In the last fee decade Australia and China have developed a strong international relation in terms of cross border trade and foreign investment. The economy of China entered a new growth phase since 1970. Rapid expansion of China’s economy was based on development of manufacturing, mining industry, urbanization and infrastructural development. Fast growth of industries generated huge demand for raw material (Heilmann et al. 2014, p.28). The demand for energy to develop transport and infrastructure and materials necessary for manufacturing sector rose rapidly. Australia since the very beginning of China’s growth support the nation by supply necessary raw materials on time. China gradually became one of the largest import and export partners of Australia. The trade relation between the two nation further strengthened by expansion of foreign investment. In the rapid growth process of China there was a major shift in key drivers of growth. China gradually shifted from producing labor intensive simple manufacturing to the production of complex goods and services. This somewhat moderates the resource demand from Australia. China’s demand has now shifted from raw materials to a greater demand for service and manufacturing expertise (Lardy, 2016, pp. 85-111).
Long term investment decision crucially depends upon the macroeconomic environment of the targeted country. The macroeconomic environment of a country is a much broader concept and hence, cannot be explained by one single indicators. Rather this involves evaluation of a number of different aspects (Fan et al. 2016, pp.187-203). In this paper some of the crucial macroeconomic factors are analyzed to examine whether investment of one of the leading mining companies of Australia BHP Billiton in China is profitable or not.
The first aspect that is considered is the general business environment. It indicates the overall business condition of the nation. Performance scores of the targeted nation are measured in terms of procedure of getting permission to operate in the nation, process of obtaining license, tax registration, availability of credit, solution toward the problem of insolvency and others. All these matters in directing business operation and hence affects the return from long terms investment (Rezai & Stagl 2016, pp.181-185). Next to general business environment economic growth is the second crucial aspects to be considered while making investment decision. Investors always desired that the targeted nation has a smooth growth path. A fluctuating growth path implies instability of economic activity. Nation with a stable growth path provides a higher and secure return to the investors. The most conventional measure for trend growth rate is the overtime movement of GDP growth rate. Unemployment indicates performance of labor market. This is associated with economic growth. A higher growth is associated with a low level of unemployment and vice versa. The statistics for unemployment indicates presence of surplus labor. A country with a high rate of unemployment thus have an excess supply of labor. This helps the newly entered foreign companies to find workers at a low wage. The next important macroeconomic variable is rate of inflation. It measures the percentage change in cost of maintaining same standard of living in two different time period. Depending on the causes of inflation, an upward revision of price level might be supportive for economic growth. Every economy requires some modest increase in price level to encourage producers by generating a higher profit from high price. The available supply of labor is supplemented with the trend in average wage growth. It is beneficial for a company to invest in another country if wage is relatively lower in the chosen country as compared to that in home country. In selection of nation for making long term investment infrastructure of the chosen nation has an important role to play. The infrastructural facilities include structure of transport and communication, availability of water, electricity and other utilities. Such spending is generally conducted by government of a nation. Therefore, strength of fiscal position matters to build infrastructure of a nation. A favorable taxation policy smoothens the path of foreign investment. When government wants to encourage foreign investment in a nation then it offers investors he facility of tax break or offers special exemption from certain type of taxes. In the cross border movement of fund both interest rate and exchange rate are important. A lower interest rate implies a lower cost of borrowing capital. A devalued currency by lowering value of domestic currency in terms of foreign currency lowers the cost of production of foreign currency in relation to domestic currency. Finally, the impact of global financial crisis and associated crisis management mechanism in China is evaluated to examine the internal stability of the economy.
In the investment decision of a company, general business environment of the targeted nation plays an important role. In order to set up a subsidiary factory in other nation the company needs to take permission from appropriate authority. The extent pf difficulty that a company might face in seeking permission determines favorability of the business investment. The targeted country need to have uninterrupted supply of electricity. In order to secure investment, property right has to defined properly (Sauvant & Nolan 2015, pp.893-934) The easy availability of credit provides confidence to the business firm. Complicated and discriminating structure of tax considered as a hurdle to enter in a nation. On the other hand, non-discriminating and favorable tax structure attract foreign investment. To examine whether China is an appropriate destination for investment of the company that depends on these factors.
