of oil and gas.
2012
June—China completes its first ever manual docking of a spacecraft with another space
module, when Shenzhou-9 docked with the Tiangong-1 lab module without relying on an
automated system. China's first female astronaut, Liu Yang, took part.
2012
August—Gu Kailai, the wife of disgraced politician Bo Xilai, is given a suspended death sentence after admitting to murdering British businessman Neil Heywood. State media for the
first time link Bo himself to the scandal.
2012
September—China cancels ceremonies to mark the 40th anniversary of restored diplomatic
ties with Japan because of a public flare-up over disputed islands in the East China Sea. Talks
between China and Japan on security matters nonetheless go ahead. China launches its first
aircraft carrier, the Liaoning - a converted former Soviet vessel.
Next generation?
2012
November—Communist Party holds congress expected to start a once-in-a-decade transfer
of power to a new generation of leaders. Vice-President and heir-apparent Xi Jinping takes
over as party chief and assumes the presidency in March 2013.
2013
January—A Tibetan monk receives a suspended death sentence and his nephew 10 years
in jail for inciting eight people to burn themselves to death. Tibetan activists say they were
forced to confess. Nearly 100 Tibetans have set themselves on fire since 2009, many fatally,
in apparent protest at Chinese rule.
2013
February—Japan's Prime Minister Shinzo Abe calls the decision by a Chinese frigate to put
a radar lock on a Japanese navy ship a "dangerous act" that could lead to an "unpredictable
situation". China says Japan should stop "illegal" activities near a group of Japanese-controlled
islands over which both countries, plus Taiwan, claim sovereignty.
2013
March—Xi Jinping takes over as president, completing the once-in-a-decade transfer of
power to a new generation of leaders. He launches an efficiency and anti-corruption drive.
2013
August—Two ethnic Uighur men are sentenced to death over clashes in Xinjiang in April that
left 21 people dead, according to Beijing.
2013
September—Former senior leader Bo Xilai is sentenced to life in prison for bribery, embezzlement and abuse of power in the
2013
October—A car drives into a crowd and catches fire in Tiananmen Square in Beijing, killing
five. Authorities suspect it was an attack by Uighur separatists.
2013
November—Communist Party leadership announces plans to relax one-child policy, in force
since 1979. Other reforms include the abolition of "re-education through labour" camps. China
says it has established a new Air Defence Identification Zone (ADIZ) over an area of the East
China Sea, covering disputed islands controlled by Japan and a disputed South Korean-controlled
rock. Japan and South Korea both protest against the move, and the US voices concern.
31
Lazard Emerging Markets Debt
Lunar mission
2013
December—China successfully lands the Yutu ("Jade Rabbit") robotic rover on the surface of
the moon, the first soft landing there for 37 years.
2014
January-May—Attacks in Xinjiang Region and elsewhere in China, focused on markets and
railway stations and attributed to Uighur separatists, leave tens of people dead and more
injured.
2014
January—China allows foreign companies majority ownership of some telecom and internet
services in the Shanghai free trade zone. A number of prominent anti-corruption activists are
put on trial, prompting criticism from human rights groups.
The planned three-month mission on the moon of China’s Yutu robotic rover is cut short by
mechanical problems.
2014
February—China's trade surplus jumps to $31.9B (£19.4B)—up 14 per cent from a year earlier—easing concerns the world's second-largest economy may be stuck in a slowdown.
2014
March—Chinese e-commerce giant Alibaba and China's largest Twitter-like service Weibo
unveils plans to sell shares on the US stock market.
2014
April—A court jails four activists linked to the New Citizens' Movement, which campaigns for
government transparency
2014
May—The US charges five Chinese army officers with industrial cyber-espionage, in the first
case of its kind. A row with Vietnam over disputed islands escalates, as ships from the two
countries collide in the waters of the South China Sea. Chinese workers flee Vietnam after
the row sparks anti-China riots. China signs a 30-year deal worth an estimated $400B for gas
supplies from Russia's Gazprom.
Hong Kong protests
2014
September-October—Protests against Beijing's plans to vet candidates for elections in 2017
grip Hong Kong.
2014
December—Ex-security chief Zhou Yongkang, the most senior Chinese official to be
investigated for corruption, is arrested and expelled from the Communist Party.
2015
January—China's economic growth falls to its lowest level for more than 20 years - 7.4%
percent in 2014. Government revises growth targets down.
2015
September—President Xi pays official visit to the United States to seek investment in China;
agrees to abjure from economic cyber-espionage.
2015
October—China expresses anger at US naval ship sailing by artificial reefs Beijing is building
among disputed Spratly Islands in South China Sea. The Communist Party announces it has
decided to end the decades-old one-child policy.
2015
November—China's President Xi Jinping and Taiwan's President Ma Ying-jeou hold historic
talks in Singapore, the first such meeting since the Chinese Civil War finished and the nations
split in 1949.
2016
January— Economic growth in 2015 falls to lowest rate in 25 years (6.9%, down from 7.3%
in 2014), and International Monetary Fund predicts further deceleration over next two years.
Source: BBC
32
China
Notes
1 As of December 2016.
2 “GDP based on PPP: World Economic Outlook Database,” International Monetary Fund, October 2016,
accessed on October 20, 2016. http://www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx.
