The Largest Emerging Market Of China Economics Essay

Summary: this article will give a brief introduction of the emerging market in China and offer an analysis of the emerging market with the eclectic theory of international production. Finally, there is a brief introduction about the ways of foreign investing in China.

1 Brief Introduction to the Emerging Market in the World

According to the authoritative definition of the International Finance Corporation (IFC), as long as a country or region’s per capita gross national product (GNP) did not meet the level of high-income countries designated by the World Bank, the stock market is the emerging markets in the country or region. In this article, emerging markets, a relative concept, refers to the developing countries, regions or an economic entity compared to the mature or developed markets in the world. There are a number of countries (Agtmael, 2007), such as the “BRIC”(China, India, Russia and Brazil) and the rising stars of South Africa, Vietnam, and Turkey and so on. Low labor costs, abundant natural resources usually are features of the emerging markets. On the one hand, in general the production lines will be transferred from the developed countries and regions to the emerging markets for enhancing competitiveness with low labor costs. On the other hand, the developed countries and regions will also imports the cheap raw materials from the natural resource-rich countries and emerging markets. Correspondingly, the emerging markets may also gain the advanced production technology, improve revenues, increase the consumption capacity and promote economic development through this cooperation. Especially, its role of promoting global economic growth after the economic crisis in 2008 attracts more attention from every corner of the world. This provides a sharp contrast compared with the developed countries fully in recession. From a historical point of view, every major economic crisis will cause the world economic structure adjustment and change. The Great Depression of last century leads to the rapid rising of the former Soviet Union. Two oil crises of the Western countries speeding up the transfer of industries to developing countries accelerate the appearance of the four Asian tigers. Currently, the Group of Eight will be replaced by the Group of Twenty (G20). The emerging market and developing economic entities will play increasingly important roles as major leading forces in the current global economy.

As the largest and fastest-growing economic entity among the emerging markets in recent years, China is an ideal investment market. After carrying out the reform and opening-up policy in 1979¼ŒChina’s economy maintained a sustained rapid growth and the level of consumption continues to increase. As a member of the world trade organization (WTO) since 2001, the market economic system is continuously improved and enhanced. Certainly, as China is an emerging market and a developing country, the problem of the market structure, brand structure, the regional consumption level is also existed there. The market environment still needs to improve and there are few proprietary brands in China. However, Chances always go with challenges. It is not only a chance for China’s economy development but also an opportunity for investors to enhance their own competitiveness. Therefore, this article will give a comprehensive analysis about the emerging market in China.

2 In-depth analysis of the Emerging Market in China

Dunning proposed the famous eclectic theory of international production and trade-off in early 70s of 20 century He has been concentrated on the development and supplement of this theory (Dunning, , 1981, 1988,1995) to the 90s of 20th century. The famous eclectic theory of international production, an integration of the international trade theory, the location theory and the “internalization” theory, is proposed for explaining foreign direct investment decisions. According to this theory, international investment company shall have ownership advantages and internalization advantages and the host country should have the geographical advantages. Dunning (1988) summarized four major categories of location factors: the market factors (including market size and potential) the trade barriers, the cost factors and the investment climate.

Broadly speaking, the host country location factors can be summarized into two categories. One is the resource conditions, including natural resources, labor resources and the proximity to market conditions. Another is the host country’s related environmental factors, such as political, economic, legal and infrastructure. Two factors play important roles in decision-making of foreign direct investment. The analysis will be shown from those two aspects.

2.1 The Analysis of the Resource Condition

After the economic crisis, China’s macroeconomic development environment has been significantly improved in 2010. With the economy of Europe, the United States, Japan and other major economic entities recovery, China’s market gradually becomes more prosperous. The macroeconomic policies are continuity, the economic growth momentum is still adequate and the economic growth is expected to be more stable and rapid.

As the largest populous nation and the third largest territory in the world, China is always playing a more and more important role in the global economy. After 30 years development from the reform and opening- up, the market in China develops a series of new characters as following:

2.1.1 Overview of natural resources

It has been said that China is a country with vast territory and abundant resources.

There are 960 square kilometers land areas in China, accounting for 22.1% of total land area of the continent of Asia, accounting for 6.4% of the world’s land area. China’s is also one of the world’s major energy countries with full conventional energy resources. Once more, China is one of the few countries to self-sufficiency in mineral. The minerals are widely distributed and large reserves. At the end of 1990, 148 species minerals have been proven in China It has been estimated that the water resources preliminary about 2.7115 trillion cubic meters. The mean annual river runoff in China is equivalent to 5.8% of the world’s runoff. The forest reserve of 9.141 billion cubic meters is the world’s No. 5, in which a variety of excellent material and higher economic value trees include. Finally, China is very rich in biological resources. A wide variety of plants and economic plants which amounts to 2,411 kinds, not only provide a variety of foodstuffs, medicines, fibers, and a variety of other industrial raw materials, but also protect and improve the natural environmental conditions. There are about 2,400 species of marine fish, which accounts for about 3 / 5 and the rest is freshwater fish.