It represents how the nations performs on different indicators determining a favorable business environment. During 2016, in terms of overall business environment China ranked 80. In 2017, the rank however improved making China’s rank two point above. Owing to reforms undertaken business environment in China has improved. The rank now increased to 78.
Several measures have been undertaken in China to favor business investment. The process of registration, availing business license or tax registration now has made as simple as possible. Company can easily avail these facilities with only a single form. In order to increase profit shares of companies China has reduced the amount payable for social contribution in forms of relaxation of concerned tax (Wang, Chen & Benitez-Amado, pp.160-170)
The system of electronic filling for payable tax and implementation if new and improved channel of taxpayer service have made tax payment easier than it was before. The credit availability is one crucial factor for investment decision. Financial institutions and commercial banks receive credit scores and central bank maintains a record on payment history. Business owners now can save their time from the simplified taxation system. The complexity of existing tax system has been reduced by making necessary amendments in civil procedure code. The civil courts have now made a much faster proceeding saving both time and money. Permits for new construction have been granted through a simplified norm of pre-construction and approvals. Establishment of good trade relation has always been the priority of China since the beginning of its growth phase. In order to promote free trade China has remove barrier to free trade exists in the form of restriction on trade credits. Insolvency is one obstacle to a stable business environment. A company is announced as insolvent if it is unable to pay its debts (World Bank 2018) . New legislation has been implement to address the problem of insolvency. To prevent insolvency reforms are taken in forms of formation of a committee for creditors’, procedure of reorganization, providing a secure right to the creditors and settlement of bankruptcy board to handle any problem in case of inconsistent behavior on part of the company. Therefore, if viewed from prospects of general business environment selection of China as a targeted investment destination seems quite reasonable.
Economic growth of a nation is identified in terms growing productive capacity reflected from a higher output. The primary indicator of economic growth is the Gross Domestic Product which is sum of marketed values of produced output (goods and services) in a nation (Bloch, Rafiq & Salim 2015, pp.104-115). A continuous riding trend in GDP asserts an increased level of output and hence a better standard of living. The rate of change in GDP between two consecutive years is the representative measure of economic growth.
Growth rate of GDP does not follow a smooth path. Fluctuation in GDP occurs in response of internal and external shocks. These fluctuations are explained with the theory of business cycle. There are broadly four phases in a business cycle. These are peak, trough, recession and expansion. A complete business cycle thus explains all the upswings and downswings in growth. Economic expansion is a phase where output expands along with expansion of employment, demand and other factors. During expansion growth rate continues to increase. A continuous increase in the economic growth rate moved the economy to the point of peak or economic boom where output reaches to the highest potential level (Jones 2016, pp. 3-69). From then, growth begins to fall along with a fall in output and employment. After period of recession the economy reaches to the point called trough. It is a phase where the economy experiences a slump. The ends of recession marks beginning of a new business capital.ds on capacity of resistance during phases of business cycle. Long held recession is not a good sign for stable economy and hence, discourage investors to invest in that nation. One way to identify phases of business cycle is to measure growth against time.
