Discuss about the Macroeconomics 1, the benefits of the foreign direct investment do not accrue automatically and evenly across the country, its sectors, and the local communities.
Foreign Investment in Australia
Foreign direct investment is considered as an integral part of the open and effective international system of economics and is also considered as a major catalyst in the development of the country. However, the benefits of the foreign direct investment do not accrue automatically and evenly across the country, its sectors, and the local communities. The national policies and the architecture of the international investment matters a lot for the purpose of attracting the foreign direct investment towards the developed country and for reaping the benefits of the foreign direct investment for the purpose of development. The challenges mainly address the host country which requires establishing the transparent, broad, and effective enabling policy for the purpose of investment and for building the human capacities for implementing the same. With the major flows of Foreign direct investment coming from the OECD countries. The developed countries can also contribute towards the advancement of the agenda. They can mainly facilitate the developing country for accessing towards the international market and the technology and ensuring the policy coherence for the development purpose.
Higher connectivity and the relaxation of the regulatory regimes have mainly encouraged the globalization and the free flowing of the capital across the country. Business, be it small or big, are going international in efforts for earning the market share and maximizing the profits. In this particular context, Australia has mainly become a key market for the businesses and there is tremendous interest amongst the foreign companies and foreign people for establishing their business in Australia. The Foreign direct investment is considered as a most popular route for the foreigners to start their business in Australia and this report will be about the foreign direct investment by an Australian company in China for the purpose of enhancing the growth and investment in long term. The Australian government is keen on enhancing the foreign investment in Australia and has also taken varied policy decisions for encouraging the Foreign direct investments. Foreign direct investment flows undertake the values of the cross-border transactions that are related to the direct investment in the given time period, mainly a year. Financial flows comprise of the transaction of equities, reinvestments of earnings and intercompany transactions of debt.
I am working as an economist for a company which deals in the mining industry. My company is looking forward for foreign direct investment for the purpose of long-term investment. As China is the main trading partner of Australia so, I have considered China as the target country for my project. In this project, we will be discussing how China will be favorable or unfavorable for the purpose of long-term investment for the company.
Factors Affecting Investment Decision in China
The decisions related to the long-term investment have been taken because foreign investment is crucial for the purpose of developing and emerging market. The company requires the sophisticated investment funding and expertise for expanding the international sales. The investment can be done through merger or acquisition between the mature companies but at first, it is important to consider whether the country will be favorable for the long term investment purpose or not. This is because new expects that the foreign investment will benefit the global economy as well as our company being an investor. The capital will be going to the business that has the best prospects of growth. This is because we as an investor are seeking for better returns for the money with the least amount of risks. The profit motive is color blind and it does not care about the religion. The foreign investment will diversify the holdings outside the Australian country and political system. Diversification will enhance the return without much risk. The benefit which the recipient country and the company will receive from our company will be related with best practices of management, accounting, and legal guidance. We will be incorporating the technology innovations in the operational practices and also some new tools of mining. By adopting such kind of practices, we are expecting to enhance the life cycle of the business. A successful foreign investment will help in raising standards of the employees of the company and it will also reduce the influence of the Australian government from the company. Foreign investment will be stimulating the target country’s economic development and will be developing a conducive environment for the investor.
Commonly, the countries now days have their own tariff rates and this is one big reason why trading gets difficult. The main point is that our company is requiring the presence in the international market for ensuring the sale and the goals and all this expected to meet through foreign investments. Our foreign investment will act as an opportunity for the China country as it will enhance the job rate and will also be developing new opportunities. This will be enhancing the income and more buying powers in the people, which lead towards the economic boost. One main advantage why we prefer the foreign investment decision is that the development of the human capital resources which is often considered as the immediately apparent. Human capital is considered as the competence and the knowledge of those that are able to perform the labor. Foreign investment will allow our company to transfer the resource and other exchanges of knowledge and where the country is offered access to new technology. Henceforth, it is clear that foreign investment will be beneficial for our company's long-term growth but on the other side, it is to be noticed that is not easy to invest in the foreign country in China as the decision is affected by many factors which affect the investment of the company. These factors play main role in the investment decision. Further, in this study, we will be investigating such kinds of factors associated with China so that investment decisions with the country can be concluded. China has been considered as the target country as in the past decades, trade in China has expanded at a breakneck pace.
Economic Growth and Business Cycles
The decision of the long-term investment in China is dependent on varied macroeconomic variables. In this part of the study, we will be discussing the main macro variables affecting the decision of investment in China. Based on this analysis, an inference will be concluded whether China is a favorable country for long term investment or not. The main macroeconomic variables and policies that are required to be considered are:
China has been enjoying 30 years of double digit growth and is mainly the world’s largest. The success of the economic growth is based on a common economy that mainly drives the growth with the government spending. China’s economy can be measured through the gross domestic product. In the year 2015, the growth was around 19.39 dollar trillion, it was the targets in the world(Zhang, 2016). China mainly grew around 7 percent in 2014 and approximately 8 percent in 2013. growth in China is making is an economic leader(Reuters, 2017). China is now considered as the world's biggest producer of the cell industry. For becoming more innovative, China is requiring more innovative companies. The worst risk is the ticking time bomb within the nation’s financial system. China’s socialist market economy is basically considered as the world's second largest economy through the nominal gross domestic product and the world’s largest economy in terms of purchasing power parities(tutor2u, 2017). China is having the fastest growing economy(Amadeo, 2017).
Since the market reforms in 1978, China has now mainly shifted from the centrally planned to the market-based economy and is also experiencing rapid economic and social developments. The GDP growth rate has mainly averaged around 10 percent in a year and the country is seeing the fastest sustained expansion by the major economies in the history and has lifted more than millions of the people out of the poverty area. Having population of more than 1.3 billion, China is considered to be having one of the economies of the target and is also enhancing playing important and influential roles in the development and in the global economies. China has mainly been considered as the largest contributor of growth since the global financial crisis of the year 2008(worldbank, 2017).
