Assignment: Managerial Economics 10/17/2012

OVERVIEW:

In the modern era, the world economy influences China was very less until the late 1980s. At that time, Chinese economic reforms initiated after 1978 began to generate significant and steady growth in investment, consumption and standards of living. As of 2012 China is a major importer of raw materials, manufacturer of basic goods, and exporter of consumer goods. The economy is dominated by large state-owned enterprises, but private enterprises also play a major role in the economy. State-owned enterprises are a major source of profit and power for members of the Communist Party of China and their families and are favored by the government. Since 1978 hundreds of millions have been lifted out of poverty – yet hundreds of millions of rural population as well as millions of migrant workers remain unattended: According to China's official statistics, the poverty rate fell from 53% in 1981 to 2.5% in 2005. However, in 2009, as many as 150 million Chinese were living on less than $1.25 a day.

In the 1949 revolution, China's economic system was officially made into a communist system. Since the wide-ranging reforms of the 1980s and afterwards, many scholars state that China can be defined as one of the leading examples of state capitalism today. Since the introduction of economic reforms in 1978, China has become the world's fastest-growing major economy. As of 2012, it is the world's second-largest economy, after the United States, by both nominal GDP and purchasing power parity (PPP).

I. General Information on China:

Economics of ChinaPRABIN RAI

1P i c t u r e

Assignment: Managerial Economics 10/17/2012

China is most populated country in the world about 1.3 billion, covering approximately 9.6 mill-ion square kilometers of the area & the world's second-largest country by land area. The People's Republic of China is a single-party state governed by the Communist Party of China with two mostly self-governing special administrative regions (Hong Kong and Macau). Its capital city is well developed known as Beijing.

Fig1.1: A geographical map of China

China's landscape is vast and diverse, with forest steppes and the Gobi and Taklamakan deserts occupying the arid north and northwest near Mongolia and Central Asia, and subtropical forests being prevalent in the wetter south near Southeast Asia. The topography of western China is rough and high, with the Himalaya, Karakoram, Pamir and Tian Shan mountain ranges separating China from South and Central Asia. The Yangtze and Yellow Rivers, the third- and sixth-longest in the world, have their sources in the Tibetan Plateau and continue to the densely populated eastern seaboard. China's coastline along the Pacific Ocean is 14,500 kilometers (9,000 mi) long—the 11th-longest in the world—and is bounded by the Bohai Sea, Yellow Sea, East and South China Seas.

In the 1946–1949 phase of the Chinese Civil War, the Chinese Communist Party defeated the nationalist Kuomintang in mainland China and established the People's Republic of China in Beijing on 1 October 1949. The Kuomintang relocated the Republic of China government to Taiwan, establishing its capital in Taipei. Since 1949, the People's Republic of China and the Republic of China (now widely known as "Taiwan") have remained in dispute over the sovereignty of China and the political status of Taiwan, mutually claiming each other's territory and competing for international diplomatic recognition.

In 1971, the PRC gained admission to the United Nations and took the Chinese seat as a permanent member of the U.N. Security Council. China is also a member of numerous formal and informal multilateral organizations, including the World Trade Organization, Asia-Pacific Economic Corporation, BRICS, the Shanghai Cooperation Organization, the BCIM and the G-20 major Economics. As of August 2012, all but 23 countries have recognized the PRC as the sole legitimate government of China.

II. Political Geography:

Economics of ChinaPRABIN RAI

2P i c t u r e

Assignment: Managerial Economics 10/17/2012

China is the second-largest country in the world by land area after Russia and is the third largest by total area, after Canada. China's total area is generally stated as being approximately 9,600,000 km2

(according to CIA 3,705,407 sq mi).

According to the Encyclopedia Britannica, the total area of the United States, at 9,522,055 km2

(3,676,486 sq mi), is slightly smaller than that of China. Meanwhile, CIA World Factbook states that China's total area was greater than that of the United States until the coastal waters of the Great Lakes was added to the United States' total area in 1996.

China has the longest combined land border in the world, measuring 22,117 km (13,743 mi) from the mouth of the Yalu River to the Gulf of Tonkin. China borders 14 nations, more than any other country except Russia. China extends across much of East Asia, bordering China, Laos, and Burma in Southeast Asia; India, Bhutan, Nepal and Pakistan in South Asia; Afghanistan, Tajikistan, Kyrgyzstan and Kazakhstan in Central Asia; a small section of Russian Altai Republic and Mongolia in Inner Asia; and the Russian Far East and North Korea in Northeast Asia.