The economy of China constituted sharp increase in its growth rate between 2000 and 2007. Growth rate declined to a significantly low level during in 2007. Growth though slightly recovered in the next two years but the nation has again entered to a phase of slow growth rate since 2010. The slow growth phase even continued till date preventing the nation to back to its lost growth phase (Bhattacharya, Rafiq & Bhattacharya 2015, pp.686-695). There are three factors explaining reasons for a slow growth of China. Economic growth of China was highly dependent on its manufacturing sector. With strength of population it become easy to be world’s factory. In recent years Chins has faced challenges of ageing population, a slow growth in population followed by the implementation of the policy of one child and unwillingness of current generation to accept a low wage. Government of China is attempting to shift the attention from an earlier manufacturing and export led growth towards a domestically dependent and service sector led growth. Consequently, export declined by 20 percent explaining the largest economic slump (Blanchard & Giavazzi 2016, pp. 49-84) The second factor is the response of China to the global financial crisis in 2008. To protect the economy from global recession fiscal stimulus of $586 billion was given. The policy though worked in the short run protecting industry and commerce. In the long run however this left the government with burden of huge fiscal deficit. The bad assets failed to make the nations any better off. China has reduced the borrowing cost in 2014 (Otsuka, Higuchi & Sonobe 2017, pp.S3-S16). This again boosted the economy shortly. The benefits are particularly realized in at the local level. The reduced borrowing cost however led the household in a highly indebted situation rather than boosting expenditure in the real economy. The government provided final stimulus to the economy in 2015. The stimulus had given to the foreign exchange market by abandoning currency peg against dollar. This reduced the exchange rate of Yuan by almost three times within a week (Sims, 2015, pp. 432-434). The third factor of China’s slower growth rate is economic transition from a developing world towards developed one. In a developed nation a growth rate of 10 percent is never sustainable. Economic growth of Chins is though slowed down as compared to that in the previous decade but the growth rate is still in line with most of the developed nation and even higher than some nations (Grinin, Tsirel & Korotayev 2015, pp.294-308).
Unemployment is an indicative measure of labor market performance and hence long standing policy implication. Unemployment describes a situation in which some existing participants cannot get jobs suitable for them. The state of unemployment has close association with economic growth pattern. In times of economic expansion labor demand is usually high and this reduces the rate of unemployment. the labor demand falls significantly during economic contraction due to slowdown of economic activity (Mok and Jiang 2017, pp. 219-243). The phase of contraction is thus associated with a high rate of unemployment. The persistent unemployment is not desirable for any nation. Government designs suitable policy framework to tackle the problem of unemployment. Flow of foreign funds has a positive influence in employment. With assistance of foreign fund production activity expands in the domestic economy. The foreign companies setting up factories in the nation hires local labor as it is costly to carry out their own work force. Tis provides a solution to the unemployment problem. In the presence of high unemployment government thuds relaxes all the restriction to entry of foreign business and investment. Foreign companies can take advantage of regulatory relaxation. With excess labor supply the wages fall to a significantly low level. Foreign companies thus hiring the low cost domestic laborers can increase their profit while benefiting the county of operation with a low rate of unemployment.
The economy of China expanded at a very rapid pace from 2000 to 2007. With a high rate of growth indicating fast expansion of economic activity, there was a drastic fall in the unemployment rate. This phase was characterized as a phase of manufacturing boom in China. Economic growth however started to fall since 2008. With worsening condition of economic activity unemployment in the economy rose sharply. With recovery in economic growth unemployment declined slightly in between 2008 and 2010. Rate of unemployment accelerated from 2010 and still the economy has a considerable high unemployment statistic (Soo, 2015, p.637). In a labor abandoned economy like China unemployment is a major cause of concern. The surplus labor during economic boom worked as a strength of the economy. in a technologically advanced world, to make a neck to neck competition globally China needs replace its earlier labor intensive production technique to a capital intensive machine technology. This though has raised productivity growth but at the cost of reduced employment growth (Juwei and Yifei 2016, p.011). The significant portion of labor force in china is now suffering from the problem of unemployment and underemployment. The excess labor supply might encourage foreign companies to enter the country by making long term investment (Chan 2015, pp.35-53). The domestic nation welcomes such investment if it is beneficial fir productive growth. The return from long term investment for BHP Billiton however depends on skilled of the available laborers and government policies.
An associated factor with unemployment is the average wage rate. In the labor market equilibrium wage rate is determined from the available labor demand and labor supply. Labor being one of the primary factor of production the cost of wage is a determinant of total cost of production. As cost of wage increases production cost increases marking a decline in profit margins (Favilukis & Lin 2015, pp.148-192). In order to conduct business investment in nations, company needs to consider the prevailing wages in the targeted nation. As low wage is associated with a high share of proof this attracts foreign investment. With a cost of wages, potential benefits from investment might be outweighed by the high cost of production. The table below shows average earning of male and female participants of the labor force together.
China is characterized as a labor surplus economy. In a labor abandoned nations labors are generally available at a low relative wage. Availability if cheap laborers was one principle factors for rapid growth of manufacturing in China (Deming 2017, pp.1593-1640). With change in composition of population the trend in wage growth is now reversed. The labor market of China in the last yen year have experienced a faster growth in the wage rate.
