Macroeconomic Policy Issues And Investment In China: An Essay.

1. Analyse current macroeconomic policy issues such as GDP growth, government debt, budget and current account deficits, inflation-targeting policy and changes in the cash rate;

2. Understand macroeconomic theories at an intermediate level focusing on both the short- and long-run topics; together with popular debate and specific policies and their outcomes in macroeconomics;

3. Evaluate the monetary and fiscal policies aimed at stabilising the economy utilising the aggregate demand and supply framework; and

4. Work collaboratively in a team environment, to achieve set goals related to the building of knowledge of economics 

Analyzing the Current Macro Environment

China and Australia maintained a good international relation in terms of trade and investment. Economic growth in China propelled since 1970. The economic growth has brought growth in different sectors including manufacturing, infrastructure and smoothen the path of economic urbanization. Along with demand has created for different raw materials, energy demand for transport and electricity and other building materials for manufacturing. Since then Australia is in a well position to meet the demand for the emerging economies. China is regarded as the largest exporter and importer of Australia. A significant investment relation is also hold between the two nations. In the new growth phase the drivers of economic growth has also changed. The driving factor of growth has transformed from manufacturing led growth to a shift towards production of a complex goods and services. This moderates Australia’s resource demand. There is a transformation of China’s demand from an earlier demand of raw materials to a broader demand of service, manufacturing and expertise. Investment decision in any country depends on the macroeconomic environment of the country of interest. Macroeconomic environment is a broad spectrum. There is no single indicator for reflecting overall macro environment. Rather a number of different aspects needs to be evaluated. First important aspect that needs to be considered in the prevailing business environment of the country. A favorable business environment include aspects such as method of dealing to obtain permit for construction, advantages of property rights, credit facilities, protection of the interests of small investors, payment of tax,  cross boarder exchange, enforcement of business contract and resolving in the area of insolvency.

Rate of economic growth is an important determinant of demand and return from investment. There are fluctuations in economic activity with respect to different business cycle phases. The extent of economic growth and business cycle fluctuation are therefore important for selecting a destination country for investment. Scope of employment opportunities and average wage rate prevailing in the industry determine the scope of expansion in the industry and corresponding profitability. Availability of skilled labor force helps to attract foreign investment. In today’s world, human capitals often considered more important than physical capital. Interest rate is regarded as the cost of investment. Real interest rate is the inflation-adjusted interest rate. Both inflation rate and real interest rate are useful indicators of macro environment.  Government is the central authority of any nation and expenditure incurred by government on improving economic state of the nation indicate ease of doing business for investor. Government makes investment in areas where private players do not find interest such as road, electricity, water and internet. Along with government, position of private sectors also matters for determining the business or competitive environment. The more is the flow of domestic credit to the private sector, greater is the potential for private sector. An important instrument of government is tax. If government is interested in encouraging private and foreign investors then it provides tax relaxation for doing business. The government sets a rigid tax structure when government wants to protect domestic economy from foreign competition. In case of foreign investment, exchange rate is an important determinant of stability in the transaction process. Trends in exchange rate helps to understand stability of exchange relation between nations. Monetary policy as designed by the central monetary authority affects different macroeconomic variables such as Gross Domestic Product, inflation and unemployment. Global financial crisis is a major macroeconomic event that affects several nations at the same time. The extent of the effect depends on interim policy of nation to absorb external shock. Stronger the economy to resist shock lesser is the impact of shocks.

Evaluating the Business Environment in China

In the report investment decision of BHP Billiton to one of the major trade and investment partner, China is evaluated. BHP Billiton is one of the leading global companies of metals, mining and petroleum based products. China constitutes large demand for Iron Ore. In order to meet domestic demand China has to import Iron Ore overseas and often faces a very high price.  Therefore, BHP Billiton investment in China will help to explore Chinese mining industry and at the same time will benefit the company as well. However, demand base is not the only factor to be considered while taking investment decision. The macroeconomic environment of the target country is the primary factor that determines the success of such investment. A favorable macroeconomic environment ensures success of business investment and help to sustain operation in the long-term. Therefore, recent macroeconomic condition of China is critically analyzed to make the investment decision economically viable.