III. Economic Factors:

As of 2012, China has the world's second-largest economy in terms of nominal GDP, totaling approximately US$7.298 trillion according to the International Monetary Fund (IMF). However, China's 2011 nominal GDP per capita of US$5,184 puts it behind around ninety countries (out of 183 countries on the IMF list) in global GDP per capita rankings. If PPP is taken into account in total GDP figures, China is again second only

to the United States in 2011; its PPP GDP reached $11.299 trillion, corresponding to $8,382 per capital. In 2009, China's primary, secondary, and tertiary industries contributed 10.6%, 46.8% and 42.6% respectively to its total GDP. And are also the world's largest exporter and second-largest importer of goods. On a per capita income basis, China ranked 90th by nominal GDP and 91st by GDP (PPP) in 2011, according to the IMF. China is a recognized nuclear weapons state and has the world's largest standing army, with the second-largest defense budget. In 2003, China became the third nation in the world, after the former Soviet Union and the United States, to independently launch a successful manned space mission. China has been characterized as a potential superpower by a number of academics, military analysts, and public policy and economics analysts.

Economics of ChinaPRABIN RAI

3P i c t u r e

Fig 3.1: The skyline of Shanghai's ultra modern Pudong financial district, across Huangpu River.

Assignment: Managerial Economics 10/17/2012

World trade has steadily grown; its importance to the international economy has also increased apace. China's foreign trade has grown faster than its GDP for the past 25 years. China's growth comes both from huge state investment in infrastructure.

Here, this picture shows the whole factors indicating economic of China, accordingly.

Actual Previous Highest Lowest UnitMarketsCurrency 6.23 6.24 8.73 1.53Government Bond 10Y 3.60 3.57 4.61 2.70 PercentStock Market 2069.07 2068.88 6092.06 99.98 Index pointsExchange Rate 6.23 6.24 8.73 1.53

GDPGDP Growth Rate 2.20 2.00 2.50 1.50 PercentGDP Annual Growth Rate 7.40 7.60 14.20 3.80 PercentGDP 7298.10 5878.63 7298.10 46.46 USD BillionGross National Product 472115.00 403260.00 470797.20 679.00 CNY HMLGDP per capita 2634.71 2425.47 2634.71 72.32 USDGDP per capita PPP 8442.23 7567.84 8442.23 250.16 USD

LabourUnemployed Persons 918.00 907.00 922.00 810.00 PERSON TTHWages 42452.00 37147.00 42452.00 445.00 CNYWages in Manufacturing 36494.00 30700.00 36494.00 597.00 CNYPopulation 1344.13 1337.82 1344.13 660.33 MillionEmployed Persons 76420.00 76105.00 76420.00 20729.00 PERSON TTHUnemployment Rate 4.10 4.10 4.30 3.90 Percent

PricesExport Prices 101.30 101.10 111.90 90.70 Index PointsGDP Deflator 534.99 501.64 534.99 100.00 Index PointsImport Prices 95.80 96.20 122.70 79.60 Index PointsConsumer Price Index (CPI) 101.90 102.00 128.40 97.80 Index PointsProducer Prices 96.40 96.50 113.47 91.80 Index PointsInflation Rate 1.70 1.90 27.70 -2.20 Percent

MoneyForeign Exchange Reserves 3285095.00 3272901.00 3309657.00 2262.00 USD MillionInterest Rate 6.00 6.00 10.98 5.31 PercentMoney Supply M0 5343.35 5023.60 5982.07 17.85 CNY BillionMoney Supply M2 94368.88 92489.50 92499.12 5840.10 CNY Billion

TradeExternal Debt 6949.97 5489.38 6949.97 158.28 USD HMLCapital Flows 221.06 286.86 1984.70 -63.21 USD HML

Economics of ChinaPRABIN RAI

4P i c t u r e

Assignment: Managerial Economics 10/17/2012

Current Account 59.70 23.50 133.10 -0.90 USD MillionCurrent Account to GDP 4.00 5.20 10.60 -3.70 PercentBalance of Trade 27.67 26.66 40.09 -66.00 USD BillionExports 186.35 177.97 186.35 2.84 USD BillionImports 158.68 151.31 162.40 2.57 USD Billion