As shown from the above figure the yearly wage in China has increased significantly from 2006 to 2016. The economic growth of Chins has flowed by a rapid expansion of wage in China. The high wage helps to boost average income and hence a higher consumer spending which further add to economic growth. The high wage on the hand results in a high cost of production. This discouraged production by lowering profit. Following a high wage cost companies either outsourced output or shift their production plants. Several companies in China have already moved their production outside China. As production shifted to other nation many workers’ loss their jobs aggravating the problem of unemployment (Hsieh & Ossa 2016, pp.209-224). To escape from high cost of production business now replace labor intensive technology with machine based advanced technology. The robotics market in Chins has expanded rapidly replacing human labor. High wage growth might discourage the company to invest in China’s market. The decision however depends on the relative wage between China and Australia.
It is therefore true that China in recent years has experienced a significant gain in labor wage but this is not a matter of much concerns for companies in Australia. this is because wage growth in China has started from a very low level (Autor, Dorn & Hanson 2016, pp.205-240). Despite considerable increase in average wage, the wage on an average worker in China is still lower than that in Australia. This makes China still an attractive destination of business investment.
Inflation is an indicative measure for the movement of price level in an economy. It is described as a situation where there is a general increase in the average price level. Inflation in an economy might be caused both from demand and supply side factors. The former is called demand pull inflation while the latter is called cost push inflation. When there is an increase in aggregate demand, then supply falls short of demand causing price level to increase (Ascari & Sbordone 2014, pp.679-739). The demand pull inflation is beneficial for economic expansion. Cost-push inflation on the other hand arises from increase in cost of production of companies and reflected in terms of a higher price of goods and services.
The percentage change in consumer price index is used as a measure of capturing rate of inflation. Rate of inflation in China though fluctuates but in general there is a rising trend of inflation. Fluctuation in the CPI inflation indicates there is instability in movement of prices of consumption basket. In the year 2009, the inflation rate in China fell to a historically low level recording a negative rate of inflation (Guo et al. 2016, pp.265-276). The economic contraction following a recessionary shock cause deflationary pressures in the economy during this time. The price level however recovers as the recession overs. Economic expansion pushed the inflation to a rate around 5% in 2011. After than inflation fell till 2014. In 2016, inflation has increased slightly but still remained at a moderate level of 2-3 percent.
In the last few years, Chins has recorded a massive acceleration in the producer price inflation. The PPI inflation has gone beyond the market consensus rate. The rise in producer price inflation is the result of a recorded gain in price of raw materials (Zhao et al. 2016, pp.101-110). The recorded increase in producer price inflation leads benefits both the business owners and the entire economy by accelerating growth. In 2011, China was considered as one of leading producer of steel. In recent years, the steel industry though has recorded a global slowdown following a lower demand but high there still remain prospect of investment growth as China’s government encourages foreign investment in different sub sectors of mining. These sub sectors include manganese ore, coal-bed gas and iron ores (Zhang, Ji and Dai 2017, p.17). The producer price inflation along with prospect of foreign investment in mining sectors offers a lucrative opportunity for BHP Billiton to enter China’s market.
Interest rate is the return payable for the loanable fund. It is considered as the cost of investment. The interest rate that is prevailed in the economy is known as nominal interest rate. When interest rate is adjusted for inflation then it is called real interest rate. With change in price level value of currency or purchasing power changes. The Fisher equation provides a relation between real interest rate, nominal interest rate and that of inflation (He & Fan 2015, pp.689-700). It suggests that real interest rate is the nominal interest rate less the rate of inflation. With an increase is price level net worth on money falls while during deflation worth of money increases. Inflation has a direct consequence on the return on investment. Inflation is usually beneficial for borrowers as they have to pay a lower return on borrowed fund. Lenders on the other hand hurt as they receive a return that worth less than the worth at times of lending. a certain amount of investment therefore though gets a similar nominal interest rate but the worth of investment differs in line with real interest rate (Kung 2015, pp.42-57). The real interest rate thus considered as a more accurate representative of actual return.
