China as an Emerging Market - Case Study Example

China as an Emerging Market Name Institution China as an Emerging Market Introduction The World Bank classifies countries based on their Gross National Income per capita into low, middle, and high-income economies. The average growth of China is 9.8% over the last three decades. Such unprecedented growth has led to improvement in the living conditions of millions of Chinese while maintaining the rate of inflation averagely at 2% to achieve a per capita GDP of 8.5%. Through the years, the Chinese economy transformed from a centrally planned system, which closed it to international trade to a market-oriented economy exhibited with increased growth within the private sector and progressive movement to be one of the leading economic powerhouses globally. These factors contributed to China being an emerging market, which involves a comparison between developing countries and developed countries. The Chinese economy is characterized by low labor costs and abundant natural resources. Production lines are often transferred from the developed countries and regions to the emerging markets like China, which improve competitiveness with the low labor costs. Consequently, the developed states also import cheap raw material from the emerging markets. The macroeconomic policies in China are continuity (Kołodko, 2003, 189). Considering that China is one of the populous countries and the largest territory globally, it plays an important role in the global economy. Considering the increment in the Chinese population, the level education has been on the rise as well which makes labor resources abundant with quality continuously improving. The high population full of middle-class income earners provides a ready market for the locally produced products. Attractiveness of China as an Emerging Market China continues to attract many international businesses due to merits it presents as an emerging market. Growth is the biggest opportunity due to the stability of the regions and sustainable competitive advantage. There is high potential growth in China with the rapid expansion of the industrial bases. The Chinese market remains attractive to many businesses due to huge potential consumers. Moreover, living standards in China have continued to improve with the regulation of various activities that impact the salaries and payment systems. In the recent years, China has been experiencing a decline in its economic growth although such fluctuations are sustainable. The country may be growing at a slow pace; nonetheless, it is becoming less dependent on the exports and investments to sustain its growth, which should motive the investors (Das, 2011, 115). China’s economy is another reason for continued attraction as an emerging market, which may be due to its demographic nature. China has a very competitive labor force compared to the developed countries. In addition, there are numerous reforms implemented by the Chinese government to improve productivity level. Some of the reforms include a reduction in the business taxes, privatization of various state-owned businesses and liberalization of the interest rates assist in the protection of small businesses and ensuring that they remain in the market. In the last two decades, the main contribution of the country to the global economy was manufacturing which made it reliant on the exports for its growth. However, with the migration, if the rural inhabitants of the towns and cities, there have been an increment in consumerism and growth in the middle class which makes the economy to be increasingly driven by consumer spending. Currently, the country outpaces other emerging markets in terms of consumption per capita by a considerable margin; however, it remains important in supporting various markets across the globe. China is credited with reviving the European luxury goods market, international manufacturers of care, and the Australian mining sector (Jayasuriya, 2011, 422). Currently, the level of consumption is increasingly becoming higher. The rapid development and increased application of technology are becoming an important driver of rapid economic growth. The Chinese government plays an important role in ensuring the achievement of the required competitive advantages by business and adequate protection of international entities. The political stability in China is of extreme benefit for trading activities. There have changes in the market economic system since the reform and opening up in China. To show commitment to building China as an emerging market, the Chinese government changed the functions and administrations to law with the aim of meeting the needs of the World Trade Organization (WTO). Furthermore, the government standardized the market to improve the integrity of the market. Easing market accessibility and making it transparent also improved the access while reducing the operation limits. As an emerging margin market, China embarked on the economic reform program contributing to stronger and responsible economic performance levels, efficiency and transparency in the capital markets (Shirk, 2011, 132). China reformed its exchange rate systems to ensure stability in the local currency to build confidence within the economy to attract the foreign investment. Investment Threats in China’s Emerging Market The largest threat associated with investment in China is its demographics. The Westerns are already feeling the effects