GovernmentGovernment Debt To GDP 25.80 33.50 33.50 1.00 PercentGovernment External Debt 6949.97 5489.38 6949.97 158.28 USD HMLGovernment Spending 63616.10 53614.40 61927.80 93.30 CNY HMLGovernment Budget -1.10 -2.50 0.58 -3.05 Percent of GDP

BusinessIndustrial Production 9.60 9.20 29.40 -21.10 PercentBusiness Confidence 122.80 126.90 146.00 105.60Car Registrations 1528.82 1245.95 1528.82 337.20 10 ThousandsChanges in Inventories 11963.50 9988.70 11963.50 3.00 CNY HML

ConsumerConsumer Spending 164945.20 133290.90 162813.00 453.00 CNY HMLDisposable Personal Income 21810.00 19109.44 21810.00 343.40 CNYConsumer Confidence 100.80 99.40 124.60 97.00Bank Lending Rate 6.00 6.00 12.06 5.31 PercentPersonal Savings 0.35 0.50 3.15 0.35 PercentRetail Sales MoM 1.41 1.28 1.41 1.28 PercentRetail Sales YoY 14.50 14.20 19.90 11.60 Percent

Economics of ChinaPRABIN RAI

5P i c t u r e

Assignment: Managerial Economics 10/17/2012

Table 1: Overall Economy Indicators of CHINA

A. Agriculture & Industry outputs:

The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 percent of the labor force and produce more than 60 percent of GDP. The two sectors have differed in many respects. Technology, labor productivity, and incomes have advanced much more rapidly in industry than in agriculture. Agricultural output has been vulnerable to the effects of weather, while industry has been more directly influence by the government.

China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), and cotton. The country is one of the world's largest producers of a number of industrial and mineral products, including cotton cloth, tungsten, and antimony, and is an important producer of cotton yarn, coal, crude oil, and a number of other products. Its mineral resources are probably among the richest in the world but are only partially developed.

B. Tourism & Culture:

China is the third most visited country in the world. The number of overseas tourists was 55.98 million in 2010. Foreign exchange income was 45.8 billion USD. The number of domestic tourist visits totaled 1.61 billion. According to the WTO, in 2020, China will become the largest tourist country and among the largest for overseas travel. The famous tourism places of China such as, Forbidden City, Beijing, Great Wall of China, Yellow River, Potala Palace, Macau, Hong Kong Island, Beijing, Shanghai, etc. The world is on the way of a sustained Chinese tourism boom.

Since ancient times, Chinese culture has been heavily influenced by Confucianism and conservative philosophies, which were instituted in 605 AD to help the Emperor select skilful bureaucrats. In recent years, a number of New Confucians have claimed that modern democratic ideals and human rights are compatible with traditional Confucian values.

Many important aspects of traditional Chinese morals and culture, such as Confucianism, Chinese art, literature, and performing arts like Peking opera, were misused to conform to government policies and half truths at the time.

Economics of ChinaPRABIN RAI

6P i c t u r e

Fig.3.2:Rice terrace in China (Guangxi)

Assignment: Managerial Economics 10/17/2012

Fig.3.3: Great Wall of China Fig.3.4: Huanglong (Yellow Dragon) Fig.3.5: Lijiang River, Guilin

C. Science and Technology:

China was a world leader in science and technology until the Ming Dynasty. Ancient Chinese discoveries and inventions, like, papermaking, printing, the compass and gunpowder(the Four Great Inventions), contributed to the economic development of Asia and Europe. However, Chinese scientific activity entered a prolonged decline in the fourteenth century. Unlike European scientists, medieval Chinese thinkers did not attempt to reduce observations of nature to mathematical laws, and they did not form a scholarly community offering peer review and progressive research. After repeated military defeats by Western nations in the 19th century, Chinese reformers began promoting modern science and technology as part of the Self-Strengthening Movement. After the Communist victory in the Chinese Civil War in 1949, efforts were made to organize science and technology based on the model of the Soviet Union. Since the end of the Cultural Revolution, China has become one of the world's leading technological powers, spending over US$100 billion on scientific research and development in 2011 alone. China is rapidly developing its education system with an emphasis on science, mathematics and engineering; in 2009, it produced over 10,000 Ph.D. 