Though the economy of the country is showing some slowdown turns but country is findings different model for growth and is still having the largest economy(cueb, 2016).
Though China’s economic growth slowed in the wake of the collapse of the Lehman brothers in 2009, still GDP is growing because of the fiscal and monetary policies in China(IMAI, 1996).
The country has now entered the staff of high growth and high inflation in terms of the business cycle.
The unemployment rate in China has decreased to around 39 percent in the starting of 2017. The average rate of unemployment in China is around 4 percent.
The chart below reveals the unemployment rate of other countries. The graph clearly depicts that the unemployment rate of China is comparatively low in compassion to other countries.
The low unemployment rate of the China is a sign of economic development. The social ministry of China in the first quarter of 2017 revealed that around 3 million new jobs were created by the country. Even when the economic growth was slow, the country has successfully managed to keep the employment stable. The leadership of China has noted more jobs growth as the economy has now entered the new normal of the slow growth(Reuters, 2017). However, there are signs of employment challenges in many of the sectors of the economy. China will be needing to resettle around half million workers that lose jobs in the coal and steel sectors in this particular year. the country is expected to speed up the blacklist system for the companies with the wages arrears. China's cabinet revealed a few days back that the risk of mass unemployment is some of their regions and sectors has enhanced and pledged more fiscal and monitor support for addressing the rise in the jobless rates. Many of the workers in China have complained regarding the under deployed and the underpaid issues though it is not technically unemployed (Imai, 2002).
Average wage rate in China has increased over the years. It was around 8822 in 1952 and it reached around 62000 in 2015.
The average salary in China is expected to increase by around 7 percent in the year 2017, as per the latest research (chinadaily, 2017). Wage rates in China have steadily increased in the past decades to the point where in the country is no longer being considered by the businesses to be the source of cheap labor(wageindicator, 2017). However, many millions of workers in China are mainly struggling for making the living wages. the cost of the living in the cities in China enhances all the time and the gaps in between the rich and the poor people saw no such sign of the closing(wageindicator, 2017). The minimum wage regulation implemented by the ministry of labor and the social security in the year 2004, mainly stipulates that every region should establish the minimum wages around 40 percent to 60 percent of the local average wages(wageindicator, 2017). However, the few cities have now reached that targets. In many of the cities, the minimum wages are around 30 percent of the average wages, while in the capital city it is still as low as 24 percent(CLB, 2017).
The minimum wage worker can mainly double the basic salaries by working the longer periods of the overtime, but still, their take away salary is just not enough(Chang, 2016). Continuous enhancement in the cost of the living of the in the cities in china mainly in the accommodation costing means that the most minimum wage workers will be having very little left over at the end of the month(Chang, 2016). Average wage rate in china mainly increases by around ten percent every year, as per the official figures and as a result, the payment gap in between many of the low paid workers and these that earn the average wage is mainly widening the real terms(Chang, 2016);(Yan, 2016). The enhancing disparities in between the low paid laborers and the managers and professionals have been mainly apparent in the China’s enterprises(Yan, 2016). China has mainly established the legal provisions on the working hours and the payment of the wages. Debt-laden standard working hours are 40 hours in a week, overtime is paid for any exceeding standard working hours and the overtime will not be exceeding the three hours day or around 36 hours in a month(Yan, 2016).
China’s inflation prices rose to around 1 percent year by year in 2017. It was the highest inflation rate in 2017 in April as the cost of the nonfood rose at a fast pace and the cost of the food fell less that in a month. On the monthly basis, the prices of the consumer went up by around 0.1 percent after declining 0.3 percent in a month. Inflation in China has averaged to around 5,3percent since 1986 to 2017, reaching the all-time high in 1989 in February which was around 24 percent.
China’s inflationary pressures went high in the starting of 2017 which was even led by the another enormous stage in the producers of price inflation. As per the statistics, the PPI jumped by around 6 percent from the earlier years(Hsu, 2017). The high inflation is the result of the booming commodity prices. The statistics have revealed that the cost of mining extraction mainly surged around 31 percent from the year before, while those for the raw material increased to around 12 percent(Scutt, 2017).
the central bank is still holding the high price of consumers that reflects the high demands for the consumer products(Reuters, 2016). the retail sales growth has been the slowest growth in the past 11 years. Growth in the service sectors has declined because of the sharp pickups in the competition(Bloomberg, 2016). Though the lower prices are due because of the heightened competition is considered very good for the consumers, there are many other factors that are also concerning. One of such factor is the income growth that has not yet kept up with the consumption growths and will also act as the drag on the retail spending until the workers mainly pay(Reuters, 2017). The government of China has been encouraging the domestic consumptions for developing self-sustaining growth and the economic stabilities. this is supposed to accompany the large structural changes from the manufacturing to service based economies, with stronger purchases of the domestically produced goods. However, the major transformations have even been slowed for the sectors of services despite the growing competitions(inflation, 2017).
The household deposit rates in the china are established by the China's people bank at around 3 percent. The inflation rate of the country is around 2.3 percent for the year. While combining the nominal rate of interest and the inflation rate of interest we mainly arrived around 1 percent real rate of interest for the savings(FT, 2015). this rate is continuously increasing. The increase in the interest rate is because of the increase in the inflation rate. The increase in real interest rates on the savings mainly motivates the people in putting the money in the savings instead of investing in the gold. Gold is mainly utilized as an inflation hedge. This mainly protects the values of the money(Gilroy, 2014). Enhancing real interest rates in the china will be stimulating people for saving instead of investing in the gold. this quite negative for the prices of the gold and the traded funds(Indexmundi, 2014). No wonder the economy of China is cooling faster. In spite of the three interest rate cuts in the past years, the real capital costing has surged towards the higher levels since the aftermaths of the financial crisis as the grinding of the country depend. Not only this sounds anomalous in the world where around 2t dollar in the global bonds is trading at negative yields, it is also influencing the disproportionate punishments on the weaker sections of the China as the economy is slowing down. The major impact of the high real interest rate is mainly to pile the further pressures on the industrial companies that mainly suffers declining the profits while contending with the welter of the services charges of debt. In the nominal terms, the weighted average lending rate of China was high which meant that the companies will have to pay more in debt service charges. The burdens of the surging real interest payments false quite unevenly on the corporate companies in China, which penalized most harshly the companies that gorged them on debts in the aftermath of the financial crisis and are also suffering from the overcapacity and the demand softening. The heavy industrial company mainly beset by the overcapacity and a collapse in the pricing powers like the iron ore mines and the steel mill are somewhat in distress.