As obtained from the Fisher equation the magnitude of real interest rate depends on both nominal interest rate and prevailing rate of inflation. The figure above shows the trend movement of real interest rate fir China for a period ranging from 2000 to 2016. As observed from the figure, the movement of real interest rate reveals a trend consistent with that of the trend in inflation rate. Years having high rate of inflation is associated with a low rate of real interest rate (Holston, Laubach & Williams 2017, pp.S59-S75). Year of deflation on other hand gives a relatively high real interest rate. In 2009, following a global slowdown China had experienced a recession with a low level of output and inflation. The low rate of inflation caused real interest rate to rise drastically (Chang, Liu & Spiegel, 2015, pp.1-15) As price level improved gradually recovers, real interest began to fall. Real interest rate over the last two years accounted a decline in the trend interest rate.
China’s government has decline the nominal interest rate with the aim of encouraging investment in the economy. Low cost of borrowing reduces actual cost of borrowing. As new companies are interested to investment in the nation the economic growth of the nation stimulated. China’s economy s continuously undergone with the pressure of a low growth rate. To revive the economy expansionary policies are undertaken (Ferrero 2015, pp.261-293). Cut in interest rate is the part of expansionary monetary policy. From the company’s cost perspective low interest mean a lower effective cost of production and a higher profitability. The low interest rate might be one factor attracting BHP Billiton to invest in China.
The financial assistance given to business organization plays an important role in determining success of the business. The financial assistances are generally provided in the form of loan, trade credit, purchase of non-equity security or any other credible forms (Sandleris 2014, pp.321-345). The availability of credit helps to build up the capital base of the company. A greater availability of domestic credit offers a promising business environment.
As indicated from the figure, domestic credit flow to the private sectors of China has increased sharply from 2011 (Fungcova & Weill 2015, pp.196-206). The figure above expressed domestic credit as a percentage of GDP. The increasing flow of funds to private from commercial banks and other forms of financial institution implies greater credit availability to private sector and hence, a greater economic prosperity (Manova, Wei & Zhang 2015, pp.574-588) Expansion of private sector is generally expected to bring greater efficiency as private sectors are more efficient than their public counterpart. This reflects strategy of China’s government to achieve economic growth by offering higher opportunity for private companies.
The credit availability though has contributed positively towards growth of private sector but it might have detrimental effect on the credit market. The continuous increase in credit to GDP ratio indicates possibility of future credit crunch (Feenstra, Li & Yu 2014, pp.729-744). The availability of credit however can work as positive determinants of business investment.
Infrastructure of a nation is one vital aspect to determine business investment. Government spending in China has increased steadily in the last few year indicating the extent of government support to the economy. Among different fields of government spending, the share of government expenditure made on consumption has declined making more funds available for conducting infrastructural investment (Callaghan 2014, p.43) The basic infrastructure on a nation include facilities of transport and communication, smooth supply of water and electricity and other necessary services. A good infrastructure indicates a satisfactory business environment with a high return on investment.
Development of infrastructure has long been the priority of government to propel economic growth. In its eleventh five year plans (2006-2010) China’s government had announced a stimulatory package of RMB 4 trillion. The growing importance of infrastructure on China’s development has increased attention of domestic and foreign investors operating in this area. The foundation of new infrastructural projects relied upon investment on railway, roads, water, energy, electricity, airport and rural projects (Fang, Pedroni & Zio 2016, pp.502-512). The expansion of transport has been reflected from quick spread of high speed rail and metro network across different cities. China has already achieved a developed infrastructure and continued to invest further.
Taxation is an important tool of fiscal policy. It is the source of government revenue to finance government expenditure on infrastructures and other areas of the economy. A separate tax structure prevails for the individual and that for the business firms. The tax rates are revised depending on the state of economy. During high inflation, government follows a contractionary fiscal policy by raising the tax rate. In time of recession, stimulus given to the economy by an increase cutting the tax rate (Jia, Guo & Zhang 2014, pp.107-122). The taxation policy particularly that of corporate tax structure affects the investment decision. A high and discriminating tax structure for corporate business restricts business growth by reducing profitability. The favorable business treatment includes offering tax concession and other forms of relaxation to secure a high profit share for the operating companies and encouraging business investment.