D. Energy and mineral resources:

Since 1980, China's energy production has grown dramatically, as has the proportion allocated to domestic consumption. Some 80 percent of all power generated from fossil fuel at thermal plants, with about 17 percent at hydroelectric installations; only about two percent is from nuclear energy, mainly from plants located in Guangdong and Zhejiang. Although China has rich overall energy potential, most have yet to be developed. In addition, the geographical distribution of energy puts most of these resources relatively far from their major industrial users. Basically the northeast is rich in coal and oil, the central part of north China has abundant coal, and the southwest has immense hydroelectric potential. But the industrialized regions around Guangzhou and the Lower Yangtze region around Shanghai have too little energy, while there is relatively little heavy industry located near major energy resource areas other than in the southern part of the northeast.

E. China Industrialization & Manufacturing:

China has obtained highly sophisticated foreign production facilities and through "localization policies" also built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites, but most of its industrial output still comes from relatively badly

Economics of ChinaPRABIN RAI

7P i c t u r e

Assignment: Managerial Economics 10/17/2012

equipped factories. The technological level and quality standards of its industry as a whole are still disastrous, despite a marked change since 2000, urged in part by foreign investment. China has experienced total factor productivity growth of 4 per cent per year since 1990, one of the fastest improvements in world economic history.

Mainly, China has a success in manufacturing the goods as a low-cost producer. This is credited to a combination of cheap labor, good infrastructure, relatively high productivity, favorable government policy, and a possibly undervalued exchange rate. The final has been sometimes responsible for China's huge trade surplus (US$262.7 billion in 2007) and has become a major source of dispute between China and its major trading partners—the US, EU, and Japan; despite the Yuan having be de-pegged (fixed in) and having risen in value by 20% against the US dollar since 2005. China is moreover widely criticized for manufacturing large quantities of counterfeit (imitating) goods—in 2005, the Asia Business Council suspected that the counterfeit industry accounted for 8% of China's GDP at the time.

The state still dominates in strategic "pillar" industries (such as energy and heavy industries), but private enterprise (composed of around 30 million private businesses has expanded enormously; in 2005, it accounted from 33% to 70% of national GDP.

Graph 3.1: A drastic change in Nominal GDP since 1978 to 2005

IV. Importance of Macroeconomics indicators:

Macroeconomics application involves here about China is predicating aggregate measures of economic activity at the international, national, regional, or state levels indicating of gross domestic product (GDP), unemployment, interest rates. Commonly includes consumer spending, business investment, home building, exports, imports, federal purchases and spending by state and local government and so on.

In 1978, China's market-oriented reforms and economic liberalization (privatization) began. China's investment- and export-led economy has grown almost a hundredfold and is the

Economics of ChinaPRABIN RAI

8P i c t u r e

Assignment: Managerial Economics 10/17/2012

fastest-growing major economy in the world. According to the IMF, China's annual average GDP growth between 2001 and 2010 was 10.5%, and the Chinese economy is predicted to grow at an average annual rate of 9.5% between 2011 and 2015. Between 2007 and 2011, China's economic growth rate was equivalent to all of the G7 countries' (France, West Germany, Italy, Japan, United Kingdom, United States, and Canada) growth combined.

A. China GDP:

China is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. On a per capita income basis, China ranked 90th by nominal GDP and 91st by GDP (PPP) in 2011, according to the International Monetary Fund (IMF). GDP in China expanded 2.20 percent in the third quarter of 2012 over the previous quarter. Historically, from 2011 until 2012, China GDP Growth Rate averaged 2.07% reaching an all time high of 2.50% in June of 2011 and a record low of 1.50% in March of 2012.

The GDP in China was worth 7298.10 billion US dollars in 2011, according to a report published by the World Bank. The GDP value of China is roughly equivalent to 11.77

percent of the world economy. Historically, from 1960 until 2011, China GDP averaged 963.58 Billion USD reaching an all time high of 7298.10 Billion USD in December of 2011 and a record low of 46.46 Billion USD in December of 1962. The GDP is equal to the total

expenditures for all final goods and services produced within the country in a stipulated period of time. This picture includes a chart with historical data for China GDP.