This is the first and foremost important thing for business concern. While starting business in a foreign country the business owner needs to get permission for setting up factories. There should be easy availability of electricity and property rights needs to be well defined. Apart from that other things come under a favorable business environment are access to credit whenever needed, the structure of taxation that is whether a discriminatory tax practice for foreign investors exists, facilities of cross border trade and legal arrangement for contract enforcement . Whether China is a good investment destination for starting a business that depends on these aspects.

The overall business environment in China as well as its performance in different indicators that determine a favorable business environment. In an overall measure of business environment China ranked 80 in 2016. In 2017, with reforms undertaken for improving business condition rank improved by 2 points and now China holds the position of 78.

China has made it easier to start a business there by simplifying different norms.  Business now can get code for registration, business license and tax registration only with a single form. Availability of credit is an important thing for business. China has provided credit scores to commercial banks and financial institution and kept a track of payment histories. In 2016, China relaxes taxation norms for companies with a reduced payment for social contribution. The mode of tax payment has now been made easier with availing facilities of electronic filing system and payment of tax, adoption of new channels for taxpayer service. The business owners enjoys less complex system of tax enforcement by amendment of civil procedure code and a faster proceeding of court. China grants construction permit for business with its simplified pre construction norms and approvals (Maro, 2014). Since its growth phase, China always gives importance on establishing a good trade relation. To accelerate this trend China has eliminated restrictions of trade credits in 2009. New legislation is made to enhance the process of insolvency. Reforms in this section include introduction of reorganization procedures, creditors’ committee formation, securing creditors’ right and establishment of a board of bankruptcy administrators that deals professionally in case any inconvenience occurs.

Importance of Economic Growth and Business Cycles in Investment

Economic growth indicates a situation where capacity of the economy to produce goods and services increase overtime. Gross domestic product of a nation reflects the monetary values of goods and services that a country produces in the accounting period (Sherman, 2016). An increase in GDP is an indicator of nation growth. Percentage change in GDP from one period to another measures growth rate of a nation.

The economy does not always follow a smooth path of growth. The fluctuations in growth rate is broadly explained in four phases- Boom, recession, slum and recovery. This is known as business cycle fluctuation that describes the pattern of economic expansion, contraction and recovery. Economic boom is defined as a phase of continuous progress and is characterized by high growth rate, high demand and greater employment opportunities. In times of recession, there is contraction of economic activity as explained a declining demand, high unemployment and low growth rate (Ilut & Schneider, 2014). A persistent recession results in economic slump. In the recovery phase, the economy gradually recover from slow down phase and move towards economic boom.

GDP growth trend in China. From 2000 to 2007, a sharp increase in GDP growth rate is accounted for China. In 2008, the recorded GDP is very low as compared to previous year reflecting a sudden downfall in its growth rate. This phase stayed for two years. In 2009 and 2010, growth rate slightly recovered. China again enters in a declining growth trend from 2010 and this continues.

Several factors are responsible for economic slowdown in China. The most significant factor is excessive debt. The aggregate debt in China has reached to a level as high as 250% of GDP since 2008. However, it initially helps China to recover from global financial crisis but imposes a heavy burden of repayment. Most of these credits have been channeled to property market. With a fall in property, the economies of China affected severely.  The slowdown of Chinese economy is more of a result of cyclical fluctuation than structural change. The trend economic growth is subject to correction of business cycle fluctuation. Al the cycles created are not equal.  With a closed financial system, China escapes from acute crisis but it made Chinese economy vulnerable to bad debts.

Unemployment is a state when some potential members in the labor force are unable to find jobs at the prevailing wage rate. This is an important macroeconomic indicator and related with pattern of growth. In the phase of economic growth, with expansion of economic activity, new job opportunities are created and unemployment rate is low (Pigou, 2013). At times of contraction, business laid off workers and this increases unemployment in the economy. The pattern of unemployment is thus related with pattern of GDP growth.

