China`s economic growth

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China’seconomic growth

Forthe past three decades china has maintained a steady growth patternsince the inception of the 1978 economic reforms. The average GDPgrowth rate during the period 1979- 2000 was depicted to be 9.2%,this accelerated to 10.1% from 2001 and 2006. Presently, China hasdepicted a growth rate ranging from 8% -9%, however, the Asian gianthold a huge prospect of becoming the most successful economies in theworld by 2020, this is because it is experiencing tremendous changesthat spell a bright future. The figures below illustrate China’sGDP, GDP growth rate per annum and GDP growth rate.

Figure1: China GDP

Figure2: China GDP annual Growth Rate

Figure3: China GDP growth rate

China’sgrowth is attributed to its capacity in capital stock there has beena continued rise in the rate of capital formation in the past fewyears. The average rate of capital formation rose from 35.2% of theGDP in 1980s to 40.2% in 2001-2005 this has risen further to 42% in2012-2013. This shows that the country is experiencing tremendousgrowth. Another sector that plays a crucial role is the marketizationand urbanization which have grown by 63.2% and 43% respectively inthe period 2002-2012. Other important sectors are trade, foreigndirect investment and infrastructure segments.

Foreigndirect investment (FDI) has been an important source of capitalformation in China. It remains at a level of about 50-60 billion USdollars in each given year, making China the largest FDI recipient inthe world. However, the growth rate of FDI has tremendously reducedfrom 30% in the 1990s to only 6% in 2005, however, the sector has isbeginning to grow since in 2013 it registered a growth rate of 10%down from 7% in 2012. The US stands in a better position to invest inChina owing to the fact that there is a significant growth patternexperienced in China as opposed to other parts of the world. Duringthe Euro crisis, major economies in Europe were shaken makingcompanies in the region incur huge losses, such economic fluctuationscan easily be mitigated by US based companies investing in strongeconomies like China’s (McAllister and Nanda, 123).

Chinaincreasing the flexibility of yuan exchange rate

TheChinese government in mid-March 2014 took a very important step in abid to offer its investors flexibility in the currency market. Thegovernment loosened its trading limits with a belief that the move iscrucial in economic growth attainment, the Chinese leader’s beliefthat exchange rate reforms will offer a platform for growth anddevelopment. The people’s Bank of China has allowed investors inthe country to push the Yuan’s value 2% in either direction fromthe trading rate in the market against other currencies, this is amove from the 1% which had been previously been allowed by thecentral bank. The central bank of China introduced the new regulationin a bid to improve its currency which has been dropping in themarket. The two way volatility paves way for expanding its band. PBOChas undertaken the initiative by guiding the parity rate lower andencouraging major bans in the country to aggressively purchasedollars.

Figure4: Flexible exchange rate system

ThePOBC depicts that the country’s trading surplus stands at 2.1% ofits GDP at the same time the central bank asserts that there is nobasis for big depreciation. POBC goes further to illustrate that thecountry’s financial system is stable and the foreign exchangereserves can be used as a buffer against any external shocks that mayoccur. Such statements act like an assurance foreign investors in thecountry. Hence, the US on the premise of the strength of the Yuan inthe market will stand in a very good position to invest in thecountry. Flexibility of Yuan exchange rate is very crucial to foreigndirect investors (FDI), since it opens up different investmentplatforms. From the figure 4 above it is evident that demand caneither move up or down without necessarily sticking to theequilibrium. This means that if demand moves up US based Housingcompanies benefit more just like they may opt to stick to theequilibrium position. The flexible exchange rate system comes asbonus to the housing companies in the US.

GuidanceCatalogue for Foreign Investment

TheChinese government has undertaken numerous changes in the nature offoreign investments to allow. The approach is an important step thatis geared towards enabling development and growth of the economy atthe same time encouraging foreign investors. US based companies oughtto adopt a framework that would give them an upper in the changingenvironment of China. One of the most important steps the company canundertake is establishing a joint venture with any local constructioncompanies in China. The approach will play a crucial role in ensuringthat the US based company does not incur extra charges andsubjectivity to restrictions (McAllister and Nanda, 134).

Thenew catalogue imposes that construction and logistics is underprohibited section, hence US based companies may not be able to getfully access as before. However, there have been numerousconsiderations by the Chinese government to reconsider their standwith the increasing need for housing in China. The Chinese governmenthas a senior approval on foreign direct investments in areas likepharmacy, technology, energy and education and foreign investment inthe construction and operation of pallet and container unit sharingsystems is now encouraged. All these aspects depict a very hugemarket in China that awaits exploitation by willing and capableinvestors across the globe.