Figure: 4.1: China expanding GDP

The table below shows the trend of the GDP of China at market prices estimated by the International Monetary Fund (IMF) with figures in millions (Chinese Yuan=CNY). For purchasing power parity comparisons, the US dollar is exchanged at 2.05 CNY only.

YearGross domestic product

US dollar exchange

Inflation index(2000=100)

Nominal Per Capita GDP(as % of USA)

PPP Per Capita GDP(as % of USA)

1955 91,000 2.46 19.2 2.43 -

Economics of ChinaPRABIN RAI

9P i c t u r e

Assignment: Managerial Economics 10/17/2012

1960 145,700 2.46 20.0 3.04 -1965 171,600 2.46 21.6 2.63 -1970 225,300 2.46 21.3 2.20 -1975 299,700 1.86 22.4 2.32 -1980 460,906 1.49 25.0 2.52 2.041985 896,440 2.93 30.0 1.65 2.841990 1,854,790 4.78 49.0 1.48 3.431995 6,079,400 8.35 91.0 2.17 5.442000 9,921,500 8.27 100.0 2.69 6.752005 18,308,500 8.19 106.0 4.05 9.612010 25,506,956 6.97 112.0 6.23 15.90

Table 2: GDP (PPP); CNY exchange rate with USD

B. China GDP Growth Rate:

The Gross Domestic Product (GDP) growth rate provides an aggregated measure of changes in value of the goods and services produced by an economy. China's economy is the second largest in the world after that of the United States. During the past 30 years China's economy has changed from a centrally planned system that was largely closed to international trade to a more market-oriented that has a rapidly growing private sector. A major component supporting China's rapid economic growth has been exports growth. This picture includes a chart with historical data for China GDP Growth Rate.

Fig.4.2: China GDP growth rate

C. China GDP per capita:

The Gross Domestic Product per capita in China was last reported at 2634.71 US dollars in 2011, according to a report published by the World Bank. The GDP per Capita in China is equivalent to 21 percent of the world's average. Historically, from 1960 until 2011, China GDP per capita averaged 601.70 USD reaching an all time high of 2634.71 USD in December of 2011 and a record low of 72.32 USD in December of 1962. The GDP per capita

Economics of ChinaPRABIN RAI

10P i c t u r e

Assignment: Managerial Economics 10/17/2012

is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total population. This picture includes a chart with historical data for China GDP per capita.

Figure 4.3: A graph showing China GDP per capita

D. China Inflation rate:

The inflation rate in China was recorded at 1.7 percent in October of 2012. Historically, from 1994 until 2012, China Inflation Rate averaged 4.3 Percent reaching an all time high of 27.7 Percent in October of 1994 and a record low of -2.2 Percent in March of 1999. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This picture includes a chart with historical data for China Inflation Rate.

Figure 4.4: A graph showing the China Inflation Rate

E. China Unemployment Rate:

The urban unemployment rate in China was last reported at 4.1 percent in the third quarter of 2012. Historically, from 2002 until 2012, China Unemployment Rate averaged 4.15 Percent reaching an all time high of 4.30 Percent in December of 2003 and a record low of 3.90 Percent in September of 2002. The unemployment rate can be defined as the number of

Economics of ChinaPRABIN RAI

11P i c t u r e

Assignment: Managerial Economics 10/17/2012

people actively looking for a job as a percentage of the labor force. This picture includes a chart with historical data for China Unemployment Rate.

Figure 4.5: A graph showing China unemployment rate

F. China Balance of Trade:

The world's second largest trading power behind the US, with a total international trade value of US$3.64 trillion in 2011. China also increasingly invests abroad, with a total of $68 billion in 2010. China reported a trade surplus equivalent to 27.7 Billion USD in September of 2012. Historically, from 1986 until 2012, China Balance of Trade averaged 6.2 Billion USD reaching an all time high of 40.1 Billion USD in November of 2008 & a record low of -66.0 Billion USD in December of 1989. Export growth has continued to be a major component supporting China’s rapid economic growth. Exports of goods and services constitute 39.7% of GDP. China major exports are: office machines & data processing equipment, telecommunications equipment, electrical machinery and apparel & clothing, and so on. China imports mainly commodities: iron and steel, oil and minerals; machinery and equipments, plastics, optical and medical equipment and organic chemicals. Its main trading partners are: European Union, The United States, Japan, Hong Kong and South Korea. This picture includes a chart with historical data for China Balance of Trade.