As shown from the above trend, the government tax revenue rise sharply from 2005 to 2009. This indicates availability of a higher revenue to finance government expenditure. The China’s economy experiences a slower growth in the last few years. Response of the government towards a slow growth is to undertake expansionary fiscal policy (Han & Kung 2015 pp.89-104). With a reduction in tax rate, there is a decline in tax revenues.
Before deciding whether to invest in a nation or not company needs to haven complete knowledge regarding the existing laws of taxation and payable tax liabilities. The collection of tax revenue in China is divided between Central and state liabilities. State Administration of Taxation (SAT) is the highest administrative body of existing taxation authority. The board has the responsibility to collect taxes like corporate income tax, value added tax, consumption tax and others (Jia, Guo & Zhang 2014, pp.107-122). Below the state level there operate local bodies of government. They collect income tax. Specific custom duties are imposed on imported and exported commodities.
In order to start business in China, companies need to get registered to SAT, local bureau office and Custom office. Corporate income tax is the main tax that is payable for nay business. The corporate income tax is calculated on the earned profit of the company. Withholding tax is the tax on companies that operates in China but is not the originated from China (Trade Commissioner 2017). VAT is another tax that is payable by business. In order to encourage foreign investment China in 2012 has revised the tax structure to favor foreign companies. The revision intends to increase profitability of the companies. Recently China has designed a tax policy reform which offers foreign companies a tax break and boosts investment. Under the new policy reform foreign companies are exempted to pay the existing withholding tax on the profits that are reinvested for business expansion. The new policy was retroactive to January 1 announcing that companies that had already paid the tax for that year would receive a refund (South China Morning 2018). China has undertaken such reforms to encourage foreign investor to invest in the nation as host of other countries have already unveiled similar type of measures.
Exchange rate presents value of one country’s currency in terms of another currency. This is one of important aspect of foreign trade and investment relation. An increase in exchange rate implies depreciation of currency. The currency depreciation attracts foreign companies to enter in the nation as they need to pay a lower relative price for the required raw materials. Currency appreciation on the other hand implies a relatively strong position of domestic currency (Aharoni, 2015, pp. 24-34). The relatively high valued currency might attract foreign investor to invest in a nation because of a higher prospect return. The movement of foreign investment is thus depending on particular area or channel for inflow of foreign fund.
Under a regime of flexible exchange rate, equilibrium exchange rate in the market is determined from the demand and supply of foreign currencies. Interest rate has an important role to play in determining exchange rate. In domestic interest rate rises above that prevailing in other countries then demand for concerned currency increases (Verdelhan 2018, pp.375-418). The increased demand for domestic currency raise the value of home currency leading to an appreciation of the currency.
The movement of exchange rate between Australian Dollar and Chinese Yuan reveals a declining trend especially since 2013. China’s economy in the last few decades has accounted an outstanding growth rate. It is now considered as the second largest economy in world. Being a global player movement of China’s currency significantly influences decision of global investors. The declining trend in AUD/CNY exchange rate implies a weak position of yuan as against Australian dollar. The declining trend in exchange followed by the policy of currency devaluation taken by the government (Kitano, N. and Harada, Y., 2016, pp.1050-1074). Government has devalued currency in order to promote economic growth through encouraging export. This though sparks fear among investors following weak position of China but is beneficial for foreign companies planning to enter the nation. In current situation, the mining giant of Australia BHP Billiton can profitably investment in China as it need to incur a lower operating cost in China.
The global financial crisis originated in United State during 2007-2008 following a break-down of housing market. United State is one of dominant economy in the global market. The crisis thus though originated in United State but is quickly disseminated to other nation as well. The housing bubble that formed in the US housing market in 2007 following a low mortgage interest burst at the end of 2007. The housing market crisis took its worst form after the collapse of Lehman Brothers, biggest investment banks in United State during September 2008 (Mensi et al. 2016, pp.257-276). The global financial crisis created a recessionary pressure on a number of developed and developing nations that shared a strong trade and investment relation with United State.
