Capital Market Imperfections in Emerging Economies

It is this that has sparked China’s vulnerability to external shocks. In 2011, China’s exports amassed almost $2 trillion, however in Feb 2012, China recorded a $31.5 billion trade deficit as a result of the European sovereign debt crisis in which China’s main trading partners plunged into recession. China’s severe BOGS decrease is an attempt to control growth and a sustained level of 7.5%. Investment policies are also critical for China to achieve economic growth and development. Foreign Direct Investment (FDI) in China is being sought primarily in the redesign of State Owned Enterprises (SOE’s) and in the development of interior provinces. Between 75-80% of World Bank loans to China in 2008 were directed to the central and western regions, the most economically disadvantaged. This promotes increased wealth within China, leading to higher levels of development due to a more positive Human Development Index (HDI), which currently sits at 0.687, up from 0.677 in 2010. Thus, trade and investment are critical factors in ensuring that China’s growth remains sustained at 7.5% whilst still encouraging increases in development.

Our research over the past five years into the battles between multinationals and local Chinese companies reveals that while market dominance by local champions is far from universal, it’s becoming ever more frequent. In industries as different as beer brewing, mobile-phone manufacturing and laundry-detergent production, Chinese companies — often seeming to appear from nowhere — are forcing multinationals to rethink their strategies and their hopes for explosive growth in the China market.

State-owned enterprises are regarded as a particular circumstance of business organisations and considered as the basis of economic growth in many countries (Zhang, 2011). It can be seen that the proportion of state-owned companies has increased from nine percent in 2005 to 23 percent in 2014 especially in China which has a proportion of 15 percent in 2014 (PwC, 2015). Furthermore, state-owned companies might be a necessary tool for development in emerging countries, because they can be directed and achieved by governments. Although state-owned companies have played an important role in an economy, they sometimes seem to perform poorly compared with private sectors on average in many countries, partly because the goals of public policy sometimes are complicated to be achieved (World Bank Group, 2014). Therefore, many countries have decided to privatise because they have expected that private sectors would operate and perform better than the government would do. Thus, privatisation has become an international phenomenon globally particularly in addressing inefficiency from state enterprises. However, there might have some benefits and drawbacks of privatisations, but all of the procedures are most likely to depend on the quality of contracts and regulation in each circumstance. For this reason, this essay will examine: firstly, the agency costs that seem to occur in state-owned companies, secondly a privatisation will be analysed as a result from those costs. Thirdly,

At the heart of these issues is one disturbing fact: China does not play by the rules. China’s market is largely a state controlled participant in the otherwise free markets (Dorn 78). The situation has not gone completely unnoticed, in 2012 President Obama announced the creation of a Trade Enforcement Unit, specifically citing unfair trading practices in China (“Obama Announces”). Despite America’s first-steps toward economic defense, the speed at which American wealth migrates to China continues to increase (U.S. Census Bureau).

China applies significant restrictions on foreign investment. But still maintains one of the world’s best economies. There are three main principle industries in China; Agriculture, Industry, and Services. Each contributing 9.7%, 43.9%, and 46.4% respectively to the overall GDP of China. The state government of China however has a huge influence on industry, out of the 61 Chinese enterprises on the Fortune 500 list, only four of these enterprises

I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.

Most commentators believe that the decision by the People’s Bank of China (PBoC) to allow the yuan to weaken reflects rising concern about the state of the real economy. Economic growth has clearly decelerated, but rebalancing the dynamics driving real GDP was never going to be a predictable process, particularly given that the government has tried to prevent the destruction of capital that is invariably required during such transformations. China has never totally turned her back on fixed investment being a significant source of economic growth. This stance has introduced excess capacity into the economy, funded by a multitude of debt instruments since 2008. Higher investment spending was seen as the best way to shore up the economy during the global financial crisis. Utilisation of newly built capacity was expected to rise once demand conditions returned to normal. The problem is that global aggregate demand growth never returned to pre-crisis levels, consequently rendering many projects economically and financially unviable. This did

In today’s world, economic power is the prime moving force in determining how much a country can produce, buy, or sell their products or services. One notable economic powerhouse is China. Over the years, the Chinese business climate has grown from a centrally planned economy to a socialist market economic system. Having this new economic system gives foreign investors many market opportunities. However, one must not forget the differences in political and cultural environment that can create risk and uncertainty for foreign investors. According to a 2010 survey by the US-China Business council, companies are reporting strong growth and profitability despite the economic downturn. China has a large market and their purchasing power is ranked second in the world. Although companies are profiting, there are fourteen business issues in China. They are: administrative licensing barriers, competition with PRC state-owned enterprises or national champions, intellectual property rights enforcement, cost increases for labor and raw materials, restrictions on foreign investments, restrictions on market access in services companies, transparency, government procurement standards and conformity assessment, protectionism risks in China, lack of equal treatment from domestic companies, lack of consumer awareness/understanding about products, miscommunications due to language barriers and ethical issues, and the difference in human resource practices. In the United States, managers tend