Economics of ChinaPRABIN RAI

12P i c t u r e

Assignment: Managerial Economics 10/17/2012

Fig4.6: A graph comparing the 2011 nominal GDPs of major economies in US$ billions, according to IMF data

G. China Exports:

China exports were worth 175 Billion USD in October of 2012. Historically, from 1990 until 2012, China Exports averaged 50.3 USD Billion reaching an all time high of 186.4 USD Billion in September of 2012 and a record low of 2.8 USD Billion in January of 1990. Export growth has continued to be a major component supporting China's rapid economic growth. Exports of goods and services constitute 39.7% of its GDP. China major exports are: office machines & data processing equipment, telecommunications equipment, electrical machinery and apparel & clothing. China’s largest exports markets are European Union, United States, Hong Kong, Japan and South Korea. This picture includes a chart with historical data for China Exports.

October 13, 2012 (Voice of America news)

China’s exports increased more than expected in September, contributing to a widening trade surplus with the rest of the world. Figures released by the government Saturday showed exports up 9.9 percent from a year earlier, despite economic problems in Europe and the United States.

Economics of ChinaPRABIN RAI

13P i c t u r e

Assignment: Managerial Economics 10/17/2012

Figure 4.7: China exports exceed billion in USD

H. China Imports:

China imports were worth 143.6 Billion USD in October of 2012. Historically, from 1990 until 2012, China Imports averaged 43.6 USD Billion reaching an all time high of 162.4 USD Billion in May of 2012 and a record low of 2.6 USD Billion in January of 1990. China imports mainly commodities: iron and steel, oil and mineral fuels as well as machinery and equipment, plastics, optical and medical equipment and organic chemicals. China’s main imports partners are: Japan, European Union, South Korea, Taiwan and ASEAN countries. This picture includes a chart with historical data for China Imports.

Figure 4.8: A graph showing China Imports

V. Risk Analysis:

Until now I’ve examined managerial decision making under conditions of risk and certainty. In such cases, the manager knows exactly the outcome of each possible course of action. Many managerial decisions are, indeed, made under conditions of certainty, especially in Economics of ChinaPRABIN RAI

14P i c t u r e

Assignment: Managerial Economics 10/17/2012

short run. And the return in long run investment depends on economic conditions in the future, the degree of future competition, consumer tastes, technological advances, and the political situation and so on. Such factors may create imperfect business and faces risk and uncertainty.

STRENGTHS

External accounts benefitting from competitiveness and industrial diversification, Risk of foreign over indebt & to the high level of foreign exchange reserves and to the

current account surplus, Self-governing risk contained: public debt mostly domestic and denominated in local

currency, Gradual move up-market, Infrastructure development prompt by the motivation package, Very high corporate savings rate that funds most investments, etc.

WEAKNESS

Growing social tensions linked to increasing inequalities, Aging of the population & cheap labor, Overcapacity in industry and trade Weakness of Chinese banks due to credit dynamism and uncertainty as to the level of

Non-Performing Loans, Environmental problems

VI. The role of Government in economy:

The role of government is maintaining law and order and establishing secure national defense expanding to conduct the business without harming its competitors through illegal business practices. China has been under the communist party rule for many decades. The communist party exercises absolute power over legislations and economic & cultural institutions.

Unlike western economies where the government promotes transparency for doing business; in China rules and regulations are not so transparent or absolute. Large manufacturing businesses can come under various regulations and bureaucracies; China promotes a form of social network called guanxiwang, where guanxi is the relationship between the individual and the entities of the network. Due to lack of transparency and corruption the guanxiwang or the social network with people from the communist party can help western businesses avoid red tape and bureaucracy. Without guanxi a westerner entering China is like entering an abyss, which is also demonstrated by the famous Chinese saying “turning at the temple door without a pig’s head” Understanding guanxi is a challenging process for a foreigner and building a guanxiwang is often a time consuming process, so it is sensible for a foreigner company to recruit the right people with the appropriate guanxiwang to overcome these challenges. Strict laws and patents in economies of the west protect domestic and foreign

Economics of ChinaPRABIN RAI

15P i c t u r e

Assignment: Managerial Economics 10/17/2012

businesses, whereas in China, the legal system is loosely defined, giving rise to various loopholes in the law. China’s agreement to the WTO has brought with it the inclusion of international business laws and patent rights amendments, but even today it is common to see technology being stolen either by the employees of the outsourced firm in China or by a Chinese competitor in the country.

