Evaluating an Emerging Market
Evaluating an Emerging Market
Emerging market in China
China is one of the leading emerging markets. Due to the rapid growth in China’s online economy, it has enabled China to be among the largest and fastest growing economy in the world (Global Intelligence Alliance, 2013). The government has created an environment for its citizens to own private investments and individuals to make international investments (Global Intelligence Alliance, 2013). The government of China is a communist state government meaning the state plans and controls the economy of the nation where a single party has all the power regarding property ownership and investment opportunities (Global Intelligence Alliance, 2013). The major industries in China are the motor vehicles industries, machines manufacturing, steel production, petroleum, and food processing (Global Intelligence Alliance, 2013).
Some of the benefits of doing business in China include the high demand for products manufactured in China due to the wide range of products made in China and the large market share it has across the globe (Global Intelligence Alliance, 2013). This gives China an advantage as an emerging market and an assurance of success since the country is striving to reach its goals of becoming a developed country. China has a good financial strength and opportunity since the Chinese government has no debts with the banks having enough capital to lend to investors due to the high rate of saving by the Chinese citizens (Global Intelligence Alliance, 2013). This is a good opportunity to any investor looking for financial capital to start any investment in the republic of China. This is also an advantage to any economy especially for investors and global trade (Global Intelligence Alliance, 2013).
Statistical and Qualitative Information on Gross Domestic Product
The gross domestic product value of China represents an average of 20% of the total world economy making it the second largest economy in the world after the United States (Karam ; Ken Wilcox, 2016). The Chinese GDP growth in 2017 was 6.8% with an annual GDP of 11221 billion US dollars making it to be ranked position 71 in the world (Karam ; Ken Wilcox, 2016). This is also attributed to the large worth of natural resources in the country, which is estimated to be 23 trillion US dollars 90%, which are important metals, used in the manufacturing industry (Karam ; Ken Wilcox, 2016). Due to the high population saving in China, it has enabled the country to have highest number of banking assets in the world with a total of 39.9 trillion US dollars with 26.54 trillion US dollars total deposits by the citizens of China. The GDP ranking per sector has the industry sector with the largest percentage with a 39.8% (Karam ; Ken Wilcox, 2016).
Statistical and Qualitative Information on Inflation
China’s inflation rate has been decreasing steadily from 2011 where the inflation rate was 5.4% until 2015 where the inflation rate was 1.44%. From 2016 to 2018, the rate has been on the rise with the current inflation rate at 2.2% with future projections indicating a steady increase of the inflation rate indicating a 3% in 2021 (Karam & Ken Wilcox, 2016). This rate has been determined by the increase in costs in food products, which led to an increase in the prices of other commodities and other non-food items increasing the inflation rate. The consumer price index is based on the price of food because it carries the highest total weight of 31.8% (Karam & Ken Wilcox, 2016).
Statistical and Qualitative Information on Political Risks
The Chinese communist party has created a suitable environment for foreign investors, which has resulted to a rapid growth in the country’s economy (Karam ; Ken Wilcox, 2016). This has led to a high relationship between the government and the economy. The economy has generated over 770 billion US dollars contributing to the government owning more than 76% of assets in the country’s economy (Karam & Ken Wilcox, 2016). The involvement of the government in the business sector has led to the business economy in accounting for 21% of the total GDP of China’s economy (Karam ; Ken Wilcox, 2016). The Chinese government has continued to create a better business environment for any foreign investor interested in the market although any investor or organization interested in investing in China has to negotiate with the government of China (Karam ; Ken Wilcox, 2016).
This negotiation may turn away investors or slow down the implementation of business ventures for investors and this creates a risk to the investors as the government involvement means that the government can change the laws any time which can negatively impact the investors (Karam ; Ken Wilcox, 2016). Legal protections to foreign investors are poorly enacted regardless the 40% contribution to China’s economy (Karam & Ken Wilcox, 2016). Some of the laws are aimed at protecting the Chinese organizations without the consideration of other foreign organizations. Foreign investors should consider the political challenges in China regardless of the beneficial aspects that come with the big market share. Foreign investors should plan and strategize on emergency plans in case there are situations unfavorable to them (Karam & Ken Wilcox, 2016).