2016 is said to be “Record Breaking Year” for Chinese Investors. According to Forbes News, five major acquisitions of U.S companies and stakes totaled up to 28.16 Billion dollars. Yet, this was only a quarter of China’s entire outward investments in 2016. Many foreign firms suppose that China’s oversea merging and investing in next decade will reach tremendous amount, but it will not occur as they expected depending on Emma Johanningsmeier’s current event reports on Wall Street Journal about “New Chinese Regulations and wary foreign governments hamper M&A investors” in august 2017.

After the economic reforms of 1978, China gradually became the manufacturing hub of the world and its GDP catapulted from 214 billion USD and 9th in the world to almost 11 trillion and 2nd in the world in 2015 (focus economics, 2016). China’s financial system has managed to sustain this rapid economic growth for many years, mostly through the appropriate allocation of capital (Yan, 2013).

Numerous myths encompass the financial connection between the United States and China. Four, specifically, emerge, and it is essential to recognize them as myths to maintain a strategic distance from misconceptions that could antagonistically impact strategy choices. The way that China has turned into the biggest remote holder of U.S. government securities is taken as demonstrating that the United States is intensely reliant on China to fund its spending shortages. Also, since China is a noteworthy hotspot for U.S. imports, U.S. customers are viewed as subject to modest Chinese merchandise. Moreover, the Chinese experts have underscored that they emphatically oppose outside weights to endeavor to impact arrangement choices and that

Since initiating a series of economic reforms and adopting the open policy in 1978, China’s economy has experienced a spectacular growth and achieved a remarkable success over the past three decades. In particular, according to the government figures released on August 16th 2010, China’s economy in the second quarter has slightly surpassed Japan’s in terms of gross domestic product. This milestone suggests that China is becoming the world’s second-largest economy behind the United States. At the same time, the opportunities created by the striking economic growth have led China’s most important investment markets, stock and real estate markets to undertake an enormous transformation and development. On one hand, since the two stock exchanges (Shanghai Stock Exchange & Shenzhen Stock Exchange) were launched in 1990, China’s stock market has served as a vehicle for financing and supporting the development and reform of State-Owned Enterprises. That is, within China’s bank-dominated financial system, stock market was restricted by a series of regulations and assumed only a secondary role in the financial economy. Not until the late 1990s did the stock market acquire an increasingly important strategic role in China’s economy. The stock market was vigorously promoted by relaxing regulations imposed on it and experienced tremendous growth in size and liquidity since the early twenty-first century (Lai & Yang, 2009, p.409-410).

For the Shanghai Stock Exchange, the market cap of the top 10 issuers of assets accounted for 39 percent of the total market volume of shares being offered for investments (Parker, p.15). Similar to the Shenzhen Stock Exchange those 10 stock issuers of assets are government owned firms. Though a growing number of non-government owned businesses have been registered on the stock market, and expanded proprietorship structure of listings, the government owned firms have far more privileges in terms of imposed government regulation than compare to other non-government owned companies. For example, the government owned businesses have favorable access to bank loans, lower costs of capital, and advantages in monopoly (Dooley,

Despite the high levels of corruption, investors do not seem to be deterred from doing business in China. Some believe that corruption acts as an effective “grease” to speed up the many layers of bureaucratic inefficiencies for starting of businesses in China (Meon, Weill, 2008). Furthermore, the policy of regional competition in China has caused the competitive lowering of bribes in order to attract businessmen with a lower “unavoidable cost” of doing business in the region. (Li, Peng 2001). Another reason would be the high predictability of corrupt practices in China (Campos, Lien, Pradhan, 2001), to the extent where investors factor “bribes and gifts” as a portion of their budget. Hence it does not appear as a deterrent to businesses when they enter the market (Dickson, 2008). Corruption due to “Guanxi” is also explained to enhance efficiency, because “Guanxi” contributes to high levels of public trust that encourages business ventures due to the availability of valuable information that reduces uncertainty (Li, Wu

This study will further lead to the dynamics of KSE listed firms. Investor trends towards highly leveraged firms and determination whether the optimum capital structure effects the decision of investor resulting change in the balance sheet of a company.