Monetary and Fiscal Policies to Stabilize Economy

The unemployment trend in China shows that unemployment rate fell sharply from 2000 to 2007. This is consistent with growth statistics of China. This is the phase when China’s economy was experiencing a boom following a growth in manufacturing sector. Growth slows down from 2008. During this time, unemployment rate rose sharply. In between 2008 and 2010, unemployment fell but not as much as that in 2007. However, this trend does not sustain. Unemployment started rising from 2011 and continues to rise though at a slower rate.  The problem of persistently rising unemployment has now become a major concern for Chinese economy. China is a labor surplus economy. Earlier this has worked in favor of Chiba’s growth as labors are supplied at a comparatively low cost to manufacturing sector that fosters growth. However, with technological advancement China has to use advance machines to compete globally. The attempt to raise productivity results in a decline in employment growth. Effective rate of unemployment is rate of GDP growth less growth of labor productivity (Fidrmuc & Huang, 2015). The GDP growth rate in China fell short of growth of labor productivity. A significant portion of labor force in China either are unemployed or under employed.

Unemployment has implications for new business. A new business always comes with new employment opportunities. It is costly to make cross borders transition of labors. The presence of unemployment implies existence of surplus labor in the economy. While making investment in a foreign country the company require a minimal labor force strength.  With unemployment availability of labor increases. This is beneficial for both the company investing and the target country. Mitigating unemployment is always a major policy goal of government. Realizing limited scope of employment in the nation, government encourages foreign investments and foreign companies. The government initiates to create favorable condition and explores new business opportunities.

Labor is an important factor of production. Labor receives wages as a return or remuneration for the labor supplied.  The wage cost constitutes a major part of business cost. A rising wage cost means growing production cost and therefore a decline in the profit margin. While deciding on business operation in a foreign country the company has to consider prevailing wage rate in the country of interest. When wages are low then it seems profitable for the company to start business in that country. A high wage cost on the other hand might outweigh the potential benefit of investment in the country.

Collaborative Teamwork for Knowledge Building in Economics

China is highly populated country. As a result, it is considered as a labor surplus economy. The surplus labors were earlier available at a cheap rate. This contents the growing manufacturing industry in China with supplying sufficient labor at a low wage. This is the reason China maintains a low wage rate even in the phase of economic growth (Bian, Huang, & Zhang, 2015). However, trends in wage growth has now changed. In the last ten years, a considerable increase in China’s wage growth is observed.

With a rapid growth rate in China, payment for employees goes up. Increased wage rate is beneficial for the economy as it boosts average income and demand. The opposite side of the story is high wage cost resembles to high production cost for companies. In view of high wage cost, many companies have already shifted their business outside China. This contributes to job loss for many workers and affects health of the economy (Yan, 2017).  With rising wage cost, many companies in China have now focused on using advanced technology and invested a significant amount on in robots to adapt automation in the production technique. In China, robotics market has grown to become largest in the world in 2013 and is still growing.

The rising wage is a concern for newly entering business organization. In the new business environment, it becomes difficult for the company to sustain its operation with a high wage cost.

Today availability of human capital is equal or sometimes even more important than physical capital. Human capital is described as the skills and knowledge that an individual possesses. The more skilled the workers the more efficient is the production process. Human capital is like an asset that further helps to create other forms of assets. With a more modernized world, human capital has become increasingly important. Any plan towards further progress of business starts from its human capital assets (Martin, McNally, & Kay, 2013). A company can increase its human capital base from extensive training and education. However, the first step towards having a skilled labor force is the basic educations. Educational attainment is a primary determinant human capital base.

Figure 5 describes the gross enrollment ratio in China. The gross enrollment ratio in China constitutes an upward trend. This gives a positive contribution to human capital formation.

Inflation in an economy is described as a situation where there is a continuous rise in the general price level. The two contributory forces for inflation are demand and cost. A rise in demand given its price pushes prices up. This is called demand-pull inflation (Mankiw, 2014). A sudden increase in production cost because of increasing cost of factor input compel producers to set price at a high level. This is cost-push inflation. Demand-pull inflation is beneficial for firms as it gives them opportunity to sell the same product at a high price and hence increases profitability. A low to moderate rate of inflation works in favor of economic expansion.