Statistical and Qualitative Information on Economic Risks
The Chinese government has invested so much on infrastructure with projects on roads, rail, and telecommunication at the forefront. This has led to stagnation in economic growth with more than half of the investments by the government decreasing in their value as the costs have outweighed the benefits associated with the infrastructure investment (Kedia & Aceto, 2015). This has led to an increase in the credit level by the Chinese government with the corporate credit level of 165% of the GDP having risen over the past 5 years (Kedia & Aceto, 2015). According to an IMF report, China’s debt to GDP ratio was 257% in 2017 and projections indicate an increase to 300% in 2020 (Kedia ; Aceto, 2015).
Other economic risks include the aging population, which has led to a reduced workforce, which is a challenge to the Chinese economy (Kedia ; Aceto, 2015). The Chinese economy is also facing the challenge of corruption that has resulted to the government spending an average of 3% to address the issue (Kedia ; Aceto, 2015). Corruption is a major concern for any investor and although the Chinese government is showing efforts to address the issue with high-profile individuals being taken to court and some being jailed, many investors still think that the process lacks transparency (Kedia ; Aceto, 2015).
Statistical and Qualitative Information on Country Demographics
China has a very large population compared to other countries with an estimated population of 1,409,517,397 (Kedia ; Aceto, 2015). The population had been growing rapidly until the government had to intervene with a one-child family program aimed to reduce the population level (Kedia ; Aceto, 2015). Due to the increased development in infrastructure, the death rate has dropped significantly leading to the high population rate. This high population is a major concern for China in providing a good quality of life to its citizens. The elderly large population is a basis for most of the market products by creating most of the business opportunities (Kedia ; Aceto, 2015).
Over 50% of China’s population is composed of the elderly generation. Due to this high population, the GDP is expected to rise in 2050 by a third, which is good for business opportunities (Kedia & Aceto, 2015). Due to the reduction in workforce based on the retirement of the ageing workforce, there is major challenge for investors in acquiring a skilled and experienced workforce (Kedia & Aceto, 2015). However, the older generation provides a diverse market due to their financial stability and need of products in their old age. Some of the industries that could benefit from this generation are the food, beauty products, and the travel industry (Kedia & Aceto, 2015).
Statistical and Qualitative Information on Liquidity of Local Debt
China has created a high liquidity splurge with a 63% supply of money in the world (Wise, Armijo, & Katada, 2015). This has created a high supply of money in its economy than any other country in the world. The main challenge facing the country is that even with this power, the local debt is still increasing (Wise, Armijo, & Katada, 2015). The total debts facing China are about 259% of its GDP, which is a large amount in an emerging market. This is a danger to the economy of China because any disruption to its supply of money required to pay any debts will lead to an increase in the debt level (Wise, Armijo, & Katada, 2015). This is a risk to investors who are now investing in other foreign countries. This decision can negatively affect the liquidity of China, which is required to protect it from any debts (Wise, Armijo, & Katada, 2015).
This has led to China challenging investments of more than 1 billion US dollars in overseas countries, which include gold and real estate investments (Wise, Armijo, & Katada, 2015). China is pumping a lot of money to the economy to entice investors with over 130 billion US dollars in the market to expand its liquidity more and bring a balance between the market and its debt (Wise, Armijo, & Katada, 2015). With the foreign exchange reserve remaining fixed, it is a big risk for China due to its rapid growth in its money supply. This can also be affected by other external factors out of control by the Chinese government, which may include hikes in the Federal Reserve, and too much cash outflow, which can affect the capacity of China to generate enough supply of money (Wise, Armijo, & Katada, 2015).