The figures above show that the real interest rate has been increasing in the past years and is expected to rise in coming time too. The increase in the real interest rates reveals that the Chinese companies are intent on both containing the outflows of capital and reining in risks to the system of finance developed by years of the debt-fueled. High-level interest rates are expected to prod the debt laden companies into deleveraging(Zhang Peng, 2017).
An infrastructural investment has taken a new pace in China within few decades. This is the significant driver of the economic growth and improved standards of living. The growth of infrastructural development was likely to remain stronger for some time. Such outlook of the China is creating implications over the Australian Commodity Exports as the infrastructure development is intensive due to usage of steel that in turn relies on inputs like coking coal and iron ore(Lim, 2008). Much of the investment in China is directed by the urbanization for increasing the amount and the quality of infrastructure. The cities were requiring a support for the growth of their population through substantial development. The trends of the infrastructural development in China are classified in various ways, but the standard grouping is:
- Utilities, such as gas, water and electricity
- Municipal Infrastructure, such as street lightening, bridging, urban roads and subterranean infrastructure.
- Social Infrastructure such as schools and hospitals
- Transportation such as highways and rail.
The Chinese National Bureau of Statistics had presented a breakdown of infrastructure investment through supplying data on Fixed Asset Investment (FAI)(Chiang, 2012). Since from year 2004, the investments in infrastructure of china had accounted for 25 to 35 percent of total FAI in China and in nominal terms china had made the growth with an average annual rate of 20 percent.
Municipal Infrastructure can be considered as an urban infrastructure as it involves waste management, water conservation and urban road maintenance. This comprises among the largest share of infrastructure investment. The rapid growth of municipal investment had revealed about the urbanization process of China. It is evidenced that from 2004 to till now, around 190 million had migrated from rural areas to the urban cities. The China as a country had expanded their coverage within many cities through the quality of their work. As per the report of the World Bank, now 65 percent Chinese Population have an access over the reliable sanitation facilities in comparison to 1990 showing under the 24 percent.
It is believed that the utilities are the second largest element that is deriving the components of the infrastructure development from past few decades. But this share had declined with the advancement of technologies because majority of households had attained their access over reliable utilities with the passage of time and need for the further investments had reduced due to such vision of people(Zurawski, 2014). The electricity infrastructure will be representing around two third part of the utilities investment, but now approximately 99 percent households have their access to electricity. An access towards water had reached to total 98 percent in the urban areas. Subsequently, the share for the water production and supply has continued to grow steadily. It is probably reflecting about the deficiencies of water in rural areas as only 85% population in rural areas had an access to safe water facilities.
Approximately, a quarter of the infrastructure investment is represented by the transportation. The largest component of expenditure formulated under the transportation development is the investment in roads. Such expenditure is framing around 20 percent of the overall infrastructure investment(KPMG, 2009). His investment has led to the expansion in the highways of Chine from 1 million kilometers to 4.3 million kilometers. However, investment in the rail networks is only occupying the smaller portion of the infrastructure development and tends to be more volatile than any other major infrastructure sectors. Nevertheless, this is resulting in 77 percent increase and even larger in the length of the passengers travelling from past 10 years. Although the investment in education had continue to grow but recently a decline in development of schools, universities and vocational institutes along with health care centers has been recorded from about 70 percent to 40 percent. The recent plans of the Chinese Government are targeting over the increase in the rate of urbanization from around 60 percent. However, subsequent challenges had led to local government debt, particularly for the infrastructure due to over-reliance on government directed investments leading to misallocation of resources.
Taxes are the most important source of revenue for the Government of China. As a key component of macro-economic policy, taxes are the greatest sources of fiscal revenue and it had greatly affected the economic and social development in China. With the implementation of changes introduced after the tax reforms of 1994, China had framed their streamlined taxation system for gearing their socialist market economy(Deloitte, 2016). According to the World Bank, the total tax rates of the corporations had revealed a total of 68 percentages of profits through involvement of both direct and indirect taxes. As a percentage of GDP, the overall tax rates were 30% of revenue revealed by the State Administration of Taxation in China.
The government agencies that are responsible for the formulation of tax policies are the Ministry of Finance. Recently the Government of China had stated that the government is planning to reform the VAT as it is forming the part of economic stimulus package from US$586 billion. It is decided to cut out the rates of the corporation taxes by 120 billion yuan(Cendrowski, 2016). The taxation policies of the China Government are formulated in four steps that is drafting, planning, promulgation and verification. Besides all the taxes, the major parts of the taxation policies are formulated by the foreign investment taxation. This is the form of tax that is applicable over the enterprises. Such taxes are the representation that reveals about the capital invested by the country for providing the services and improving the capabilities of manufacturing for both the native consumers and the world markets. The growth over such tax rates displays the confidence of the investors in supplying pace to the business(Georgine K. Fogel, 2010). China had become the country that had capitalized the benefits of the FDI by flowing it between the suppliers of the capital and the host regions. Several factors that had affected the taxation policies of the China are:
- In the early 2000s, China had declared the United States as the largest recipient of the foreign capital. They had become the outside investors who have willing to place their risk over the local regions. The global conditions and the general economic environment of China had helped the country in determining the flow of FDI to china. It is deemed that the nation is thriving for the creation of large swaths of the invested capital in the capital markets and business environments through channelizing the flow of capital. The large amount of investible capital had proportionately overwhelmed the ideas of sound local investments that had forced the individual investors companies and institutions to invest their wealth over the emerging and developing markets.