3 “The BCG Global Manufacturing Cost-Competitiveness Index,” BCG.Perspectives.com, August 19, 2014,
accessed on November 6, 2015, https://www.bcgperspectives.com/content/interactive/lean_manufacturing_globalization_bcg_global_manufacturing_cost_competitiveness_index/.
4 “The Global Competitiveness Report 2015-2016,” World Economic Forum, accessed on October 21, 2016,
http://reports.weforum.org/global-competitiveness-report-2015-2016/.
5 “The World Factbook,” US Central Intelligence Agency, accessed on November 6, 2015 https://www.cia.
gov/library/publications/the-world-factbook/geos/ch.html.
6 Magnier, Mark. “China’s Communist Party Approves Five-Year Plan,” The Wall Street Journal, October 29,
2015, accessed on November 6, 2015, http://www.wsj.com/articles/chinas-communist-party-approves-fiveyear-plan-1446124597.
7 Page, Jeremy, “China Deepens Xi’s Powers With New Security Plan,” The Wall Street Journal,” November
12, 2013, http://online.wsj.com/news/articles/SB10001424052702304644104579193921242308990.
8 Economy, Elizabeth C,, “China’s Imperial President,” Council on Foreign Relations, Foreign Affairs Article,
November/December 2014, accessed on November 6, 2015, http://www.cfr.org/china/chinas-imperialpresident/p33968.
9 https://www.ft.com/content/48abb5dc-7e3b-11e6-8e50-8ec15fb462f4, accessed October 21, 2016.
10“Innovation put at core of China’s five-year plan,” Xinhua.net, October 29, 2015, accessed on November 19,
2015, http://news.xinhuanet.com/english/2015-10/29/c_134763789.htm.
11As of October 21, 2016 Source: Bloomberg.
12https://www.brookings.edu/testimonies/chinas-economy-and-financial-markets-reforms-and-risks/,
accessed October 21, 2016.
13As of November 2015, Source: Bloomberg.
14Szu Ping Chan, “IMF: Shadow banking poses threat to financial stability,” The Telegraph, October 1, 2015,
accessed on November 19, 2105, http://www.telegraph.co.uk/finance/economics/11131354/IMF-Shadowbanking-poses-threat-to-financial-stability.html.
15“China’s shadow banks – A moving target: China’s shape-shifting shadow banks evolve once more,” The
Economist, September 6, 2014, accessed on December 11, 2014, http://www.economist.com/news/
finance-and-economics/21615625-chinas-shape-shifting-shadow-banks-evolve-once-more-moving-target.
16http://www.bloomberg.com/news/articles/2016-07-27/china-mulls-tightening-wealth-product-rules-21stcentury-says, accessed October 21, 2016.
17“China Plans Wealth-Product Rules to Cut Shadow Banking Risks,” Bloomberg, December 5, 2014,
accessed on December 11, 2014, http://www.bloomberg.com/news/2014-12-05/china-plans-wealth-product-rules-to-limit-shadow-banking-risks.html.
18“People’s Republic of China: 2016 Article IV Consultation,” International Monetary Fund, IMF Country Report
No.16/270, August 2016, http://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf.
19“People’s Republic of China: 2016 Article IV Consultation,” International Monetary Fund, IMF Country Report
No.16/270, August 2016, http://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf.
20Tejada, Carlos, “China Places Cap on Local Government Debt,” The Wall Street Journal, August 30, 2015,
accessed on November 19, 2105, http://www.wsj.com/articles/china-places-cap-on-local-governmentdebt-1440928627.
21Chivakul, Mali, W. Raphael Lam, Xiaoguang Liu, Wojciech Maliszewski, and Alfred Schipke, “Understanding
Residential Real Estate in China,” International Monetary Fund, IMF Working Paper 15/84, April 2015, https://
www.imf.org/external/pubs/ft/wp/2015/wp1584.pdf.
22“People’s Republic of China: 2016 Article IV Consultation,” International Monetary Fund, IMF Country Report
No.16/270, August 2016, http://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf.
23Anderlini, Jamil, “China property market set for demographic hit,” The Financial Times, December 5, 2014,
accessed on December 11, 2014, http://www.ft.com/intl/cms/s/0/ca218cbc-7c63-11e4-9a86-00144feabdc0.
html#axzz3L9rARLmJ.
24“People’s Republic of China: 2016 Article IV Consultation,” International Monetary Fund, IMF Country Report
No.16/270, August 2016, http://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf .
25“The Global Demographic Transition—What Role Are China & Other Emerging Asian Economies Likely to
Play,” Citi, October 21, 2013.
26“China’s demographic transition,” ChinaDaily.com.cn, November 4, 2015, accessed on November 19, 2015,
http://www.chinadaily.com.cn/business/2015-11/04/content_22363684.htm.
27Mody, Seema, “Changing its baby policy may not be enough for China,” CNBC.com, November 2, 2015,
accessed on November 19, 2015, http://www.cnbc.com/2015/11/02/changing-its-baby-policy-may-not-beenough-for-china.html.
28For more information on exchange rate policy, please see the next section.
33
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