QUIZ TWO

ECON2226_1A_2020 – Chinese Economy

Date: November 6th, 2020

Name: ______________________________ Student ID: ________________________

General Instructions:
1. Time: 11:20 am-12:20 pm, November 6, 2020, in-class or on Moodle;
2. This is a closed-book quiz and please turn on your camera during the quiz;
3. File name: please use the following format for your file: QuizTwo_StudentID_name.docx if you
take the online quiz;
4. Please submit your answer file on time. 10 minutes peacetime can be allowed for your
submission online. Late more than 5 minutes will not be accepted;
5. Both direct answer through word file or scanned/photo copy of handwriting file will work; And
clearly mark the ID number for each question;
6. This exam should be done individually. Identical answers with your classmates’ work are
considered as plagiarism, which will lead to a zero score for that question or even the failing
grade for the entire course.

Part One: Multiple Choices

Note:
 There is at least one correct answer for each question.
 Please select all the correct answers to get the point for that question. Inclusion of any incorrect answer or
missing any correct answer will get you lose the whole points for each question.
 The wording of the question (statement vs statements) has NO relation with the number of correct answers
 Each question accounts for 3 points out of 100 points in this quiz.
 Please write your answers for MC questions in the table below:

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10
                 
Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20
                   

1. The banks belong to BIG FIVE state-owned banks in China are:

A. Industrial and Commercial Bank of China
B. Bank of China
C. Agricultural Bank of China
D. China Construction Bank

2. The policy banks in China include:

A. People’s Bank of China
B. China Development Bank
C. Agricultural Development Bank of China
D. Export-import Bank of China

3. The CORRECT statements about the banking systems in China include:

A. Young but grow fast

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 B. Not influenced by the government entities
C. Regulations of banking industry is still under development
D. The market share of large commercial banks declines during recent years

4. The most important source of revenue for banking industry in China is:
A. Investment returns
B. Interest income from loan
C. Wealth management service
D. Credit card service

5. During early 2000, the reasons for large amount of non-performing loans in the commercial
banks in China include:
A. Soft budget constraints on the state-owned enterprises
B. Credit control is low in the state commercial banks
C. The banks invest too much money in the stock market
D. The central bank has strong administrative control on the interest rate of the commercial
banks

6. How many stock exchanges are in China (OVERALL):

A. One
B. Two
C. Three
D. Four

7. The characteristics of stock market in China include:

A. High turnover ratio
B. High profitability and high dividend yield
C. High volatility
D. Dominated by institution investors

8. Which shares are designed for companies incorporated inside of China:

A. A share
B. B share
C. H share
D. N share

9. The INCORRECT statements about the split-share structure are:

A. It happens to the A share in China
B. It classifies the shares to be two parts: tradeable and non-tradeable (in stock market)
C. Non-tradeable part can never be transacted
D. Non-tradeable shareholders have different interest with tradeable share holders

10. Which one is the current IPO allocation mechanism:

A. Savings linkage offering
B. Online fixed pricing offering
C. Auction-like IPO allocation
D. Bookbuilding IPO allocation

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11. During the welfare allocation period of housing market in China, which one is the most important
source of housing supply for urban households:
A. Commercial housing developers
B. Work unit
C. Self-built
D. Foreign investors

12. The policies that Chinese government has used to support the house purchase include:
A. Housing provident fund
B. Economic and comfortable housing
C. Welfare allocation of housing by SOEs
D. 70-90 policy

13. About the supply side of housing market in China, which statements are CORRECT:
A. The market is concentrated by a few very large developers
B. The level of privatization is high
C. The level of globalization is high
D. Construction expense accounts for the largest share in the cost structure

14. The funding sources of real estate developers in China include:

A. Bank loans
B. Raised by developers themselves
C. Trust company
D. Pre-sales and funding from customers’ mortgage

15. Factors that could affect consumers’ home purchasing in China include:
A. Housing price
B. Interest rate for mortgage loan
C. Disposable income for the household
D. Rental expense

16. Which statements about housing bubbles in China are CORRECT:

A. China still experience strong demand due to the increasing level of urbanization
B. Chinese households still have strong ability to buy houses given their high savings
C. Housing developers can provide enough residential housing since they can get land at very
low price
D. Chinese government plays a critical role in stabilizing the housing market

17. Which statements are NOT CORRECT about the international trade of China:
A. China has transformed from an isolated economy to an open economy
B. The trade structure is concentrated
C. Processing trade is still taking about one third of total trade in China
D. China is highly competitive in technology-intensive goods in the trade

18. In which year, China joined WTO:

A. 1949

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 B. 1978
C. 1986
D. 2001

19. The CORRECT statements about the trade relationship between China and US include:
A. China is the 3rd-largest good export market of US in 2019
B. China is the fastest growth market for US service export during the year 2008-2017
C. China is running trade deficit with US driven by China’s good imports
D. The trade relationship between China and US has become increasingly complex