“Shanzhai” or the copycat culture is an integral part of the Chinese society; the society is predominantly Confucian and the Confucian tradition promotes individuals sharing what they create with the society to promote greater harmony. Hence anything from shoes to cell phones are copied and sold openly in markets across the country. China today is the world’s largest producer of counterfeit (imitation) products.

VII. My Investment Decision:1) The economic growth rate of China will be keeping at average 9% in the future

decade: The economic growth rate of China has been at average 9% annually for last two decades, which is three times rates of the economic growth of the developed countries, but the China’s economy will keep this growth rate at least twenty years. The main reason is that the economy of China is in the course of urbanization, internationalization, industrialization and marketalization. More than half of population in China will give up the rural village life style and embrace the urban life style. It means that at least 700 million Chinese will change its life style, such as eating, drinking, dressing, transporting, communicating, sheltering, etc. It indicates a large potential business opportunities for a foreign investor.

2) China has built an extensive transportation network since 1980. China has built an effective, extensive transportation network for last twenty years. China has 80000km railway, 3.73 million kilometers highway, 152 airports. It is very easy for a passenger to travel from the North to the South, from the West to the East. Many high speed railway lines connecting Beijing with Tianjin, Beijing with Shanghai, Wuhan with Guangzhou, Zhengzhou with Xi’an, have been running since 2008.  Even Lasha, the capital of Tibet, is connected with other cities in China by a railway line. 

3) The favorite investment policies are still available in special economic development zone. In order to develop economy of the inland regions of China, the governments of China set up a series of favorite investment policies, ranging from taxation to land-using on these provinces. Encouraging foreign investment in the coast area is the first tier of opening door policy of China.

Economics of ChinaPRABIN RAI

16P i c t u r e

Assignment: Managerial Economics 10/17/2012

4) Doing business and improving life quality are thinking by everybody in China. Now the seed is blooming and growing, everyone not only enjoy the status of the economy, but also want improve and contribute to the economy sustainable. The energy and power of the economic growth in China not only rely on the favorite economic policies, but also burst out of the Chinese hot heart. The later will push the China’s economy grow up more healthy and more sustainable. For any investors, it means that the business in China will be more effective.

5) High educated work force in China is growing. Every year, more than 6 million students graduated from the universities in China. Most of them are bilingualism--- Chinese and English. Most of Chinese students are learning English at the kindergarten, and English exam is a big subject in the Chinese education system, either for entrance to high school or admission to university. So for any foreign investors, language is not a problem for running the business in China.

6) China has a large market to develop. Everyone knows that China has a large land and a large population. Literally, it does mean a large market. Economically, China has a large effective market for an investor to develop. For instance, China has 80 million vehicles including 30 million cars by 2008. The vehicle ownership number is growing by 30% yearly. So, the business relating the vehicle maintenance is a large market.

7) Green economy, green society and healthy life are the growing markets in China. Green and healthy are the hot topic in China now. Clean city, clean air, clean water are demanded in China. China has been named the third largest market all over the world by the World Bank. The government of China has invested billion dollars in the clean energy industry. The promoting policies for using clean energy are implemented across country. Especially, the government of China will support a clean tech project economically.

There is a model postulate that regional advantages influence the decision to invest in one region as opposed to another. That is,

Yi = f (Xi) (1)

Where,

Yi = the amount of investment in region i;

Xi = a q-dimensional vector of exogenous variables such as factor costs, taxes, business climate, and agglomeration economics; and

f (∗) = an unknown functional form.

Accordingly, if a country or region wants to attract FDI, it can increase the rate of return on foreign firms’ projects and reduce their investment risks. Enhancing political stability can

Economics of ChinaPRABIN RAI

17P i c t u r e

Assignment: Managerial Economics 10/17/2012

reduce the risks of investing in a country. After-tax rate of return can be increased by reducing taxes or improving infrastructure.