Liquidity of Debt between China and the United States
Developed markets like the United States are easier to identify due to their developed and large economies. These countries have a high level of liquidity (Edwards & Lawrence, 2013). This high level of liquidity is aimed to settle any arising debts facing a country, which creates a suitable environment for foreign investors by being able to meet their short-term as well as their long-term payment obligations without affecting their economies negatively (Edwards & Lawrence, 2013). This is beneficial to the investors especially the foreign investors. On the other hand, emerging markets like China have foreign reserves to address any changes in the exchange rates (Karam & Ken Wilcox, 2016). Liquidity conditions for emerging markets are continuously improving which is not so for developed markets. These markets are also considering and addressing other risks that may hinder a good business environment (Karam & Ken Wilcox, 2016).
Government Regulations between China and the United States
Government regulations on emerging markets are suitable to entice investors. This may include tax exemptions, favorable laws, and low legal fees (Karam & Ken Wilcox, 2016). Most governments on emerging markets have implemented favorable policies for organizations to work freely which in result leads to economic growth of the country. The government may provide financial incentives for the organizations to invest heavily and increase their production (Karam & Ken Wilcox, 2016).
In developed countries like the United States, the government has increased its regulations and policies to increase environmental and health safety to protect its citizens from the negative side effects of too many industries (Edwards & Lawrence, 2013). These countries are also reconsidering the established investments and enacting policies, which favor some organizations and investments in their country to ensure a balance and sustainability of the industries (Edwards & Lawrence, 2013). Some investments may cause stunted economic growth where the government must come in and control the economy through the regulatory policies to ensure a constant growth in its economy (Edwards & Lawrence, 2013).
GDP between China and the United States
The middle class is rapidly rising across the globe increasing the GDP per capita, which is a benefit to emerging markets (Karam & Ken Wilcox, 2016). This is because of the increased revenue earned by the population in the emerging markets increasing the consumer spending which impacts positively on the investments in the country (Karam & Ken Wilcox, 2016). With a good income, the living conditions of a country increase leading to a growth in the economy, which is favorable for investors in those countries (Karam & Ken Wilcox, 2016). An example of this trend is in China.
On the other hand, this growth in emerging markets is closing the gap between developed markets and emerging markets (Edwards & Lawrence, 2013). The developed markets have a high GDP and since investors are looking for countries that have a growing market due to the benefits of a growing economy compared to an already grown economy, investors will likely invest in emerging markets more than in developed markets (Edwards & Lawrence, 2013). Developed markets require investors to adapt to new modes on investments to be able to compete with the current market trends (Edwards & Lawrence, 2013).
Market Liquidity of Local Debt between China and India
China has a high market liquidity of local debt and is able to cover any debts and payments (Kedia & Aceto, 2015). This has been achieved by the fact that China is able to make more money or use the Federal Reserve that act as a security for the country. India on the other hand, which is an emerging market, has heavily invested in bonds to bring a balance on liquidity (Hill & Palit, 2018). These bonds are meant to secure the investors. The government also carries out open market bond sales to supply money into the business environment (Hill & Palit, 2018). There is a high liquidity in the banking system. India’s debt market is important and can be used as a substitute to banks in providing finances to investors in their country (Hill ; Palit, 2018).
Equity Market between China and India
India’s equity market was 2.3 trillion US dollars in 2017 and is predicted to increase to 6.1 trillion by 2027 (Hill & Palit, 2018). The equity market of China was 13.8 trillion US dollars in 2017 and is projected to increase to 30 trillion dollars by 2027, which is almost the size of the U.S equity market (Kedia & Aceto, 2015). This shows an increase on the equity market which leads to increase in the interest rates. This will mean more costs in borrowing money, which can affect investors negatively. The spending by consumers will decrease as many products and services will become more expensive affecting the revenues that investors make (Kedia & Aceto, 2015).
Market Exchange between China and India
India has the National Stock Exchange and the Bombay Stock Exchange as the largest stock exchanges for share trading (Hill & Palit, 2018). These stock exchanges provide easy trading to investors across the country. The National Stock Exchange has been ranked position 10 in the world’s largest stock exchange in 2017 with more than 1.41 trillion US dollars of the total market capitalization (Hill ; Palit, 2018). China on the other hand has two major stock exchanges, which are the Shanghai Stock Exchange, and the Shenzhen Stock Exchange (Kedia ; Aceto, 2015). Shanghai Stock Exchange has been ranked the third largest stock market with a market capitalization of 5.5 trillion US dollars. The Shanghai Stock Exchange is not accessible to foreign investors and is controlled by the Chinese government (Kedia ; Aceto, 2015).
