Term Paper:

Emerging Economies and Markets

Country: China

Submitted By:-

Name Roll No.

Abhishek Sharma 16XPGDM02
Ram
chandana
Vinti
Swati
Aashna 16XPGDM01
# WHAT IS EMERGING MARKET?

Emerging markets, also known as emerging economies are nations that are investing in more
productive capacity. They are moving away from their traditional economies that have relied
on agriculture and the export of raw materials. Developing countries want to create a better
quality of life for their people. Therefore, they are rapidly industrializing and adopting a free
market or mixed economy.

An emerging market economy describes a nation's economy that is progressing toward

becoming more advanced, usually by means of rapid growth and industrialization.

An emerging market economy (EME) is defined as an economy with low to middle per
capita income. Such countries constitute approximately 80% of the global population, and
represent about 20% of the world's economies.

The term emerging markets refers to low-income countries which generally have a rapid pace
of economic development and where government policies favor economic liberalization.

Although the term "emerging market" is loosely defined, countries that fall into this category,
varying from very big to very small, are usually considered emerging because of their
developments and reforms. Both China and Tunisia belong to this category because both have
embarked on economic development and reform programs, and have begun to open up their
markets and "emerge" onto the global scene.

According to the World Bank, the five biggest emerging markets are China, India, Indonesia,
Brazil and Russia.

These markets not only do some have high economic growth rates but nearly all have high
population growth rates.

Emerging markets are important because they drive growth in the global economy. Over 75
percent of the expected growth in the world trade over the next two decades will come from
the more than 130 developing and newly industrialized countries. These countries experience
an expanding role both in the world economy and on the political frontier.

Many emerging market economies become important bases for global manufacturing
operations. At the same time, many emerging markets are enjoying booming export business.
As they gain global presence, many emerging markets also benefit from regulatory reforms,
cross-border trade, and loose monetary policy.

# CHARACTERISTIC OF EMERGING MARKETS

Emerging markets stand out due to a number of major characteristics. Certain of these may
well apply to other markets as well, but an emerging market generally carries a large number
of these features. The main characteristics of big emerging markets can be summarized as
follows:

a) High growth rate:

Emerging markets generally enjoy high growth rates which are often perceived as attractive
by investors, although some countries usually described as emerging do have even shrinking
economies (Arnold et al, 1998). According to Bridgewater (et al, 2002), emerging markets,
such as China, which had the fastest growing, and India, the second fastest growing GDP in
the world, represented attractive investment opportunities. That is to say, they are the worlds
fastest growing economies.

b) High level of risk and extremely volatile:

The second feature of emerging markets, beyond the opportunity they represent for business
growth and high returns, is that they entail greater risk that do mature markets. In other
words, the strong growth potential of many emerging market economies is accompanied by
volatility and high risks (Hitt et al, 2000).

c) High population:

The market potential of these big markets in terms of population size is immense. As
mentioned before, these countries constitute approximately 75 % of the global population.
For instance, Chinas overall population exceeds 1.3 billion, about one-fifth of the worlds
population.

d) Regional economic drivers and major political importance:

Big emerging markets are regional economic powerhouses with large populations, large
resource bases, and large markets. Their economic success will spur development in the
countries around them; but if they experience an economic crisis, they can bring their
neighbors down with them.

Within their regions, they have also major political importance. Furthermore, they are critical
participants in the worlds major political, economic, and social affairs. They are seeking a
larger voice in international politics and a bigger slice of the global economic pie.

e) Have undertaken significant programs of economic reform:

Emerging markets have embarked on economic development and reform programs, and have
begun to open up their markets and emerge onto the global scene. They are characterized as
transitional, meaning they are in the process of moving form a closed to an open market
economy while building accountability within the system.

That is to say, they are transitional societies that are undertaking domestic economic and
political reforms. They adopt open door policies to replace their traditional state
interventionist policies that failed to produce sustainable economic growth.

# WHY CHINA??

Since 20 years the Chinese economy has a very important role in the international scene, and
also continues to be subject of contrasting reviews.
The surface of China is 9,671,018 km2, making it the largest state in East Asia and the
population is approximately 20% of the world:
China is the most populous country in the world.
The importance of China in the XXI century is reflected in its role as second largest economy
to GDP after United States.