In the list of affected nations after GFC, China is counted among one of few nations that successfully combat the recessionary pressure. The economy experienced only a moderate slowdown because of global financial crisis. The slowdown of China’s economy resulted more due to its internal economic structure rather than external shocks. The main force behind fairly strong position of China in the phase of GFC is relatively little exposure to the global financial market. The export of China fell in significantly after the crisis. The growth of export in November 2008 turned negative of -2.2%. This was in sharp contrast to a rate of 20% in just one month back. Export of Chins fell by 17% in 2009 (Norrlof & Reich 2015, pp.227-250). With growth recovery of advanced countries from 2010, China’s export again experienced a positive growth rate. However, following a moderate growth of advanced world after the crisis, export from China had grown only up to limited extent. Despite a decline in foreign demand in 2008-09, China managed to maintain a relatively high growth during this period. A 10% growth rate of China’s economy during 2010 outperformed most other nations in the world. The economy still enjoyed a greater potential growth due to relatively strong position of domestic demand and other internal sectors.
In order to maintain a relatively stable position during crisis government policies played an important role. One key factor behind China’s stability was quick adaption of stimulatory packages. This was made possible because of a strong fiscal position of the government. Receive support from a strong financial position China was in position to undertake fiscal and credit expansion. Since 2000, China was successful in maintaining a low ratio of government debt to GDP. In fact, in 2007 there was a surplus in government budget. Despite providing stimulatory packages to protect the economy from hit of the crisis, the ratio of deficit to GDP remained at 0.4 and 2.2 percent in 2008 and 2009 respectively (Ma, Li & Li 2016, pp.163-176). The ratio is far smaller when compared with most other developed nations. During crisis hit, counteractive measures were taken by the government minimize the impact of global recession. China had adopted a policy mix of fiscal and monetary policy to maintain the strong position of the economy. For developing countries adoption of expansionary fiscal policies often ends up with a large deficit in the balance of payment account. This underpins the confidence of exchange rate draining the foreign exchange reserve to a relatively low level. This constrained the feasibility of fiscal stimulatory packages. In this regard also China is in an advantageous position. High level of foreign exchange reserve in China makes the fiscal stimulus extremely effective. In the first quarter of 2011, the foreign exchange reserve of China was estimated to be $3 trillion. With this China became the largest holder of foreign exchange reserve holding foreign reserve three times greater than Japan, nation in the second position. Thus China can undertake stimulatory packages without worrying for deficit in balance of payment or rising borrowing cost. The most important factor behind China’s resilience to GFC was limited flow of international capital. Since 2001, China started losing its control over foreign banks and flow of international capital due to the entry of WTO (Liming et al. 2017, pp.128-144). The financial development of China is mostly based on domestic funding sources. In 2008, the estimated total assets of foreign banks in China was $193 billion. This accounted only 2.4 percent of total bank assets of China.
The mechanism of crisis resilience provides confidence to investors to invest in s nation. Presence of strong fiscal position indicates ability of the government to support the economy in the phase of any crisis (Claessens & Van Horen 2015, pp.868-918). The secure position of the provides a great security to the invested fund. This in turn make China a desired destination for investment choice.