- China’s attractiveness for becoming a destination of the investments were resting on the capital investments that is derived through the development of infrastructure , productivity and the working skills, availability of the resources and the development of business value chain(GURRÍA, 2017). Such level of maturation had created an element for the attractiveness of China with regard to FDI in comparison of other nations. The taxation policies are greatly affected by the sale of goods and services that is facilitated by the resources and best infrastructure of the growing and developing economy. The lower costs of transactions due to maturity of the elements enable the investors to earn higher returns on investments reflecting that their enterprises are generating higher profits(Orr, 2017). Another factor that attracts the taxation policies are the availability of low-cost and skilled workers who possess the abilities, proficiencies, aptitude and experience of creating, manufacturing and providing better services for competing in the global markets.
- When the national government enforces the rule and enacts about some policies favoring the state entities at the cost of privately held firms, such environment affects the taxation policies. Such environment had only impacted through encouraging and impeding at the same time leading to attraction of FDI(IMF Country Report, 2016). Although, excessive regulations tend to hinder the policies through enhancing the entrepreneurial and commercial activities. It creates a compulsion over the managers and employees of the global organizations to spend more time and money over the formation of new rules and regulations. The investors in China had pulled towards investment opportunities due to high startup costs, manufacturing facilities, legal exposures and other cumbersome complying items that have made the business environment more conducive.
The most glaring aspect of the Chinese business environment is the sheer size of the population and growing markets that had changed the prospects of the international businesses. China is the infused market that had reflected a rapid growth through industrial development and economic changes. This has become the world’s largest trading nation after United States and Germany. They were the important trading partner of Australia. Several economic, social, political and cultural values had governed the business practices in China. According to world trade organization (WTO), China had started making growth in the business environment since after 2001 of its joining affected mainly through the imports, expanded exports and the inflows of FDI(data.worldbank, 2017). The country had achieved rapid industrial development with the increase in technological advancements with the increase in productivity. People of the Chinese community had eliminated the system of township collective-household-production with the introduction of agriculture sector. Apparently, many non-agricultural, trade and industrial facilities are still state-owned and centrally planned but the private ownership of the production assets had now become legal. Joint ventures were encouraged; restraints from foreign trade were relaxed, especially in the coastal special economic zones and open coastal cities. A signs of affluence in the reformed economy were generated through the number of its millionaires.
The main industrial exports of China are textiles, manufactured goods, garments and electronics. The leading export materials of China are antimony, tungsten, mercury, tin, manganese, molybdenum, salt and barite. China is the world’s largest producer of Aluminum (Agriculture and Agri-Food Canada, 2014). Initially, China has faced the deficits in the trade and current accounts but later on with the acceleration of the inward capital investment, the business environment had experienced a new success. In 1980s an economic slowdown had created a sharp fall in the imports while on the other hand this had continue to rise in exports but with the development of infrastructural facilities and internationalization, a rise in the reserves of exports were noticed. When the imports had roused faster than the exports, the surplus was eventually eroded. As per the recent changes in the value added production, national tax revenue and foreign trade, over 190 countries had started doing investment in Chinese business environment leading to inclusion of country among the top 450 World Fortunes among 500 Companies. According to Member priority survey, the majority of Australian Companies had served the domestic market of China as 81% had recorded their successful operations in China.
In 2006, one of the emerging institute of China known as Chinese National Development to Reform Commission (NRDC) had planned to manage the investments in economy in a much better way. They have addressed the plans that fostered to establish the relationship between national security investments and foreign investments(Guoqiang, 2015). This had instructed China to gradually relax their restrictions over the foreign holdings to energize the domestic enterprises. This had increased the flow of foreign capital in the economy of China that has directed them towards modern service industries, high-tech industries, infrastructural development, high-tech industries and planning for the ecological/environmental protection. The NDRC had taken the steps for increasing the investments in MNC’s leading to higher investment, set up of production, assembly and training institutions in China. The major goal behind these steps of NDRC is to enhance the independence of innovation among the Chinese enterprises. This has led the economy of China to grow and prosper. All these factors had made the direct outbound investments to grow and prosper by reaching at the level of $73.3 billion by the end of 2006(Magnier, 2016). It is noticed that majority of outbound investments had initiated from the overseas acquisitions.
Domestic credit to private sector can be described as the financial resources that are offered by the financial institutions to the private sector that ascertain a claim for the repayment of the resources includes purchases of non-equity securities, loans, trade credits and the other accounts receivables(Tradingeconomics, 2017). The higher domestic credit to private sector signifies that there will be greater opportunity as well as space to develop and to grow for the private sector of the country. The higher financial resources provided to the private sector helps them to play bigger role in enhancing the national economy that is better health and the development of the economy of the country(Ecohorizons, 2014).
According to the World Bank compilation of the development indicators, the domestic credit to private sector in China was accounted at 133.7 percent in the year 2013 and 153 percent in the year 2015(Tradingeconomics, 2017).
The statistics shows that the domestic credit to private sector in China contributes highly in increasing the economic growth and development of the country. Promoting and encouraging the domestic credit to the private sector helped China to become a developed country. China set an example by promoting domestic credit to the private sector as this leads to growth of the economy of the country.
The continuous rise in the financing costs leads to increase the flow of the financial resources as the credit offered to the private sectors allows to the increase in the economy of the country as well as lending the money on credit will also allow the country to receive the financial resources from these private sectors that will also contribute in increasing the economy of the country. The increase in the Gross Domestic Product (GDP) results in the growth and development of the country and makes the country economically strong(Mackenzie, 2013).
