Question.3184 - Analyze the following article and provide a report that answers these questions: Risk of China economic collapse overblown | Emerging Markets | AMEinfo.com. (n.d.). Middle East business & financial news | business directory & current events | AME Info. Retrieved July 22, 2010, from http://www.ameinfo.com/35739.html 1. Based on the findings in the report, analyze three factors MNCs can use to evaluate China's risk as a potential foreign investment.
Answer Below:
Many economist and analyst are of the view that China is on the brink of economic collapse. As we have seen that Thailand and US economy were on development phrase, but eventually they went bust, so they are of the view that Chinese economy will collapse. China is on the road to development, the only major risk that the Chinese economy faces is geopolitical in nature, which will create investment opportunities for the Long term investors. During the year 2003, China’s growth rate was 21%, which increased the investment in the economy by 30%. However, this rapid growth of the economy led to overcapacity in some sectors of the economy, while the sectors like energy and transportation sector dwindled. The sudden withdrawal of credit by market forces led economic collapse in Japan, Thailand, Korea and technology sector of the US economy. During the early 1990s, Japan tightened its monetary policies, which led withdrawal of capital from the economy. Similar things happened in technology sector of the US economy. In 1998, there was a sudden withdrawal of foreign credit, which led to economic crisis in Korea and in Thailand. The financial market of China has a resemblance to the financial systems of these countries; neither the domestic capital market nor the external credit inflows are large enough to sustain capital allocation or its withdrawal. This was further exaggerated by the china’s banking systems which forced it to lending. The stock of credit in the financial system in Japan, US, Korea and Thailand is equivalent to 224%, 170%, 142% and 117% respectively of the stock of deposits in the financial system. However, it is 77% in China. China also has a high liquidity from the current surplus and foreign direct investment inflows, which has pushed the China’s exchange reserve above $400 billion. Because Investment and personal consumption each account for about 40% of the total demand, continued strong growth in investment is the main reason for growth in China’s production based economy. Chinese population has a habit of high savings as opposed to the western countries, which builds deposit used to finance credit growth and investment. As opposed to other countries, there is no market or administrative mechanism that restricts credit growth even in case of Non-Performing loans. However, ample domestic and external liquidity will continue to drive rapid credit growth. The only economic setback that is likely to affect China this year will be driven by geopolitical factors. US’s electoral politics will lead to tension between US and China over trade. This tension will cause periodic and debt market weakness, creating good opportunities for buying for those who have a long term investment horizon on China.More Articles From Finance
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