Growingolder population: 30% over 60 by 2050

Retirementhomes industry in China is booming simply because there is a rapidincrease in the overall proportion of its elderly population, theincrease has compelled the nation to shift from traditional familycare to institutional care approach. The Chinese government is underpressure to develop community care services intended to improvesupport to the home based care services. Institutional care iscurrently strongly recommended as a format to meet the needs of theolder people in China. The senior care industry in China is stillyoung and has not developed to standards to accommodate all the olderpeople, currently there are around 100,000 housing institutionsacross the country. The government aims to increase these by about 3%by 2015 in order to accommodate a larger population of the olderpeople.

Figure5: China Population Pyramid

Fromfigure 5 above it is paramount to conclude that there is a higherprevalence of older people aged between 50 to 80 years as compared tothe younger generation below 40 years. This is an indication of thehigh demand for both nonprofit housing structures and profits housingstructures in the country. There is a higher segment of the people inthe country who would prefer moving from one city to another insearch of suitable climatic conditions. It means that such citieslike Beijing will experience shortages in the long run due to thehigh demand. Thus, it is crucial for the US based Constructioncompany to consider direct foreign investment to China as it standsto get a ready market with high demand (Thinker, 45).

Growingwealth of young middle class who can afford to pay for parents care

Asa developing country with a population of more than 1.3 billion,China registered a GDP per capita of around $1,000 as compared to thedeveloped nations that registered values ranging from $5,000 to$10,000. However, in 2005 average disposable income of Chinaincreased by 9.6% as compared to the previous period. Presently thecountry has registered a per capita GDP of $3583.38 which is anincrement from the previous periods. The figure below illustrates GDPper capita of China.

Figure6: GDP per Capita

McKinsey(2006) asserts that the rising economy in China has boomed theemerging of the middle class in the county. 77% of all urban Chinesehouseholds live in less than RMB 25,000 per annum and those veryhouseholds live a minimum quality of life. When it comes to seniorhousing, these households cannot affords to send the elderly familymembers to senior living facilities. It also postulates that by 2025the figure will likely drop to 10%, at this period 90% of the urbanhouseholds in China will make up one of the largest consumer marketsin the world as the spending is approximated to be about RMB 20trillion annually.

Figure7: Changes in income levels

Figure7 above shows the percentage share of urban households in terms ofincome class. For instance, in 2005 it was estimated that 10% of thehouseholds in China belonged to upper middle class with an annualincome of between RMB 40, 001 and RMB 100,001. Following the trendit’s by 2025 it is expected that the range will rise by 60%. By2025, the number of households that will be classified as massaffluent and global affluent will increase significantly.

Chineseinfrastructure

Infrastructuredevelopment remains at the top of the agenda of the Chinesegovernment that has undertaken tremendous steps to improve its roads,airports, railways and upgrading other means of transportationthroughout the country. The Chinese government has come to arealization that modern economy runs on reliable data and rails,electricity and telecommunication. From 1990s to 2012s, millions ofChinese citizens have benefited greatly from the upgrades undertakenby the government. Businesses are not left out when it comes to theuse of these infrastructures. Between 2001 and 2004 investment inrural roads grew by 51% annually, this is a massive range that ismeant to open up the country for future developments.

Currently,the government has relied on its infrastructure quality to strengthenits economic position in the world market. The infrastructuraldevelopment of China is an enhancer in foreign direct investment thisis because it enhances communication of all the relevantstakeholders. Investment is dependent on the levels of infrastructurein the country. China has an important platform that enables easymovement of goods and services throughout the economy.

Figure8: China Roads

Investmentdeal

Investmentclimate

Chinahas set up a number of special economic zones (SEZ) and economic andtechnological development zones (ETDZ), export processing zones andbonded warehouses with an aim to attract foreign investors and exportactivities in the countries. Numerous preferential policies thatinclude taxa rates, foreign exchange, customs, investment andemployment among many other aspects are provided. The shanghai Pilotfree trade zone launched in 2013 is aimed at deepening reform andopen up policy innovations to establish advanced rules on trade andinvestment. These places the three major foreign direct investmentslike industries manufacturing, real estate and leasing and commercialservices on the top of the list. US based companies are bound tosucceed since the Chinese government has already established anappropriate environment (McAllister and Nanda, 200).