Rate of change in consumer price index is an average measure of inflation. The trend inflation rate in China shows a fluctuating trend. There is no stability in the level of consumer prices. In 2009, the inflation rate went to a recorded low level and became negative. The negative rate of inflation is termed as deflation.  This is the time when the economy had gone through a downturn in almost all of its major areas. GDP growth rate was at a significantly low level, unemployment rose because of economic contraction (Zhang, 2013). All these contributes to deflation in the economy. In the next two years, with economic recovery price also regained and reached at a moderate level of 5% in 2011. The four consecutive years of 2012, 2013, 2014 and 2015 inflation rate fell and remained in the range of 1% to 2%. This is the time when price level gradually attained a stable level. In the next year, inflation rose slightly and goes a little above 2%, however below 3%.

The producer price inflation in China has accelerated to a level beyond expectation. This is resulted from a noticeable gain in prices and raw materials. The high producer price inflation ensures growth both for industries and for the economy as a whole. The industrial firms in China asserts the view that profit will be enhanced in the future again with a rising demand generated from economic boom. The steel industry in China has recorded expansion at the fastest pace since 2016. In this environment, investment of BHP Billiton in China is beneficial for the company.

Real interest rate is the inflation-adjusted interest rate. In a world of inflation, value or purchasing power of currency changes continuously. When inflation rate increases then purchasing power of money decreases and in the phase of declining interest rate value of money increases. Borrowers normally benefitted from rising inflation rate they have to pay a relatively small return in real terms. Lenders on the other hand suffers from rising inflation as the money they received as loan repayment worth less than when they were lent (Keynes, 2016). Therefore, the same amount of investment though earn same rate of nominal interest but a different rate of real interest and hence a difference return. Therefore, real interest rate gives a more accurate measure of interest rate.

Real interest rate is obtained as nominal interest rate less inflation rate. Therefore, real interest rate depends both on nominal interest rate and inflation rate. The trend in real interest rate is consistent with that obtained in the for inflation rate. The years that recorded a high inflation rate accounted for a low real interest rate. Similarly, the years having a low inflation rate or a deflation points to a high real interest rate. In 2009, inflation rate in China had reached to very low level and consequently real interest rate had reached to a peaked level. When inflation rate started regaining then real interest rate started falling. In the last, two three years real interest has constituted a declining trend.

Government in China considers a downward revision of the interest rate with the objective of reducing borrowing cost for the companies and boost economic growth of China. Chinese economy was facing a considerable downward pressure. This prevent economic growth in the nation. Price level was declining at a much faster rate than that expected. This makes real interest rate higher than the average historical rate. Low inflation rate indicates a downward pressure of domestic demand. China is also facing a depressed demand for its traded goods (Song, Storesletten, & Zilibotti, 2014). To pull back the economy to the growth track production and investment needs to be encouraged. With this objective, a reduction in the official rate is considered that reduces the real interest rate faced by the business firms.

Cut in interest rate means a lower borrowing cost and hence, is beneficial for doing business in any nation. This makes China an interesting place for business investment for BHP Billiton.

Government expenditure in a nation is an important determinant of Gross Domestic Product. It has a positive contribution on GDP. Government makes expenditure on goods and services to make the good available at a low price. All types of consumption, investment and transfer payments incurred by the government included in government expenditure. These spending are financed from the tax revenue earned by the government.

The government expenditure for final consumption expenditure made by the government. The figure represents government consumption expenditure as a percentage of GDP. Government expenditure for consumption has shown a declining trend more or less. The decline for consumption expenditure means availability of more funds to make other productive investment (Jia, Guo, & Zhang, 2014) There are different sectors in an economy where private investors do not invest.

Government expenditure for consumption has though declined but total government expenditure has increased overtime. This indicates a shift in government focus from consumption to investment. In recent years, because of a declining growth rate, government needs to shift its focus from consumption expenditure and make productive investment.