BHP Billion is globally operating mineral company with headquarter situated in Australia. The company expands its business by ci ducting investment in different nation across the globe. The paper analyzes feasibility of investment decision in China. China over the last few decades has become one of the important partners of Australia in terms of both trade and investment. In the business decision the macroeconomic factors play an important role by influencing return on investment. A stable macroeconomic condition ensures a higher return while lack of stability implies low return on invested funds. Among different macroeconomic factors considered the first factor discussed is the general business environment. The overall understanding about the business environment depends on ease of getting permission to set up factories, supply of electricity, security of property rights, credit availability, protection to the interest of the investors, facilities of tax payment, permission of cross border trade, secure enforcement of contract and remedial measure to the problem of insolvency. The overview of general business environment and associated facilities suggests that there is an overall satisfactory environment for doing business. The rank of China in terms of general business environment has increased from 80 to 78 encouraging more businesses to enter China. The nation has given considerable attention to improvise its performance in different aspect necessary for a favorable business environment. Companies in China now can easily get permission. Registration to tax, access to license, attainment of credit and other facilities have now become much easier. The objective is to encourage domestic and foreign investment in the nation. The new mad improved business environment might give the company a profitable outlook to invest in China. In addition to business environment, there are several other factor that need to be considered to determine prospect of long term investment. Economic growth is the most important determinant of macroeconomic performance of a nation. Analysis of economic growth of China reveals that the nation has accounted a steady growth rate till 2007. The growth rate of China outpaced many of developed nations in the world. Since 2010, China has documented a slow growth. The growth has slowed down due to the increasing burden of ageing population which reduces the availability of manufacturing labor, a change in growth composition from manufacturing and export led growth to consumption and service led growth and burden of government debt. The growth though has slowed down but it is still higher than that of many of the developed nations. Therefore, the slow growth is not the matter of much concern, leaving China still is an attractive destination for business investment. The fluctuations in the China’s growth rate has been explained in reference to phases of business cycle. The slow growth rate in China has increased the rate pf unemployment in the economy. One factor contributing to rising unemployment of China in the adoption of advanced technology that replaces manual labor with machine learning technology. The manufacturing sector is China previously enjoyed the benefit of a low wage in the labor surplus economy. The benefits now have seemed to be reduced. In the last ten years, there is an significant growth in annual wage of the laborers. The wage might seem higher in context pf domestic economy but it is relatively lower when compared with other countries especially the eveloped one. It true that wages have accelerated in China over time but it is still much lower as compared to Australian standard. Mining is one of labor intensive sectors. Labors are required for several purposes. The relatively low wage thus can provide the company a higher return by increasing its profit prospects. Inflation in an economy measures the movement of general price level. A moderately rising inflation trend indicates prosperity of the nation and thus attracts business. The rate of inflation after years of a downward trend has started to increase since 2016. This gives producers and business firms a hope in terms of increased profitability. A related aspect of inflation is the movement of real interest rate. The real interest rate is the actual return to investment or cost of borrowed fund. It is obtained from nominal interest rate less rate of inflation. The trend in real interest rate showed a continuous downward trend since 2014. This helps the investors to borrowed capital at a relatively low cost and hence encouraged business investment gain in productivity.
Return on investment and business operation largely depends on the infrastructural development of a nation. In terms of infrastructure, China has made rapid progress. The government of China injects a large sum of money to develop and build infrastructure within the nation. The infrastructural development attracts domestic and foreign investment. Along with infrastructural development the flow of credit to the private sector has improved. The development of private sector helps to develop business by raising efficiency of business operation. A complicated tax structure works as a barrier to foreign investors. China however focuses on simplifying the tax structure. Recently Chins has announced a tax breaks for foreign companies. According to the new policy framework, there is no need to pay earlier withholding tax for the foreign companies. Economic stability of a nation depends on the capacity to absorb internal shocks. It is always beneficial for a company to invest in a that is relatively stable and has an efficient crisis management policy. One prominent example of external shock is the global financial crisis of 2008. China though had affected from the global recessionary shock in terms of a negative export growth but still maintained a satisfactory growth rate because of its less dependency on external fund and relatively strong fiscal position.
China since the beginning of its growth constituted a reasonably high demand for minerals. The high demand of minerals along with favorable business environment makes the nation as one attractive investment destination particularly for mineral companies. The favorable business environment will secure BHP Billiton’s investment in China. It is therefore recommended for the company to materialize the investment plan in China. The relatively slow growth might have deemed the possibility of investment but China is already in a path of its transition towards a developed nation and will soon sustain its smooth growth pace. The rising unemployment trend indicates presence of unutilized labor in the economy. This favors the investment by suppling adequate labors at a low cost. Investment needs to be made in regions where company can easily hire the surplus labor. The company needs to know the existing structure of taxation and possible areas where it can enjoy a tax break or exemption. This will work in favor of yield from investment. China efficiently handled the shock of global recession in 2008 and is able to counter any future shock with efficient designing of fiscal and monetary policy. Considering all the positive and negative aspects together, it can be concluded that China offers a brighter prospect for long -term foreign investment.
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