International Macroeconomic MBA FT8 Assignment
Why chosen China over the next 5 years as the new market
IPS company is a French company producing red wine, with the limited growth these years in the domestic market, it is time for IPS to exploring expansion into international markets. Following is a report about China macroeconomic policies and risk which can help IPS to determine if they should enter the China market.
China is the most populous country in the world. The total population of China was around 1.35 billion people. The population growth rate is around 2%-3%. The market is huge because of the high populations and huge demand, and the labor cost is much lower compare with North America and EU.
Population growth rate:
China economy is becoming the second largest in the world in the last few decades after experienced tremendous growth with a nominal GDP around USD 9 trillion. GDP per capita will double from 2010 to 2020.
The average inflation rate in China was around 2.65 percent compared to the previous year from 2012. Inflation Rate in China averaged 5.30 percent from 1986 until 2017.
In 2016 the GDP of China was $11.2T and its GDP per capita was $15.5k.
In China, the unemployment has been fairly constant around 4% over the last decade. And it is really low rate compare with EU and south American, which mean most of the people they have a job and stable income, they have the buy power.
China consumer confidence
It is higher than 100 since the last 5 years, that means Chinese people are satisfy with their economy environments. This is also a good reason for we consider making the invent in this market. People in China would like to spend more money to purchase.
Individual Personal Income
It was expected to be 34268.23 CNY by the end of 2017, In the long-term, the China Disposable Income per Capita is projected to trend around 41365.21 CNY in 2020, according to our econometric models. That means the income of Chinese people is growing every year, they are buy power is growing too.
Chinese people still has high personal savings. The bank interest rate for deposit was expected to be 0.35 percent by the end of 2017, In the long-term, the China Deposit Interest Rate is projected to trend around 1.10 percent in 2020, according to our econometric models. That also means China customer has the buy power for the red wine.
Exports from China
Exports in China averaged 616.71 USD HML from 1983 until 2017.In 2016 China exported $2.06T, making it the largest exporter in the world. During the last five years the exports of China have decreased at an annualized rate of -8.07%, from $2.04T in 2011 to $2.06T in 2016.
Electronics and machinery make up half of total exports, and the rest is garments account and construction material and equipment represent. The three big markets for China export are Asia North America and Europe. China did not export red wine which is good for our company investment.
Imports to China
In 2016 China imported $1.32T, making it the 2nd largest importer in the world. During the last five years the imports of China have decreased at an annualized rate of -14.03%, from $1.39T in 2011 to $1.32T in 2016.
, Imports to China jumped 17.7 percent year-on-year to USD 177.11 billion in November of 2017. It mostly dominated by intermediate goods and a wide range of commodities, including oil, iron ore, copper and cereals, China’s rapidly demand for red wine not only in the modern city, but also in the small downtown.
China Customs assesses and collects tariffs. There are six categories import tariff: general rates, most-favored-nation (MFN) rates, agreement rates, preferential rates, tariff rate quota rates, and provisional rates. The government offer preferential duty reductions or exemptions to the Special Economic Zones, open cities, and foreign trade zones within cities. So, it is benefit for the company to choose office in these cities.
The corporate income tax rate in China is 25 percent. Foreign investors enjoy corporate tax reductions, exemptions of tax on dividends repatriated during a certain period and other tax advantages. Besides, packages of reduced income taxes, resource and land use fees, and import/export duties can get foreign direct investment incentives, it is priority treatment in obtaining basic infrastructure services, streamlined Government approvals, and funding support for start-ups.
China’s Fiscal Policy In 1994, the government launched a bold fiscal reform in order to struggle against a rapid decline in the tax/GDP ratio, which dampened the government’s ability to conduct macroeconomic and redistribution policies.
The highlight of the reform was the changes made to the taxation system and the adaptation of the tax-sharing scheme. Here the Value-Added Tax and the Enterprise Income Tax were controlled by the central government as they are the most lucrative sources of tax revenues.
The reform resulted in a steady increase in revenues which increased from 10.8% of GDP in 1994 to 22.7% of GDP in 2013. While expenditures followed suit, and increased at a double-digit rate in the same period, the fiscal deficit was kept in check. In the 1994-2013 period, the government’s fiscal deficit averaged 1.4% of GDP.
China’s Monetary Policy
Under the guidance of the State Council, the People’s Bank of China (PBOC) formulates and implements monetary policy, prevents and resolves financial risks, and safeguards financial stability.