Domestic credit supplied to the private sector measures the financial assistance given to private sectors of the economy by different financial institutions in forms of loans, non-equity security purchase, trade credits or any other receivable form. For a business, supply of credit plays a crucial role (Dembiermont, Drehmann, & Muksakunratana, 2013). Especially for starting up a new business, credit supply is very essential. It builds the capital base for the company. The capital is used to purchase raw materials, purchasing machines and helps to recover its fixed cost. Without sufficient supply of credit, it is not possible to continue business. Larger the availability of credit more it is favorable for the firms.

The flow of domestic credit to the private sectors in China has increased sharply. The credit ratio has reached to its peak level in 2003. In this year, China has experienced a high growth rate.  After that, growth rate fell and reached to the lowest level in 2008. One important indicator of economic prosperity and development is the rising share of private sector investment. The figure of domestic credit is expressed as a percentage of GDP. An increasing trend in capital flow to private sector from financial institutions like bank and others imply greater availability of resources for private sectors and hence greater opportunity for private sectors.  A flourishing private sector plays an important role for the economy. A strong private sector secures efficient performance and a better health for the economy. In 2013, the ratio of domestic credit given to the private sector and Gross Domestic Product recorded as 133.7% (Chivakul & Lam, 2015).  Giving opportunity to private sector is one factor contributing to achieve a growth rate. China has allowed broader scope and opportunity to the private sector and supported them with strong financing. This fosters economic growth in China and forms a mixed economy going beyond communism.

Availability of credit to the private sector though is a positive sign for the economic growth but this holds to a certain extent. A continuously growing credit to GDP ratio is associated with a forthcoming banking or financial crisis. This is what China is experiencing in recent years. As the growth trend of China shows recent years, China is suffering from a slowdown in the growth rate. However, the credit ratio in continued to grow. Credit boom has occurred in 2009 – 2010. The credit grow in China is associated with a steady economic growth along with financial liberalization.  

Apart from government expenditure, another vital component of fiscal policy tool is tax. It is the only source of government revenue. Government designs separate tax structures for individual and that for business firms. In times of economic contraction, government reduces the tax rate. This indirectly raises the demand disposable income of the household and boosts demand. This is called expansionary fiscal policy (Engström & Gars, 2015). During high inflation, tight fiscal policy is adapted which corresponds to an increase in the tax rate. When tax rate increases then people left with less disposable income and demand contracts, which controls inflation. Expansion of business depend on the policy of taxation. If government imposes high tax on corporate profit, then it seems less profitable to operate in the nation and business shifts to nation having a less rigid tax structure. In order to encourage business government provides concession of tax and other tax relaxations.

The trends in tax revenue sharply increases from 2005 to 2009.  Increasing tax revenue means government has enough funds for public spending. In 2010, tax revenue decreases slightly and remains nearly same for the next three years. In 2013 and 2014, tax revenue decreases pointing towards an expansionary fiscal policy.

For a foreign company, while deciding on starting operation in a new country it is important to have knowledge about the taxation laws and tax liabilities that it has to bear. In China, collection of tax revenues are divided between 2 bodies of government – Central and local. The highest authority of taxation is the State Administration of Taxation (SAT). It collects Value added tax (VAT), corporate income tax, consumption tax and other specific form of taxes (Trade Commissioner, 2017). Below this level, there are local governments and bureau offices collecting income taxes or other taxes. For imports and export concerns, there are custom duties, Vat or consumption taxes collected by the custom administrative office.

Before starting business companies need to be registered to both Sat and local bureau and custom office. The major taxes that are levied on business are corporate income tax; a tax computed against profit, Withholding tax; tax imposed on derived income from China that enterprises nor originated in China makes, VAT (Brean, 2013). Other forms of taxes prevailing in China are consumption tax applicable on goods that are non-necessities or luxury items, products having adverse impact on health and environment and different specialized taxes such as land appreciation tax, stamp tax, deed tax, urban maintenance and construction tax and custom duties.

In 2012, China revised its tax structures in favor of foreign companies. By this revision, foreign companies are able to take a greater share of profit by paying a low tax rate. The withholding tax rate is as small as 5%.   However, since 2015 China has rolled back some of the incentives given to foreign companies. The levied tax rate on foreign companies has also increased. Coupled with this, intense competition from domestic companies and high labor cost makes many companies to leave the nation.