associated with the post-war’s baby boomer;s reaching the retirement ages. Such patterns are likely to be repeated in China in which similar demographic patterns lags Europe and the United States though they are amplified through China’s one-child policy. The policy began as a boost to control the population as the households had fewer dependants is now dragging investment as the generation reaches the working age. Few people contribute little in terms of taxes with the aging population having fewer children to support economic growth (Liu & Tao, 2012, 166). Moreover, the aging population spends less compared to working age, which damages the economy. However, China introduced the two-child policy, which would take about 20 years to have a positive impact on economic performance. There are several challenges associated with investment in emerging markets like China. Most of the large companies are state-owned meaning that although international businesses may own stake, the shareholders could find themselves relegated to the second priority behind the government. The emerging markets seem to provide new opportunities for investment like higher expected returns, diversified benefits, and elevated economic growth. However, there are risks to both local and international businesses. Chinese international investors are susceptible to foreign exchange rate risk. Investors in stocks and bonds often produce high returns while using the local currency. Therefore, investors have converted the local currency to domestic currency. Currency fluctuation may have a great impact on the total return on investment. Some markets follow the patterns of normal distribution, which makes financial models applicable in deriving the prices and ensuring accurate economic forecasts regarding the future of the equity prices. China has been undergoing significant changes, which makes it impossible to utilize historical information in drawing a proper correlation between the returns and events (Shirk, 2011, 153). Currently, China has an unhappy record of accomplishment, heavy regulatory system, volatility, and unfamiliar economic system, which discourages the foreign investors. Besides, economic turbulence worsened the situation. Since China is an emerging market, investing in its stocks may be risky compared to investing in the developed market due to the proper regulatory framework, tax, and foreign exchange. There are economic and currency risks that international business should consider. Emerging markets often suffer from insufficient labor, deflation, unregulated market economies, inadequate raw materials, and unsound monetary regulations. The currencies used in the emerging markets are extremely volatile to the changing market financial conditions. Therefore, financial gains can be lessened through devaluation of currency or significant drop. China has incredible resilience towards international financial crisis. Although China claims to have enforced strict laws and regulations against insider trading, it has not proved to be rigorous in terms of prosecution of unfair trading practices. International business may suffer from insider trading and different types of market manipulation through induction of the market deficiencies in which the equity prices significantly deviate from the intrinsic values (Chang et al., 2014, 122). The liquidity of the emerging markets is lesser than developed countries. In China, such imperfections often result in higher broker fees and increment in the level of price uncertainty. China has a poorly developed system compared to other emerging markets preventing businesses from accessing the essential financial assistance required for business growth. The attained capital is always issued based on the rates of return, the increment in the business’ weighted average cost of the capital. Conclusion An emerging market economy is an economy that exhibits from low to middle per capita income. China is an example of an evolving market. These countries represent about 80% of the global population and represent about 20% on international economies. Although World Bank considers emerging markets as countries that fall within such category range from small to big, the defining factors are development and reforms. Although China is considered one of the global economic powerhouses, it is still a developing economy. China remains a global destination for international businesses due to several opportunities it presents such as readily available human resources from the high population, stable political and economic condition, reforms that encourage foreign investment, and increased level of competition. However, the country also experiences various demerits associated with being an emerging market. References Chang, J., Zhang, W., Alon, I., Lattemann, C., & McIntyre, J. (2014). China Goes Global. Bradford: Emerald Group Publishing Limited. Das, D. K. (2011). China: Epitome of an Emerging Market. Journal of Emerging Knowledge on Emerging Markets, 3(1), 105-122. Jayasuriya, S. A. (2011). Stock market correlations between China and its emerging market neighbors. Emerging Markets Review, 12(4), 418-431. Kołodko, G. W. (2003). Emerging market economies: Globalization and development. Aldershot, Hants: Ashgate. Liu, J., & Tao, H. (2012). Chinese Under Globalization: Emerging Trends in Language Use in China. Singapore: World Scientific. Shirk, S. (2011). Changing Media, Changing China. Oxford UP. Read More