After the occurrence of the Global financial crisis, the condition of China was comparatively fine. The losses were also limited because the government of the country adopted the measures to stabilize the economic condition of the country. The government decided to promote the domestic credit to the private sector. This helped the country to stabilize the condition as well as the dependency of the country on the credit and investment helped to increase the economic growth. The foreign credit came up as a risk for the country during the crisis so the country decided to offer credit to the private sector of the country which provided dual benefits to the country.
The global financial crisis affected the whole world as it destabilized the development of the countries and the financial markets. The Global financial crisis leads to downfall in the banking industry and the financial institutions of the world. These institutions suffered losses that impact the economies of the countries adversely. The Asian countries including China were also affected by the Global Financial Crisis (GFC) as it resulted in the reduction of the demand of the trade, investment, GDP and manufacturing sector. Many of the monetary policies as well as the fiscal policies were implemented by the government of the China in order to diminish the effect of Global financial crisis. The major reasons behind the financial meltdown in the China were losses in the US stock market, losses in the FOREX market, decline of the export growth and reversals in the cross-border financial flows.
The Chinese banks suffered losses of around $20 billion in the US stock market as the value of the bonds decreased. But the losses of China were limited in comparison to the other countries. Huge capital loss was suffered by China in the FOREX market because the value of the US dollar decreased and the inflation level of US increased that impact the currency of the China as well. Later, China sold all the bonds in the lower value resulted in the losses(Burdekin, Barth, Song, & Zhou, 2011).
The most severe impact on the Chinese economy was due to the global financial crisis as China was highly dependent on the US for the exports. The growth of the export affected the country and experienced low growth. This resulted in increase in the unemployment rate in the China and the direct losses were suffered by China but it was limited in comparison to the other countries. The highly adverse effect due to the crisis on China was in obtaining the trade financial.
The cross-border financial flow of the China takes place only through Foreign Direct Investment (FDI). China faced lot of difficulties and inconsistency in the cross-border financial flow because of the illegal exchanges, overstatement of the import proof of purchases and understatement of the export invoices which resulted in the increased threats to the stability of the financial system of the China. Later, the government of the China controlled the capital flow as well as indulged in stabilizing the rate of the currency exchange which helped to reduce the damage to the country(Zhou, Shi, Li, & Yuan, 2011).
In the previous two decades, the economy of the China has come out as a chief player in the world economy. The high Gross Domestic Product (GDP) growth of the China has changed the distribution of the economic activities to every corner of the world. The exports activities of the China lowered the consumer prices for the whole world and the most important impact begun on the global commodity prices because of the imports activities. China has turned into the most important center of the intra-industry trade and also become the engine for the economy of the world. China managed to maintain the high growth even in the crisis by adopting the monetary and the fiscal policies that helped to reduce the effect of Global financial crisis(Li, Willett, & Zhang, 2012).
The monetary policies of the China are implemented by the People’s Bank of China (PBoC). In the year 2016, ‘prudent’ policy was implemented by PBoC. The prudent policy was used as market-based approach in order to manage the liquidity and to expand the variety of tools in the banking system that includes lending facilities and repos as well as to encourage better allocation of the capital and to conduct market interest rates for the purpose to match the objectives of the PBoC(Bloomberg, 2017). This Policy helped the banks to use the capital efficiently. The policy enabled the PBoC to become more practical in handling the monetary policy. The policy allowed the PBoC to maintain stable and consistent increase in the cost of the capital(Sheehan, 2017).
Now in the year 2017, China is pursuing ‘prudent and neutral’ monetary policy. The policy is implemented in order to promote greater flow of the financial resources in the economy of the China. For the purpose to implement the management of the stability in the level of the liquidity and the market interest rates efficiently, all the variety of the monetary policy instruments is applied(Reuters, 2017). The focus of the China is to support and encourage the rural areas, farmers, agriculture as well as micro and small business through the implementation of this monetary policy. Encouraging these sectors of the country will help to increase the economic growth as these sectors play an important role to develop and increase the economy of the country (Jianfeng, 2017).
The monetary policies that are implemented turned out as successful for China as these policies helped China to stabilize as well as increase the flow of the financial resources in the county. The implementation of the new monetary policies helped to achieve the growth in the economy of the country.