Infrastructure of the nation helps to determine the level of foreign investment. The overall government spending of China’s government has increased overtime. In the composition of government expenditure, the share of expenditure made on consumption has declined as shown above. Government has to make investment to make some basic facilities. These include the spending on transportation and communication, electricity, water and other services needed for country’s development. Nations having a good infrastructure provide a business friendly environment.   

The percentage of people having access to water resources has increased overtime. There is a sharp increase in the number of people getting water. The consumption of electric power has increased overtime.

The rising government expenditure in China gives a clear indication that the policymakers are taking initiatives for improving economic growth of the nation. Annual government expenditure has increased by more than 25% annually (Chow, 2015). The increasing government expenditure provides fiscal stimulus and accelerates economic growth. In order to achieve a targeted growth rate of 7% in the current year government spending on fixed asset has increased.

The Chinese government has provided considerable support for the economy. Government uses either fiscal or monetary policy tool to boost demand and growth. Government expenditure and taxes are the two instrument of fiscal policy. Growth in the Chinese economy has slowed down for several reasons. Change in fiscal policy earlier has made government spending stringent and contributes to a slow growth rate in China. This along with other factors contributes to a slowdown in Chinese economy. Considering this, government revises fiscal policy and focuses on increasing its spending.

With a supportive government, it is favorable for the business firm to operate in a country. The people in Chin smoothly enjoy different facilities such as access to water resources, electricity consumption and broadband facilities.

Exchange rate between two countries is the amount of currency required to purchase one unit of foreign currency. This is the most important determinant of trade relation between countries. An increase in exchange rate means depreciation of domestic currency. This reduces currency valuation of domestic currency (Ghosh, Ostry, & Qureshi, 2015).  The depreciation of currency always encouraged exports by making exported goods cheaper to the foreign country. A decrease in exchange rate means the country has to pay less for one unit of foreign currency. This means appreciation of currency. Whenever, currency appreciates imports become cheaper.

In a flexible exchange rate regime, the forces of demand for foreign currency and supply of foreign reserves determine exchange rate. The movement of interest rate influences the movement of exchange rate. A high interest rate means a high return for invested capital. This attracts foreign investment and raises the demand for home currency. The effect of high interest rate on the exchange rate is offset in the presence of high inflation rate.

The movement of exchange rate between Australian dollar and Chinese Yuan in last few years. No clear trend is observed in the exchange rate. As there are a   number of factors that influence exchange rate, the stability in the exchange rate is difficult to achieve. Current regime of exchange rate in China is a combination of floating and fixed exchange rate. Though there is no sharp increase or decrease in the trend exchange rate, an overall decline in the exchange rate is observed. This is because of the Chinese government policy or currency devaluation.

Export in China is seen as one of driving factor for growth. Currency devaluation is the way of boosting export. During 2011, 2012, 2013 and 2014 the exchange rate was comparatively high. During this time, China’s government has decided to keep its currency strong in order to achieve an economic growth that results from rising domestic demand rather than export driven. However, China failed to achieve its goal and in 2015, the actual growth rate fell 7% short of than that expected (The Conversation, 2017).The low growth rate has kept banks in China in pressure and lack money to lend for investment in new equipment and establishing factories. This puts further limit to demand drive growth and reliance remain on export sector.

A low valued Yuan helps the Australian company BHP Billiton to set up its factories at a relatively cheaper rate. This would be beneficial for China as well because increased supply of Australian dollar will push the exchange rate downward and help China to achieve a demand driven growth as intended.

Apart from fiscal policy, monetary policy is another major instrument of government used to stabilize the economy. The primary objective of monetary policy is to control the inflation rate and ensure price stability. The central monetary Authority controls inflation using the tool of money supply. At time of inflation, central bank reduces the available money supply. This increases the prevailing interest rate and reduces investment and demand. The low demand brings prices down. In time of low inflation, demand needs to be stimulated. During this time, Central Bank increases the availability of money supply. The increased money supply reduces the interest rate boosting investment and demand.