Regulatory Bodies between China and India
The market of India is regulated and controlled by the three regulatory bodies which are the Ministry of Finance, the Reserve Bank of India, and The Securities and Exchange Board of India (Hill ; Palit, 2018). China has the China Securities Regulatory Commission (CSRC) which is a national body with the responsibility of maintaining an orderly and a fair market in China. The CSRC heads 36 other bureaus, which cover the entire geographical regions of China (Kedia ; Aceto, 2015).
Political Trends of China
Some of the political trends in China that play an important role in the emerging market include the creation of small groups which are used in coordinating policy making across all government agencies (Karam ; Ken Wilcox, 2016). These leading small groups are involved in important decisions and guidelines impacting the country’s economy. Some of the roles include financial and economic affairs, which are important in creating a suitable environment for foreign investors (Karam & Ken Wilcox, 2016). China has also implemented new anti-corruption strategies, which are led by a commission answerable to the state and not to the party. This measure is aimed at creating a good working environment for the citizens of China and foreign investors. Funding should be done to these groups to ensure that they implement and monitor any government policies across the country (Karam & Ken Wilcox, 2016).
Economic Trends of China
China’s economy has been rapidly expanding based on research by the National Bureau of Statistics (Arouri, Boubaker, ; Nguyen, 2014). This is due to the government regulation policies, which favor investors. Employment rate has also increased with the unemployment rate lower than 5% (Arouri, Boubaker, ; Nguyen, 2014). Due to the high number of investments, more jobs are being created every year, which is an indication of development and economic growth for any country. The number of infrastructure coming up every day is also an indication of growth and this will enhance trade within the country and foreign countries (Arouri, Boubaker, ; Nguyen, 2014). Most industries in the country have also witnessed a rise in their profits, which has led to an increase in their productivity. More provision of capital should be availed to entice more investors to invest in the country (Arouri, Boubaker, ; Nguyen, 2014).
Technological Trends of China
China has been on the forefront in technology advancements. China has invested heavily in global tech, which has led to Chinese companies manufacturing their own products with companies like the GoPro becoming a global dominant in drone production (Arouri, Boubaker, ; Nguyen, 2014). Besides the products, China has also invested in internet services with Alibaba and Tancent among the top leaders on the internet. Both Alibaba and Tancent have a net worth of 1 trillion US dollars (Arouri, Boubaker, ; Nguyen, 2014).
China has not been left behind in mobile phone investment with most of the services using the Smartphone technology, which includes payment of services, ordering for services and other online services can be all accessed with a touch of a button (Arouri, Boubaker, ; Nguyen, 2014). With such advancements in technology, it will give more convenience to consumers as well as the investors. The government can support upcoming companies, as technology is a medium for easier operation of investment services (Arouri, Boubaker, ; Nguyen, 2014).
Arouri, M. E. H., Boubaker, S., ; Nguyen, D. K. (2014). Emerging markets and the global economy. Oxford: Elsevier.
Edwards, L., ; Lawrence, R. Z. (2013). Rising tide: is growth in emerging economies good for the United States? Washington, DC: Peterson Institute for International Economics.
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Hill, E., ; Palit, A. (2018). Employment policy in emerging economies: The Indian case. London: Routledge, Taylor ; Francis Group.
Karam, A., ; Ken Wilcox. (2016). The China factor: Leveraging emerging business strategies to compete, grow, and win in the new global economy. Hoboken, N.J: Wiley.
Kedia, B. L., ; Aceto, K. (2015). Emerging markets and the future of the BRIC nations. Cheltenham: Edward Elgar Pub. Ltd.
Wise, C., Armijo, L. E., ; Katada, S. N. (2015). Unexpected outcomes: How emerging economies survived the global financial crisis. Washington, D.C.: Brookings Institution Press.