Exchange rates are the rates that float against each other. It means that the rates are in fluctuating constantly. The evaluation of the currency is being determined by these fluctuations. The exchange rate regime is a way in which an authority of any country manages the currency in respect to the currencies if the other countries, as well as according to the market of foreign exchange. The exchange rate regime is closely associated with the monetary policies. The exchange rate regime and the monetary policies depend on various factors, which are common in nature. The country china has been managing to implement the floating exchange rate regime on the basis of the demand and supply in the market, associated with the currencies. The central Bank of China has been formulating a defensive current times policy. General modifications and evolution in the policies of the China’s foreign exchange has the purpose of making the country the lead in the global economy. The aim is to promote the currency Yuan, as a reserve of global currency (China defends new currency regime, 2017). There are certain factors that determine the exchange rate regime of the country, such as the structural constraints, growth of liquid financial markets, political consideration in the domestic market of the country, and the autonomy of monetary policies in relation with the stability of the exchange rates (Salitan). The country of China has an absolute control over its policies related with currency. Such control enables the country to regulate the trade related activities and also regulated the currency movements of the currency in the foreign exchange market. In the year 2015, the country allowed its currency to get devalued in the previous band of trading. The banks having the foreign currency in China have to operate under various strict rules and regulations. This is the reason that the currency cannot be considered as fully convertible. The investors who are interested in converting dollars or many other foreign currencies in return of the China’s currency, Yuan, have to directly exchange it with the central bank of the country. After the investor deals with the central bank of the country, these currencies are being printed so as to get in usage of the individuals, business as well as banks. Talking about the current scenario, the country of China has the largest reserve in the world, having a reserve of US$3.2 trillion. In order to strengthen the value and position of the currency Yuan, the country of China has been selling reserves of foreign currency in the market. And, on the other side, in order to weaken the value and position of the country’s currency, China has been using the local currency in order to buy the foreign currency. The monetary policy has been impacting the flow of the currency of China (How Does China Control Exchange Rates?, 2017). The currency of the country Yuan is considered to be a powerful currency, among all the global currencies. This is so because the country has been pegging Yuan in respect to the dollars. Over the times, the value of dollars in respect to other currencies has been rising, so is the value of Yuan has increased. (economist.com, 2015)
The benefits of the foreign direct investment do not accrue automatically and evenly across the country, its sectors, and the local communities. Major challenges are being faced by the foreign direct investment coming from the OECD countries. However, in order to enhance the agenda, the developed countries can also contribute. In order to get an access of the international market, the developed countries can facilitate the developing country and ensure the policy coherence for the development purpose. China has been considered as the target country as in the past decades, trade in China has expanded at a breakneck pace. China is a favorable country for long term investment. There are various macroeconomic variables that are required to be considered such economic growth and business cycle, unemployment rate as well as policies, average wage rate in the country of China, inflation rates and policies, and real interest rates. In the year 2015, the growth was around 19.39 dollar trillion; it was the largest in the world. China mainly grew around 7 percent in 2014 and approximately 8 percent in 2013. China has mainly been considered as the largest contributor of growth since the global financial crisis of the year 2008. The rate on unemployment in the country of China has been reduced. The average rate of unemployment in China is around 4 percent. The low unemployment rate of the China is a sign of economic development. However, there are signs of employment challenges in many of the sectors of the economy. Many of the workers in China have complained regarding the under deployed and the underpaid issues though it is not technically unemployed. In the recent years the average rate of China has been increased. However, many millions of workers in China are mainly struggling for making the living wages. China has mainly established the legal provisions on the working hours and the payment of the wages. China’s inflation prices rose to around 1 percent year by year in 2017. The high inflation is the result of the booming commodity prices. The inflation rate of the country is around 2.3 percent for the year. The household deposit rates in the china are established by the China's people bank at around 3 percent.
Foreign direct investment is considered as an integral part of the open and effective international system of economics and is also considered as a major catalyst in the development of the country. The developed countries can contribute and assist the developing countries in order to attract more foreign direct investment that shall foster the economy as well as the growth, in respect to the other global economies. In order to develop the business in the country of China, the report has been assessing the various variable of macroeconomics in the context of the mining industry of the country. The variables such as growth of economy and the process of the business cycle, rate of unemployment, average wage rate of the country, inflation rate, and real interest rate, expenditure of the government on infrastructure, taxation policies, business environment, effect of global financial crisis and monetary policies of the country. From the above discussion, it is clear that the country China is a favorable country in order to start up a mining business. As the country gives a high domestic credit to the private sector, that shall open up to more opportunities, for the company. Also, the government of China is very much interested in investing for infrastructure, which shall benefit the company to obtain easy and advanced infrastructure for the business set up and survival. The taxation policy of the country keeps on reforming, and such growth over the tax rates displays the confidence of the investors in supplying pace to the business. China is the infused market that had reflected a rapid growth through industrial development and economic changes. This has become the world’s largest trading nation after United States and Germany. Through this it can be witnessed that in order to attract more international business, the country shall formulate such policies and strategies that shall benefit the company. Also, the economic growth of the country is remarkable, as in the year 2015, the growth was around 19.39 dollar trillion, and it was the largest in the world. The low unemployment rate of the China is a sign of economic development.
So, it can be concluded that Chins is a leading and fast growing economy, inviting companies, across the globe, in order to develop and add on to the international business of the country. The mining industry of the country is also considered to be reliable and promising, to get entered in.(Rabinovitch, 2013). Based on the above discussion, following are the recommendations that can be drawn:
- Most of the variables of the macroeconomic such as the economic growth, government investment on infrastructure, taxation policies etc. are in favor of the business that has to be conducted. It can be concluded that the country has a general and favorable business environment, which makes it suitable to start up a company.
- However, there are certain macroeconomic variables which the country is not supporting in favor of the company to be established. Such as the unemployment rate. The unemployment rate in the country is very low, and in the year 2017, the country was able to create 3 million jobs for the citizens. From the company’s perspective, this can prove to be a hindrance in looking for the potential candidates to employ. However, by offering attractive salary packages, along with perks and job security, the company can overcome such hindrance.
- Wage rates in China have steadily increased in the past decades to the point where in the country is no longer being considered by the businesses to be the source of cheap labor. For the company, this shall prove to be a matter of increasing cost, as the company will have to invest more in arranging for the human resource.
- The Asian countries including China were affected by the Global Financial Crisis (GFC). The Chinese banks suffered losses of around $20 billion in the US stock market as the value of the bonds decreased. However, in the current times, the situations are not the same. But, the company will have to face certain issues in raising funds through the banks and other financial institutions of the country. The company must have a promising history and the turnover along with the mortgage must be influential, in order to get loan.
China defends new currency regime. (2017). Retrieved from FINANCIAL TIMES: https://www.ft.com/content/d42526ee-418c-11e5-b98b-87c7270955cf
How Does China Control Exchange Rates? (2017). Retrieved from FXCM: https://www.fxcm.com/insights/how-does-china-control-exchange-rates/
Agriculture and Agri-Food Canada. (2014). Business Environment China.