The focus of monetary policy in China is to keep its currency RMB at a stable level and foster economic growth. People’s Bank of China (PBOC) has implemented the objectives of monetary policy. The target of PBOC is not limited to attainment of price stability and expansion of employment opportunities. It intervenes in matters associated with low interest rate differential in rural and urban region, prevents lending to some specific sectors, demand write off for stranded assets with a change in policy prescription by central government.

Recently, China has declared to adapt a tight monetary policy in terms of increasing existing rates in the money market. The two most recent monetary framework includes

• Adaption of tight repo rate following a rise in MLF rate
• PBOC has shifted gears after the past impetus steadied economy

The central bank in China has implemented the tight monetary policy by increasing the interest rate charged in operations in open market. The interest on funds lend through Standing Lending Facilities has also increases it has the effect of checking the price of assets and inflation. The rate for reverse repurchase repo has also been increased by 10 percent basis points. This is regarded as the first increase ever since 2013. The recorded increase in SLF rate is 3.1 percent from an earlier 2.75 percent. This is a surprising step of the monetary authority. However, PBOC has given a string message of the tight monetary policy. The factory prices are rebounding in recent years after facing some years of deflation. The policy intends to increase cost of borrowing in the short tenure. Policymakers hold the belief that the current state of China’s economy demands a combination of tight monetary policy and stimulatory fiscal policy. The low interest rate earlier results in a raising the borrowing largely and raises the debt to GDP ratio (Chang, Liu, & Spiegel, 2015). The current monetary policy scheme of implementing a tight monetary policy through money market rates and lending facilities reflects the central bank‘s objective to achieve a liberal interest rate.

The financial crisis originated in United States of America during 2007- 2008 is known as Global financial crisis. Given the large size of USA, economy the crisis though initially began in USA has its impact in many major economies across the globe and this makes the crisis global. The crisis had resulted from bursting of financial bubbles in housing market and investors in USA lost their confidences. The effect gradually transmitted to other countries directly or indirectly related with USA (Grant & Wilson, 2013). Some countries escape from the crisis because of their crisis management technique while others severely affected.

China is regarded as one of few nations that escape from the adverse impact of financial crisis. In the crisis time, China has experienced only a mild slight slowdown in its economic activity. In the global financial turmoil, the closed financial system of China protects it from financial breakdown. The partial impact of the crisis in China was derived from a declining demand of export. China is highly depended on its export sector. Because of crisis, different countries have reduced their demand of export. This affects China’s economy to some extent. Despite that, China has maintained a relatively high growth rate even in the crisis period (Constantinescu, Matto, & Ruta, 2015). A number of significant factors contributed the high growth rate in the crisis period. First is its relatively strong fiscal position. The strong fiscal position provide stimulatory package in the crisis time. The government of China adapts fiscal and credit expansion during crisis. The budget deficit was relatively small and remained less than 3% since 2000 indicating strength of government budget (Breslin, 2016).  China possesses a large reserve of foreign exchange. In most of the emerging economies, tools of expansionary fiscal and monetary policies create deficit in their balance of payment account. In this case, also China points towards an exception. This allows China to undertake stimulus packages without bothering about high cost of borrowing or possibility to end up with a crisis in the balance of payment unlike most economies.  In China’s economy because of restricted international capital flow, the foreign banks have little influence on domestic financial system. All these factor together act to rescue the economy from the global crisis.