Tax rates and tax incentives are found to be important determinants in making new plants and capital investment location decisions (Fortune, 1977; Papke, 1987; Ondrich and Wasylenko, 1993). In China, the magnitude of FDI in different investment incentive zones and cities should vary because of the tax differentiation. Hence, this study examines the effectiveness of tax rates.

In Summary,

Better access to Chinese market, Maintain a foothold/test-ground in Chinese market, Expanding products export/open up new market by investing, More opportunities provided by transformation and potential, Defend existing rivals on Chinese market, Diversification into new production lines in potential rapid growth area, Expected higher profits, The desire to induce China into a long-term commitment to a particular type of

technology, Investment incentives in China, Use of relative low-cost labor, Establishment of an export base.

With a view to realize such a target, I’ve been taking following measures: Improving the business and investment environment as followings:

Revise legal instruments on foreign investment in an efficient manner. Diversify investment forms to deploy more channels for attracting investment through

conversion of operations with different companies. Invest for infrastructural improvement and heightening the quality of financial,

banking, technological services.

Recommendations and Conclusion:

Although the business plans were not always met, the companies underlined that they were on the right track, but had to find ways to optimize their operations. When a firm has informal way of developing their market entries, without extensive business planning and analysis, a long-term business focus is necessary, long-term business planning is difficult in China. Only the implementation stage will indicate if sufficient parameters have been considered during the planning stage. Smaller firms had a more practical approach to market-entry. Even as not setting too many barriers during the initial strategy design, operational aspects were seen as being of more importance. As a result the planning of the market-entry explicitly considers high flexibility in decision-making during implementation. As a consequence for the smaller firms short-term targets have been more significant.

Economics of ChinaPRABIN RAI

18P i c t u r e

Assignment: Managerial Economics 10/17/2012

As claimed by an American business magnate, investor, and philanthropist: widely considered the most successful investor of the 20th century. …“The 19th century belonged to England, the 20th century belonged to the US and 21st Century belongs to China. Invest accordingly.” - Warren Buffett, The Chairman and CEO of Berkshire Hathaway.

It is a fact that the expanding Chinese trade may have induced painful restructuring within some the most vulnerable and employment generating industries in the region. Emerging economy firms are becoming important participants in the global economy, and the results of this study tend to confirm that new multinationals use each other as reference points in their international market entry decisions. So the firms do, face competition from more established multinationals from developed economies in this internationalization process.

In examining host location policy uncertainty and home country institutional distance, this study has improved the understanding of how institutional forces shape entry strategies in emerging economies.

And the results contribute to the understanding of the influence of reference groups and identities, by showing the influence of prior investments from different reference groups. Multinationals from emerging economies seem more likely to be influenced by prior entries from their home country than by firms from other countries, and more level to follow the entries of other emerging economy firms than those of firms from developed economies. Hence, one of the key challenges for emerging-economy firms is to catch up, as their developed economy peers are likely to have superior resources and capabilities.

References:

http://en.wikipedia.org/wiki/Chinahttp://www.tradingeconomics.com/china/indicatorshttp://www.coface.com/CofacePortal/COM_en_EN/pages/home/risks_home/country_risks/country_file/China?extraUid=572105http://www.zerohedge.com/news/chinas-non-performing-loan-nightmarehttp://www.businessweek.com/articles/2012-10-03/why-the-u-dot-s-dot-needs-chinese-investmenthttp://www.globalfinance.org/portal/data/publications/countryrisk/China05.pdfhttp://www.voanews.com/content/china-export-rise-nearly-ten-percent/1525941.htmlhttp://en.wikipedia.org/wiki/File:PR_China-SAR_%26_SEZ-English.png

Related News Blogs and Books: CNNMonney.com

270 Park Avenue, New York, NY 10017© 2011 JPMorgan Chase & Co. jpmorgan.com/institutional

CHINA’S Emerging Financial MarketsChallenges and Global Impact (2009) John Wiley & SonsForwarded by: Paul A. Volcker Former Chairman, US Federal Reserve

Economics of ChinaPRABIN RAI

19P i c t u r e

Assignment: Managerial Economics 10/17/2012

Zhou Xiaochuan Governor, People’s Bank of China

Annex

Economics of ChinaPRABIN RAI

20P i c t u r e

Assignment: Managerial Economics 10/17/2012

Final Figure00: A map showing Special Chinese Economic zones

Economics of ChinaPRABIN RAI

21P i c t u r e