With the effect of geography, there are main six areas (Northeast Region, North Region, East Region, Central Region, Southwest Region and Northwest Region) of their own characteristic nature resource in China. Therefore, it is safety to conclude that China’s nature resource is a great advantage.

2.1.2 Advantages of the Labor Resources and the Funds

First of all, since the total population is increasing and the level of education, especially the higher education, is rising, the labor resources are so abundant and the quality is continuously improving. The demographic dividend still remains. Then, the potential supply of funds is enormous as the Chinese savings rate has always remained above 40%. Finally, the supply quality will also be improved for the upgrading of industrial structure.

2.1.2 The Proximity to the Emerging Market in China

The proximity to the emerging market in China will be discussed from two aspects: the demands and the attitude of the government.

2.1.2.1 The Demands in China’s Market

With the China – ASEAN Free Trade Area today (January 1, 2010) founding, the largest population free trade area will begin to enter the era of zero tariff. Undoubtedly, the emerging market in China will become the largest trading market. The following presentation will give a detailed analysis.

At present, the level of consumption in developing country is becoming higher and higher, according to the observation of Leila and Dwight (2007). As 700 million farmers existing in China, there are huge potential consumers in rural areas market. With the rapid increasing in the purchasing power of farmers, rural consumption will be subsequently expanded. Their demand for durable consumer goods will become a rapid growing market. The urban and rural resident’s consumption potential in education, health care, culture, entertainment, tourism and leisure is huge. The rapid development and wide application of high technology will become an important driving force of rapid economic growth. The continued expansion of urban employment will drive the growth of domestic demand as well. Cars, communications equipment, computers, housing and the renovation gradually become new consumption hot spots. The investment demands from the government and enterprises including the foreign and domestic companies remain strong. The great non-state economic potential will be released. What is more encouraging, China’s second-quarter GDP in 2010 has taken the world’s second point than Japan.

In a word, the emerging market in China is huge and its potential is unlimited.

2.1.2.2 The Attitude of the Government

A stable political situation is extremely beneficial for trading. The market economic system has basically taken shape after more 30 years development since the Reform and Opening- up in China.

Firstly, it is the change of the government function and administration according to law. In order to meet the needs of WTO, The Chinese government abolished 789 administrative examination and approval projects in 2002. This indicated that a substantial step and the achieved important results have been taken in the reform of administrative examinational system in the departments of the State Council of China. Thirdly, the government standardizes the market order and improves the integrity of the market. Finally, the market access is eased and the transparency of market access is increased and the operating limits are also reduced.

2.2 The Analysis of the Related Environmental Factors

The related environmental factors are divided into the hard environment and soft environment. The hard environment is the infrastructure and other tangible things and the soft environment refers to the political, legal, education, human and other intangible qualities. In the following discussion, the investment environment is divided into economic environment, political environment and legal environment for studying respectively.

2.2.1 The Economic Environment

Although China is a socialist country, a market economy system has been established as the basic economic system since the Reform and Opening-up. With the continuous improvement of the reform, the market in China will be more perfect. In spite of the State-owned enterprises have formed a different degree of monopoly in many major industries, for example, transport, hydropower, and oil, it does not mean there is no space for investors. In fact, “the government is more open to imports and foreign investment than many developed countries” (Cavusgil, Ghauri, and Agarwal, 2002). What is worth to mention is that the overall economic situation is very good and different consumption levels and consumption structures have already been formed from the coast to the mainland. The abundant natural resources and adequate labor is another important driving force for economic growth. Though the Olympic economy, the infrastructure construction has made great achievements. There is no doubt that the developed transportation and convenient information are import tonics for China’s economy.

2.2.2 The Political Environment

The political environment is composed of many elements. Any background and factors which influence the political system are elements of the political environment. There are economic, geographic, cultural, ethnic, interest groups, religion and so on. These elements can be divided into two major natural and social classes, which constitute the political system together. The political environment affects the provisions of the basic situation of the political system and directs its development process. The economic factor among various elements in the political environment is a decisive role for the political governance of the system elements. A country’s economic situation and economic system not only determine the status and nature of state power, but also directly affect the whole process of political decision-making and the structure and operation of the state power.

As the largest socialist country in the world, China has experienced the era of closed- door policy in the dynasty of Qing. The painful history reasons make the country realize that there is no way for isolating. With the impact of geographical conditions, ideology culture historical tradition and national situation, a single system of state structure is implied in China. This political structure ensures the stability which is very important for investing. Once more, the economic system reform in China will promote the comprehensive changes of the political system, the ownership structure of the national economy, the industrial structure and the running system. For example, the Western Development Strategy not only affect China’s economic development environment but also influence the political structure. In addition, under the great effect of the Reform and Opening-up policy, there is no doubt that the policy will be carried out continuously.

In a word the, with the self-improvement of the political structure, it will be more helpful for investing in China.