Conclusion and Recommendation

BHP Billiton is a global mineral company having it’s headquarter in Australia. The company is recently planning to make investment in China, one of the major trade and investment partners of Australia. The report evaluates the macroeconomic environment in China to consider whether it is a wise decision on the part of the company to invest in China. The business environment including different components such as dealing with construction permit, getting electricity supply, the security of property registration, availability of credit, protection of minority investors, taxpaying facilities, cross border trading, contract enforcement and attention to insolvency problem. Overall, there is a favorable business environment in China. The country has made improvement for providing different facilities to the business. The rank has improved by two points. It now becomes easier for company to get business license, registration of tax, get credits and other facilities. Apart from business environment, there are numbers of other thing that matters for business. The next things that is considered is the economic growth. The growth phases are explained using for phases of business cycles- phase of economic boom, recession, slump and recovery. GDP grows sharply from 2000 to 2007.  In 2008, growth slows down because of global financial crisis but growth rate remains higher than most other economies. Recently China is facing a slowdown in the growth rate resulted from a high debt share, crash in property market and other business cycle fluctuation. With a slowdown in the growth rate, the economy contract and job opportunities shrinks. This results in a rising unemployment rate in recent years.  A related aspect of unemployment is the wage rate.  In the beginning of China’s growth phase, low wage rate works in favor of China’s growth rate. However, the situation has changed now. The wage cost in China has now increased to a level higher than that in previous years. Quality of the labor force is determined by the available human capital. Training and education program makes positive contribution to increasing availability of human capital. Level of education is viewed in terms of the gross enrollment ratio, which shows an upward trend overtime. Rate of change in the price level or inflation is another aspect having direct consequence on growth rate. The price level after facing a declining trend for three to four year has regained since 2016 showing a hope to producers and business firms. Level of inflation determines the actual rate of return on invested or borrowed capital through its impact on real interest rate. With a fluctuating inflation rate, the real interest rare also constitutes a fluctuating trend. However, from 2014 the real interest rate is decreasing. This is good news for business as they can now borrow capital at a low rate of return. The fiscal position of China’s government is strong. This allows government to make expenditure in needed sectors of the economy. Government expenditure in China has increased significantly in the last ten years. Because of which people now enjoys a greater access to water resources, electricity and internet connection. The ratio of domestic credit to private sector has increased in China. This shows China’s reliance on private sector as a driver of growth. The taxation policy in China is clearly designed and distinct between central and local government. Any company, willing to start a business in China has to be registered under all levels of tax authorities. Earlier China provided tax concessions to foreign companies. However, many of which has rolled back now but some remains. China has a hybrid exchange rate regime with having a combination of fixed and flexible exchange rate system. Since, export is one of the key sectors in China government always intends to devaluates currency to promote export growth. In addition to the fiscal policy, China is also giving focus on suitable design of its monetary policy. Recently, China has taken a tight monetary policy with increase in different rates of money market and standard lending rates. The recent policy stimulus of the government is an expansionary fiscal policy in combination with a tight monetary policy. As far as the effect of global financial crisis is concerned, China escapes from the adverse impact of the crisis. With a closed financial sector, the financial crisis has a less severe impact on China.  The export sector had faced a declining demand but the overall growth rate remain positive.

China is believed to be one of the largest consumer of minerals. It constitutes a large, sustainable demand for imported raw material. This makes China an attractive place for investment in mineral industries. China has created favorable business environment. This provides support to BHP Billiton decision to invest in China. Considering growing demand for minerals in China, it is recommended for the company to pursue the decision of investment in China. The slow growth rate in China in recent years can be a matter of concern but China is taking adequate steps for recovering its growth rate. The growing unemployment statistics in China indicates presence of a surplus labor in the economy. The company should set up plants where it can easily employ theses surplus labor. However, it should also be kept in mind that average wage of the labors are also growing. This can increases production cost and outweigh the profits. Before setting up plants, it should have detail knowledge about the tax structure of China. This will help the company to avail appropriate tax exemption and works in benefit of the company. The company should set up factories in areas of special economic zone.  In order to maintain export growth China maintained a devalued currency.  This woks in favor of BHP Billiton both in terms of reducing its cost in China and can export products. However, monetary authority in China has declared to go with a tight monetary policy the nation maintains an expansionary fiscal. The company should try to take advantage of the ease fiscal policy tool in favor of business expansion in the new nation.  China resisted the shocks of global financial crisis and escaped from the severe recessionary shocks. The close nature of financial sector in China protects it from external shock. Along with this, the strong fiscal position always helps the nation to stay strong at times of crisis. This advantage works in favor of foreign investment in China.  Therefore, BHP Billiton should go for investment in China and carry out operation using the favorable business environment.

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