Introduction to the Economy

Behind almost every major market trend is some underlying economic factor. From rising GDP growth rates to declining unemployment or the threat of Asia's economic crisis, economic trends are a major determinant of what happens to China’s companies and their stock prices. Along with corporate earnings, economic reports are the most watched regularly scheduled pieces of news. Almost every week there is an economic report that can help investors estimate what the future of the economy holds. This section will educate you about several basic, yet crucial economic concepts and will tell you the economic information that's most important to you as an investor.

Fiscal Policy

The economy can be impacted by the China’s government through two major types of economic policy. The first type is called fiscal policy, which is economic policy instigated by the Central Government. The fundamental tools at the disposal of these branches of government are taxation law and government spending. By changing tax laws, the government can effectively modify the amount of disposable income available to its taxpayers. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies Or, the government could choose to increase government expenditure by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal policy and its effect on the economy.

2003 China will continue to use a pro-active fiscal policy. Expanding domestic demand is a long-term and basic foothold for China's economic development, while the implementation of pro-active fiscal policy is an important measure to expand domestic demand. The pro-active policy, characterized by increasing government expenditure to spur domestic consumption demand, was introduced in 1998 as a major effort to offset the negative impact of the Asian financial crisis. The central government has so far issued a total of 660 billion yuan (US$79.5 billion) worth of long-term treasury bonds and plans to issue another 140 billion yuan (US$16.9 billion) in bonds in 2003.

Monetary Policy

The second way the government can impact the economy is through monetary policy. Monetary policy is instigated by the central bank of a nation (see PBC) to control the supply of money within the economy. By impacting the effective cost of money, the central bank can affect the amount of money that is spent by consumers and businesses (see The Federal Reserve and Monetary Policy).

International Economics

While most investors are concerned with the state of affairs in China, it is also important to keep an eye on what is going on around the world. More and more it seems that the global economy is taking shape with circumstances in many parts of the world having a large impact on things at home.

From an economic perspective, currency valuations are probably the most important factor to be concerned about. Depending on the state of various economies, the relative value of a yuan(or a dollar, yen, Euro, etc.) can fluctuate compared to other currencies. You will often hear about a "strong Yuan" or a "weak Yuan." A strong Yuan is when the Yuan can be converted into a historically high quantity of other currencies. A weak Yuan means that the Yuan cannot buy very much of another currency. These factors have an impact on imports and exports because goods and services from a foreign nation are usually purchased in the currency of the producing nation. For example, if the Yuan were strong, one would expect imports to be high and exports to be low because the Yuan will buy a lot in a different country while it is expensive to purchase dollars with outside currencies. Alternatively, with a Yuan you would expect high exports and low imports. For investors who choose to invest in foreign securities, there are additional risks to be concerned about. In addition to worrying about the performance of the company and its stock, foreign investors need to be concerned about currency risk. Currency risk is the risk of an investment losing value because of changes in the value of the foreign currency.

The other major concern for China investors is the amount of goods and services the country exports to other countries. The U.S. is a major exporter of products to countries around the globe, so U.S. companies and the U.S. economy are often dependent upon foreigners being able to purchase American goods and services. When other economies struggle, decreasing the disposable incomes and capital expenditures of those countries, the effects are often felt at home. In some cases, such as the Japanese collapse during the 1990s, the U.S. government can step in and boost up the foreign economy with investments or credit.

The European Central Bank is analogous to the Federal Reserve Bank of the United States. Therefore, the ECB attempts to maintain price stability for the currency of the European Union, the Euro. The central banks of the member nations of the EU are all part of the larger ECB system. Like the Fed, the ECB influences interest rates by controlling the rate at which member banks may borrow from the ECB.