Amadeo, K. (2017). China's Economic Growth: Cause, Pros, Cons, Future. Retrieved from Thebalance: https://www.thebalance.com/china-s-economic-growth-cause-pros-cons-future-3305478
Bloomberg. ( 2017, February 03). China Tightens Monetary Policy by Raising Money Market Rates. Retrieved May 24, 2017, from Bloomberg: https://www.bloomberg.com/news/articles/2017-02-03/china-s-pboc-increases-interest-rates-in-open-market-operations
Bloomberg. (2016). Photographer: ChinaFotoPress/Getty Images. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2016-12-22/china-s-understated-2-inflation-at-odds-with-bond-yuan-slump
Burdekin, R. C., Barth, J. R., Song, F. M., & Zhou, Z. (2011, December 12). China after the Global Financial Crisis. Retrieved May 24, 2017, from Hindawi: https://www.hindawi.com/journals/ecri/si/530306/
Cendrowski, S. (2016, December 12). Inside China’s Global Spending Spree. Retrieved May 24, 2017, from fortune.com: https://fortune.com/china-belt-road-investment/
Chang, R. (2016). Here's What China's Middle Classes Really Earn — and Spend. Retrieved from bloomberg: https://www.bloomberg.com/news/articles/2016-03-09/here-s-what-china-s-middle-class-really-earn-and-spend
Chi Hung KWAN . (2010). The Chinese Economy Viewed from a Business Cycle Perspective: To hit bottom in 2011 and recover strongly in 2012. Retrieved from riet: https://www.rieti.go.jp/en/china/10102901.html
Chiang, P. S. (2012, September 07). China approves $157-billion infrastructure spending. Retrieved May 24, 2017, from www.reuters.com: https://www.reuters.com/article/us-china-economy-idUSBRE88613C20120907
chinadaily. (2017). Wage Rate. Retrieved from chinadaily: https://www.chinadaily.com.cn/business/2016-11/14/content_27366367.htm
CLB. (2017). Wage Rate. Retrieved from CLB: https://www.clb.org.hk/content/wages-and-employment#?Income inequality
cueb. (2016). Forum on China Economic Growth and Business Cycle / China Urban Life Quality Index Conference. Retrieved from cueb: https://english.cueb.edu.cn/news/78425.html
data.worldbank. (2017). China. Retrieved May 24, 2017, from data.worldbank.org: https://data.worldbank.org/country/china?view=chart
Deloitte. (2016). China Taxation and Investment.
Ecohorizons. (2014, SEPTEMBER 22). A HIGH VALUE OF DOMESTIC CREDIT TO PRIVATE SECTOR (% OF GDP) IS A SIGN OF A STRONG ECONOMY! Retrieved May 24, 2017, from https://ecohorizons.wordpress.com/2014/09/22/713/
economist.com. (2015, february 19). Devaluing the yuan would do China more harm than good. Retrieved from The Economist: https://www.economist.com/news/finance-and-economics/21644205-devaluing-yuan-would-do-china-more-harm-good-currency-peace
- (2015). China’s real interest rate surges to post-crisis high. Retrieved from FT: https://www.ft.com/content/74990c3e-fd69-11e4-b072-00144feabdc0
Georgine K. Fogel. (2010). BUSINESS ENVIRONMENT IN CHINA: ECONOMIC, POLITICAL, AND CULTURAL FACTORS .
Gilroy, A. (2014). Why China’s real interest rates are increasing. Retrieved from marketrealist: https://marketrealist.com/2014/10/why-chinas-real-interest-rates-are-increasing/
Guoqiang, L. (2015, January 21). What is the future of Chinese trade? Retrieved May 24, 2017, from www.weforum.org: https://www.weforum.org/agenda/2015/01/what-is-the-future-of-chinese-trade/
GURRÍA, A. (2017). ACTIVE WITH THE PEOPLE’S REPUBLIC OF CHINA.
Hsu, S. (2017). This Is Why China Wants Its Inflation Rate To Pick Up. Retrieved from forbes: https://www.forbes.com/sites/sarahsu/2017/04/05/this-is-why-china-wants-its-inflation-rate-to-pick-up/#318c451b318c
IMAI, H. (1996). EXPLAINING CHINA’S BUSINESS CYCLES. The Developing Economies.
Imai, H. (2002). China's Growing Unemployment Problem. Retrieved from JRI: https://www.jri.co.jp/english/periodical/rim/2002/RIMe200209unemployment/
IMF Country Report. (2016). THE PEOPLE’S REPUBLIC OF CHINA.
Indexmundi. (2014). China - Real interest rate. Retrieved from Indexmundi: https://www.indexmundi.com/facts/china/real-interest-rate
inflation. (2017). Inflation rate. Retrieved from inflation: https://www.inflation.eu/inflation-rates/china/historic-inflation/cpi-inflation-china.aspx
Jianfeng, Z. (2017, May 3). China to pursue prudent, neutral monetary policy in 2017. Retrieved May 24, 2017, from CCTV.com: https://english.cctv.com/2017/03/05/ARTIcePhqOTttadvFIfYkjTM170305.shtml
KPMG. (2009). Infrastructure in China:Fortune for growth.
Li, L., Willett, T. D., & Zhang, N. (2012). The Effects of the Global Financial Crisis on China's Financial Market and Macroeconomy. Retrieved 2017, from https://www.hindawi.com/journals/ecri/2012/961694/
Lim, C. (2008). The Economic Infrastructure of China And The Affects On Staples, Inc.