2.2.3 The Legal Environment

The analysis on the domestic legal environment of marketing mainly refers to the regulations, decrees, regulations promulgated by the state, the government departments and the local government (such as provinces, municipalities and autonomous regions) and so on. With the deepening of the economic reform and opening up and the more international trading according to international standards and requirements, China has been increasing emphasis on economic legislation and law enforcement.

It has been proposed to form China-specific socialist legal system in the 15th National Congress of the CPC in1997. At the end of 2009, there are 232 laws, more than 600 effective administrative regulations existing, more than 7,000 pieces of local laws and regulations in China. The building of China-specific socialist legal system has taken solid steps.

2.3 The Investment Approach in China

According to the group of Satish Shankar (2008) , there are six (Participate in the mass market, Localize the “4Ps”, Manage costs aggressively , Build local team, Acquire selectively and Stay the course

) keys for succeeding in the emerging market.

Foreign investment is an important part of China’s basic national policy of opening up. The way of attracting foreign investment in China is generally divided into direct investment and other investment. The most using direct investment is the Chinese-foreign joint venture, the Sino-foreign cooperative enterprises, the wholly foreign owned enterprises, the foreign-invested joint-stock companies and the joint development enterprises. The other ways of investing are also becoming the hot pot ,including the compensation trade and so on.

2.3.1 The Chinese-foreign Joint Venture

For jointly trading in China, the Chinese-foreign joint venture, an equity joint venture, is an enterprises constructed by the foreign companies and other economic organizations or individuals with Chinese companies and other economic organizations according to the Law of the People’s Republic of China on Foreign-Capital Enterprise (1986) from the Legislative Affairs Office of the State Council People’s Republic China (2010). Its characteristics are that joint parties invest together, operate, and bear the risks and responsibility for profits or losses according to the proportion of their total investment. The parties’ investments are translated into the capital contribution ratio. Usually, the foreign party’s investment proportion shall be no less than 25%.

The Chinese-foreign joint venture in China was first set up in various ways and the most using method in China.

2.3.2 The Sino-foreign Joint Venture

Based on the Law of the People’s Republic of China on Foreign-Capital Enterprise (1986), ‘the Sino-foreign joint venture’, a contractual joint ventures, is an enterprises composed of foreign enterprises and other economic organizations or individuals and Chinese companies, and other economic organizations in China through joint investment or cooperation conditions provided by all. According to the contract, the rights and obligations of the parties is identified.

2.3.3 The Foreign-owned Enterprise

The foreign-owned enterprise is an enterprises established only by foreign companies, enterprises, other economic organizations or individuals, according to the laws published by The Legislative Affairs Office of the State Council People’s Republic China (2010). However, it should meet at least one of the following conditions, namely the use of international advanced technology and equipment or products all or most to export. This organizational form of foreign company generally is the limited liability enterprises.

2.3.4 The Foreign-invested Joint-stock Companies

Once more, based on the related law from the Legislative Affairs Office of the State Council People’s Republic China (2010), the foreign investors and individuals can also build the foreign-invested joint-stock companies with Chinese enterprises or other economic organizations by the foreign investment corporation in China. The total capital of the stock company is formed by equal shares. According to the related law in China, the shares purchased and holden by the foreign shareholders should be more than 25% of the total registered capital.

2.3.5 The joint development enterprises

The cooperative development is an abbreviation of oil exploration and development cooperation in offshore and onshore. It is a widely used way of international economic cooperation in the field of natural resources. Its greatest features are high-risk, high investment and high returns. The cooperative development is generally divided into three stages, namely exploration, development and production phases.

2.3.6 New foreign Investment Ways

For expanding the area of investment and further opening the domestic market, China is also actively exploring and developing BOT (Build-Operate-Transfer), and other new ways of using foreign capital. Taking into account that the cross-border mergers and acquisitions have become the main mode of the international direct investment, the Chinese government is working on policies to facilitate foreign investment in those area in China as well.

3 Conclude

Chinese economy mainly in 2009 benefited from the shot fast, heavy punching 4 trillion plan to expand domestic demand and the “double touch” regulation of combination of initiatives. The government had already successfully achieved the target of GDP growth in the ration of 8%. The figures have proved that China has become the world’s third largest economy. As an economic power, the overall capital strength has been shoulder to shoulder with the world. After a long period of economic development, the arts of the government’s macro-control capacity and economic regulation have become more sophisticated. As the emerging economies, there is a huge space for domestic economic development as long as China seized the opportunity to accelerate economic restructuring. China will have good long-term economic prospects if solving problem in the development and being cautious to the risk.

However, Chances always go with challenges (Poillon, 2000). The World Bank released the latest “China Quarterly” in the June 18 (2010) and made an assessment of China’s economic growth prospects which make a “remarkable” performance in the financial crisis. It said that China’s economic growth prospects are good, although still with long-term uncertainty. Certainly, as the largest emerging market in the world, China remains a hot spot for investment. The issues which the multinational companies and investors have to take in to account are only how to achieve the transfer of assets and build a brand as soon as possible in China.