The PBOC’s main objectives are:
1) Ensuring domestic price stability
2) Managing the exchange rate and
3) Promoting economic growth.
At the beginning of each year, the State Council establishes guiding targets for GDP, the Consumer Price Index (CPI), money supply (M2) and credit growth. The PBOC’s policy rate is the one-year lending rate. The Central Bank recently vowed to maintain a “prudent” monetary policy while conducting policy fine-tuning at an appropriate time during the National People’s Congress (NPC) in March of 2016.
The Central Bank manages money supply through Open Market Operations (OMO), which are conducted with both domestic and foreign currencies and comprise repo and reverse repo, government securities and PBOC bills. The Bank also uses the reserve requirement ratio to influence lending and liquidity. Other instruments that the Central Bank uses to manage and adjust liquidity in the banking system are short-term loans, short-term liquidity and standing lending facility operations.
The agenda of China’s top authorities include bold reforms on interest rate and monetary policy management in order to adopt a more market-driven approach.
China’s Exchange Rate Policy In the wake of the global financial crisis, China pegged its currency to the USD at 6.82 CNY per USD from June 2008 to June 2010.Since then, the PBOC has made a number of revaluations to the currency in order to bring it closer to it market value.
While the Chinese yuan is freely convertible under the current account, it remains strictly regulated in the capital account. Chinese authorities expressed their willingness to allow the yuan to be fully convertible in the near future.
Chinese authorities are gradually enhancing the use of the currency in other parts of the world in order to promote the yuan as a global reserve currency. Although the process is far from being completed, China has already established trade settlements with selected countries and launched a series of currency swap agreements with more than 20 central banks. In addition, China is rapidly expanding the yuan’s offshore market. The opening up of the country’s capital market will be a crucial step in the yuan’s journey to becoming a major reserve currency.
Government Measures to Motivate or Restrict FDI
China government appears to discourage foreign investment in sectors deemed key to social stability, sectors for which China seeks to develop domestic firms into globally competitive multinational corporations and sectors that have historically benefited from State-sanctioned monopolies or a legacy of State investment. The Government also discourages investments intended to profit from speculation (currency, real estate, or asset). Moreover, the Government has indicated that it plans to restrict foreign investment in resource-intensive and highly-polluting industries.
In 2016, China grew at its slowest pace since 1990, as its manufacturing and construction industries slowed and fears abounded about its debt levels. According to the Bank of International Settlements, China’s total debt has grown from $6tn at the end of the financial crisis to almost $28tn at the end of 2016. This means its total debt is equivalent to 260 per cent of its GDP, while the debts of Chinese companies are about 170 per cent of GDP.
The new Monetary system left local governments with fewer sources of revenue. As a result, they had to rely on land sales and indirect borrowing (mostly so-called “shadow banking”) to finance their activity. In addition, local governments put in place off-budget local government financing vehicles to raise funds and finance investment projects.
Although debt is still at manageable levels, an increase in the reliance on shadow banking and the rapid pace of debt accumulation is worrisome. In an effort to increase revenue sources for local governments, in August 2014, the National People’s Congress passed amendments to the budget law, allowing provincial government to issue bonds directly and increase transparency. This move paves the way for local governments to raise debt in the bond market.
China’s government debt is almost entirely denominated in local currency and owned by domestic institutions. In addition, the government has cash savings equivalent to 6% of GDP in the People’s Bank of China. This situation shields the economy against government debt crises. In 2015, public debt amounted to 15.6% of GDP.
China exited the financial crisis in good shape, with GDP growing above 9%, low inflation and a sound fiscal position. China economy will remain the major driver of global growth for the foreseeable future. All these in directors show us that China is a good market for our company to do the new investment. China’s growth has long been driven by capital accumulation, supported by high savings. Financial risks are mounting on the back of high and rising enterprise debt, expanding non-bank activities and enormous over-capacity in some sectors. A burst of the housing bubble would hurt the real estate, construction and several manufacturing industries. However, household indebtedness remains moderate and prudential regulations for mortgage loans are stringent, so the financial sector could likely absorb the shock. Social safety net coverage has improved over the past decade, contributing to reduce poverty. Nevertheless, income inequality remains high. Social infrastructure needs to be further developed, especially for rural citizens, and the tax and transfer system made more progressive.