Mackenzie, K. (2013, April 17). China’s credit-to-GDP ratio, updated (and why it matters). Retrieved May 24, 2017, from Financial Times: https://ftalphaville.ft.com/2013/04/17/1463992/chinas-credit-to-gdp-ratio-updated-and-why-it-matters/
Magnier, M. (2016, December 13). China’s Economy Rebounds With Help From Government Spending. Retrieved May 24, 2017, from www.wsj.com: https://www.wsj.com/articles/chinas-economy-rebounds-with-help-from-government-spending-1473744662
Orr, G. (2017, January). What can we expect in China in 2017? Retrieved May 24, 2017, from www.mckinsey.com: https://www.mckinsey.com/global-themes/china/what-can-we-expect-in-china-in-2017
Rabinovitch, S. (2013, july 24). China unveils measures to boost economy. Retrieved from FINANCIAL TIMES: https://www.ft.com/content/549e0008-f46d-11e2-a62e-00144feabdc0
Reuters. (2016). Chinese Inflation Grows at Fastest Rate in Six Months. Retrieved from Fortune: https://fortune.com/2016/11/08/chinese-inflation-growth-cpi/
Reuters. (2017, January 06). China central bank says to maintain prudent, neutral monetary policy in 2017. Retrieved May 24, 2017, from REUTERS: https://in.reuters.com/article/china-cenbank-idINKBN14Q1A2
Reuters. (2017). China February producer inflation fastest in nearly nine years as commodities surge. Retrieved from Reuters: https://www.reuters.com/article/us-china-economy-inflation-idUSKBN16G06N
Reuters. (2017). China’s Economy Is Set for Steady Growth. Retrieved from fortune: https://fortune.com/2017/03/12/china-economic-growth/
Reuters. (2017). China's unemployment rate falls below 4 percent at end of first quarter. Retrieved from Reuters: https://www.reuters.com/article/us-china-economy-jobs-idUSKBN17R0JN
Salitan, C. (n.d.). China's Currency Regime: The Perceivd Threat to the U.S. Economy. Retrieved from INTERNATIONAL AFFAIRS REVIEW: https://www.iar-gwu.org/node/180
Scutt, D. (2017). Inflation in China is heating up fast. Retrieved from businessinsider: https://www.businessinsider.com/inflation-in-china-is-heating-up-fast-2017-2?IR=T
Sheehan, S. (2017, March 30). China's Subtle But Significant Attitude Change on Monetary Policy . Retrieved May 24, 2017, from THE Diplomat: https://thediplomat.com/2017/03/chinas-subtle-but-significant-attitude-change-on-monetary-policy/#/https://thediplomat.com/2017/03/chinas-two-sessions-and-the-2017-economic-outlook/
Tradingeconomics. (2016). Real Interst rate. Retrieved from Tradingeconomics: https://www.tradingeconomics.com/china/real-interest-rate-percent-wb-data.html
tradingeconomics. (2017). Average yearly wages in China. Retrieved from tradingeconomics: https://www.tradingeconomics.com/china/wages
Tradingeconomics. (2017). China - Domestic credit to private sector (% of GDP). Retrieved 2015, from https://www.tradingeconomics.com/china/domestic-credit-to-private-sector-percent-of-gdp-wb-data.html
tradingeconomics. (2017). GDP of CHINA. Retrieved from tradingeconomics: https://www.tradingeconomics.com/china/gdp-growth-annual
tradingeconomics. (2017). Inflation rate. Retrieved from tradingeconomics: https://www.tradingeconomics.com/china/inflation-cpi
tradingeconomics. (2017). Unemployment Rate. Retrieved from tradingeconomics: https://www.tradingeconomics.com/china/unemployment-rate
tutor2u. (2017). China - Economic Growth and Development. Retrieved from tutor2u: https://www.tutor2u.net/economics/reference/china-economic-growth-and-development
wageindicator. (2017). Wages in China. Retrieved from wageindicator: https://www.wageindicator.org/main/salary/minimum-wage/china-custom
WANG, J. (2016, february 2). A 5-Step Plan to Boost China’s Economy. Retrieved from BARRON'S: https://www.barrons.com/articles/a-5-step-plan-to-boost-chinas-economy-1454400524
worldbank. (2017). CHINA. Retrieved from worldbank: https://www.worldbank.org/en/country/china/overview
Yan, W. (2016). Average salary in major Chinese cities is $900 and growing. Retrieved from https://www.chinadaily.com.cn/china/2016-01/21/content_23183484.htm
ycharts. (2015). Real interst rate in China. Retrieved from ycharts: https://ycharts.com/indicators/china_real_interest_rate
Zhang Peng. (2017). China raises short-term interest rates in fresh tightening signal. Retrieved from CNBC: https://www.cnbc.com/2017/02/03/china-economy-news-pboc-raises-short-term-interest-rates-in-fresh-tightening-signal.html
Zhang, Y. (2016). Measuring Business Cycles in China: A Brief Review. OECD.
Zhou, S., Shi, M., Li, N., & Yuan, Y. (2011, June 8 ). Effects of Chinese Economic Stimulus Package on Economic Growth in the Post-Crisis China. Retrieved May 24, 2017, from Hindawi: https://www.hindawi.com/journals/ecri/2011/492325/
Zurawski, K. W. (2014). Infrastructure Investment in China.
To export a reference to this article please select a referencing stye below:
My Assignment Help. (2021). Essay: Benefits Of Foreign Direct Investment In Macroeconomics." (63 Characters). Retrieved from https://myassignmenthelp.com/free-samples/econ1102-macroeconomics-1/national-policies-and-architecture.html.
"Essay: Benefits Of Foreign Direct Investment In Macroeconomics." (63 Characters)." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/econ1102-macroeconomics-1/national-policies-and-architecture.html.
My Assignment Help (2021) Essay: Benefits Of Foreign Direct Investment In Macroeconomics." (63 Characters) [Online]. Available from: https://myassignmenthelp.com/free-samples/econ1102-macroeconomics-1/national-policies-and-architecture.html
[Accessed 08 December 2023].
My Assignment Help. 'Essay: Benefits Of Foreign Direct Investment In Macroeconomics." (63 Characters)' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/econ1102-macroeconomics-1/national-policies-and-architecture.html> accessed 08 December 2023.
My Assignment Help. Essay: Benefits Of Foreign Direct Investment In Macroeconomics." (63 Characters) [Internet]. My Assignment Help. 2021 [cited 08 December 2023]. Available from: https://myassignmenthelp.com/free-samples/econ1102-macroeconomics-1/national-policies-and-architecture.html.