Pricecontrols

Chinahas abolished most of its price controls strategies, instead it haslet the market forces determine the prices of the majority of theproducts traded in the market.

Currency

Bankingand financing

Chinahas changed its finance sector tremendously from one controlled bythe PBOC to that which is diversified.

Foreigninvestment

Chinawelcomes foreign investment and it is bound under WTO rules tofurther open its industries to foreign investment. China has donethis by adopting the recently revised catalogue that denotes areaswhere more preference is given on foreign investment.

Taxincentives

Theprinciple tax incentives include 15% of preferential tax applicableto a new high technology enterprise and a 50% super deduction for anyqualifying R&ampD expenditure. There is also a geographically basedtax incentive offered by the government on any new high technologyenterprise established after 2008. The incentive is a two year taxholiday of 15% followed by a three year tax rate of 12.5%. The figurebelow depicts China’s taxation on companies

Figure9: China Taxation and Investment

Riskstabulation

Political risk factors

Rating

Weight

r×w

Attitude of host government

3.00

35%

1.05

Conflict

2.00

35%

0.70

Corruption

4.35

30%

1.31

Total

100%

3.06

Economic risk factors

Rating

Weight

r×w

GNI per capita

5.00

30%

1.50

FDI Potential

4.67

35%

1.63

Inflation rates

3.00

35%

1.05

Total

100%

4.18

Total risk factor

Weight

Value

w×v

Political risk

60%

3.06

1.83

Economic risk

40%

4.18

1.67

Total

3.51

Conclusionand summary

Foreigndirect investment is very crucial across the world this is becauseit offers multinationals a chance to expand their markets and enternew territories without restrictions. The level of foreign directinvestment by the US and multinational corporations outside of the USand non-US has increased tremendously over the last 20 years. Theinternational community has endeavored to ensure that there areclarity and appropriateness in different sectors by steadily reducingbarriers and restrictions on foreign direct investments. However,there are those countries that have become consistently hostile toinvestors.

TheForeign Investment Risk Matrix provides a framework with which aforeign investor can analyze the combination of both political riskand economic risk for making investment decision. The firm usesvalues that are defined by the matrix for their impact on thespecific foreign direct investment project that can be collecteddirectly from the internet by the multinational corporation toevaluate the political risk and economic risk for a specific countryrelated to the specific project under review. In this case US basedcompanies ought to adopt a framework and invest in China’s growingreal estate industry as it is also expected to grow further by almostdouble the present growth rate.

Chinais a growing market that is also expected to grow further in thefuture. There are numerous stimuli for economic liberalization thatwill reduce political risk and shows the process by which economicliberalization leads to economic development. As the host countrygovernment liberalizes the political and economic environment,multinational corporations will be permitted an increased range ofeconomic activity. Economic liberalization leads to reducedrestrictions on foreign investors this in turn reduces the operatingcosts on foreign investments. Multinationals always require a reducedrate of return as it protects their assets and finances. Any companythat operates in other territories would want to feel safe,appreciated and welcomed. China is that one market that has exhibitedall the aspects multinationals are looking for. Any country evolvingpolicies for foreign direct investment must ensure that it isconsistent and offers regulations that allow foreign investors tocome into the economy. China has undertaken a number of deregulationsfrom its former policies which are a step towards accepting foreigninvestors in the country.

Finally,US based companies stand a good position to invest in China, owing totheir capital size, efficiency and quality of products as compared tonumerous other companies across the world. FDI in China has beenkicking started by the government in almost every sector to offer aplatform for foreign investor’s relief the country’s pressure interms of housing plans and economic growth. China has faced a hugechallenge when it comes to its housing plans this is because it isexperiencing an upsurge in the old age individuals who need more careas compared to the younger generation (Thinker, 90). Additionally, alarger proportion of China’s citizens can afford houses thatunfortunately are limited. It is on this precept that US basedcompanies ought to invest in real estate development in China.

Workscited

McAllister,Patrick, and Anupam Nanda. `Which Factors Determine Cross-Border RealEstate Capital Flows? A Gravity Modelling Approach`. SSRNJournal(2014): n. pag. Web.

Thinker,Big. `A Modest (Real Estate) Proposal`. Paediatricand Perinatal Epidemiology25.4 (2011): 314-314. Web.