20. Based on our discussion in the class, Trump’s rationales for tariffs against China include:
A. US trade deficit with China has soared since 1985 which hurts US manufacturing and
employment
B. China gains access to U.S. technology by employing many unfair procedures.
C. China’s industrial policy, especially “Made in China 2020”, involves substantial subsidies
and support to the state-owned firms, which further hurt US economy
D. China did not successfully fulfil the commitments to access to WTO

Part Two: Short Essay

Note: please explain in detail to each question. Only list the bullets as the lecture notes will lead to a
discount of your points. Each question accounts for 20 points of 100 in this quiz.
1. In the early 2000s, one of the major issues of the banking system in China is the non-performing
loans, which are the loans in default or close to being in default. In 2001, about 29 percentage of
total bank loans in China are non-performing loans which caused significant threat to Chinese
economy. Please discuss what the negative impacts can be if banks hold large percentage of non-
performing loans in China. Hint: please focus on the impact on the banks and the economy in
China.

With non-performing loans in the banking system, China is facing a long-term challenge.
There are several negative effects, namely on the state commercial banks and on economic
reform and the growth of real economy.

First, non-performing loans will contribute to the decline of profitability of the state
commercial bank. As the major source of revenue for banks in China are interest income from
loan, but now they cannot receive principal and interest from the non-performing loan. As they
cannot receive loan repayment from the non-performing loans, their capital reserve will
decrease such that they have constraints in borrowing or lending money out. This will
negatively affect their liquidity and deteriorate the creditworthiness of the banks. Investors
may have low confidence on the banks and think it is not safe to put their deposits inside the
bank. If many of them withdraw their deposits at the same time, the bank may not have
sufficient reserve to meet their withdrawal demand and thus bank runs may be incurred. If
serious, the entire banking system will be affected as banks usually borrow from one another.

Second, non-performing loans will lead to the collapse of the real economy. Banks have an
important role in channel funds from the savers to the investors. With the existence of non-

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 performing loans, people may think that the banks are not doing good jobs and they have less
confidence in putting money into the banks. When they withdraw their money out of banks and
refuse to put money into the banks, the banks will not have enough reserve and thus they have
not enough capital to lend out. Many corporations, especially small and medium size
enterprises (SMEs) rely on the banks for their financing and liquidity support as they are not
listed in the stock market and thus banks are the only source of their financing and liquidity
support. When the banks do not have enough capital to lend out, SMEs may have financial
difficulty, and some may even go bankrupt. Then decline of investment will be resulted. As
SMEs are important for employment in labor market, bankrupt of some of the SMEs will lead
to significant increase in the unemployment. This will at last affect the economic growth of
China.

2. Starting from late 1990s, urban housing market in China became commercialized and started to
grow quickly. Since then, the average price for residential housing experienced a dramatic
increase, from 1,854 yuan/m2 in 1998 to 8544 yuan/m2 in 2018. Surprisingly, given this rapid
increase, Chinese households continue to show strong signal of demand reflected by the high
level of ownership rate in the world. Based on your learning and understanding, please pick three
factors that you believe are the most important ones contributing to the increasing demand of
housing in China.

There are several factors contributing to the increasing demand of housing in China, namely
strong demand, the high savings and low cost of holding property, Hukou policy, wealth
preservation and marriage incentive.

First, there is still strong demand of housing in China by increasing level of urbanization,
upgrading and replacement. As there is better income and facilities in the urban areas, the level
of urbanization keeps increasing and this increases the demand of housing. With the economic
growth in China, some people become wealthier and they would like to move into a bigger
apartment with better location. This results in increasing upgrading demand and thus the
overall demand of housing in China. Also, there is increasing replacement demand as people
would like to change to a more convenience location or home-school district for better
education for their kids.

Second, increasing demand is driven by high saving and low cost of holding property. Due to
culture issues, Chinese people believe that saving and buying their own houses are of upmost
importance as it makes them feel safer. Also, there is lower cost of holding property in China
when compared to other countries like US and Tokyo. Therefore, all these factors support the
increase of housing purchase.

Third, Hukou policy also contribute to the increase of housing demand in China. As Hukou
policy affect the right of purchase housing-control demand, urban residents have to be home-
owners to gain access to various public services such as education and healthcare. In order to
provide better education for their kids and have well-developed healthcare system, Chinese
parents will prepare for buying houses in the cities with prestigious schools and better medical
services. Therefore, this increases the demand of housing in China.

In addition, wealth preservation is another important factor for the increasing demand for
houses in China. The property prices in China almost keeps increasing due to the strong

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demand and some people will choose to buy houses as investment rather than buying stocks
and bonds in the market. Therefore, this further increases the demand for housing.

Moreover, marriage incentive contributes to the increasing demand of houses as well. Young
couples nowadays no longer live with their parents after marriage like in the past. Once they
prepare for marriage, they will buy houses for their own uses. Therefore, marriage is one of the
factors contributing to the increasing demand of houses in China.

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