China, officially the People's Republic of China (PRC), is a unitary sovereign state in
Asia.
The country's major urban areas include Shanghai, Guangzhou, Beijing, Chongqing,
Shenzhen, Tianjin and Hong Kong. Covering approximately 9.6 million square
kilometers, China is the world's second largest state by land area.
China with its known history beginning with an ancient civilization one of the
worlds earliest that flourished in the fertile basin of the Yellow River in the North
China Plain.
China has become one of the world's fastest-growing major economies. As of 2014, it
is the world's second-largest economy by nominal GDP and largest by purchasing
power parity (PPP). China is also the world's largest exporter and second-largest
importer of goods.

Measure: percent
Source: TheGlobalEconomy.com, The World Bank
World bank definition: Annual percentage growth rate of GDP at market prices based on
constant local currency. Aggregates are based on constant 2010 U.S. dollars. GDP is the sum
of gross value added by all resident producers in the economy plus any product taxes and
minus any subsidies not included in the value of the products. It is calculated without making
deductions for depreciation of fabricated assets or for depletion and degradation of natural
resources.
Country comparator suggestions

The country comparison tool can be used to create interactive charts using over 150
indicators. The variables are drawn from major international organizations and prominent
NGO's and are updated regularly. One can compare countries over time using the line charts
or the rankings of various countries by selecting a specific year. The comparison charts as
well as the source data can be downloaded for free after registering.

Below are brief guidelines for country comparisons:

Compare countries: income levels. One can use GDP per capita in dollar terms to compare
incomes across countries. However, the comparison may be somewhat misleading because
consumers face different prices in various countries. One thousand U.S. dollars can buy much
more in Mexico compared to the U.S. since prices in Mexico are lower. To account for the
differences in prices, one should look at the GDP per capita in Purchasing Power Parity
terms. In that way, one compares countries in term of real income (what can be purchased) as
opposed to the dollar income.

Compare countries: level of development. The most basic comparison is between GDP per
capita levels or the levels of GDP per capita in terms of Purchasing Power Parity. However,
GDP can be a misleading measure as it may not capture other aspects of the quality of life
such as crime, education, environmental quality, etc. The Human Development Index
published by the UN is a composite measure that accounts for a broader set of development
factors.

Compare countries: economic structure. One should look at the shares of Agriculture,
Industry, and Services in the overall value added of the economy. Generally, lower income
countries have a larger share of agriculture and the share of services expands as they develop.

Compare countries: unemployment. The unemployment rate is the standard variable used
to compare countries. However, one may want to look at youth and long-term unemployment
as well. Both indicators suggest deeper, longer-term problems in the labor market.

Compare countries: corruption. There are two indexes that can be used. One is the
Corruption Perceptions Index from Transparency International and the other is the Corruption
index from the World Bank. The two institutions apply different methodologies to measure
corruption and while the results are similar, they are not the same.

Compare countries: rule of law and governance. The best data to look at are the World
Bank governance indicators. They can be used to compare countries in terms of the quality of
the bureaucracy, the efficiency of the public administration, and more.

Compare countries: financial development. One can chart the level of private credit as
percent of GDP and stock market capitalization as percent of GDP. The first measure shows
the development of credit markets while the second one is a measure of stock market
development.

Compare countries: economic freedom. The Heritage Foundation publishes several indexes
of economic freedom in different areas of economic life: labor market, financial markets, and
others. Each of them reflects the degree of government interference and the efficiency of the
regulatory and legal system.

Compare countries: globalization. The Globalization Index from the KOF Institute in
Switzerland provides well-known and widely used measures of economic, social, and
political globalization. Each index reflects the degree of integration of a country with the rest
of the world.

Compare countries: internal and external balances. The three most commonly analyzed
balances are the Current Account balance, the Trade Balance which is part of the Current
Account, and the fiscal balance measured as government revenues minus government
spending. If a country has persistent deficits in any one of those balances exceeding 4 percent
of GDP, that could suggest the need to rebalance the economy.

Compare countries: infrastructure development. One could look at a number of indicators

to compare countries including the spread of mobile phones, the number of passenger cars,
the length of railroads, the capacity of ports, etc.

Compare countries: energy production and use. The energy statistics are abundant making
it possible to compare countries along many dimensions. Some of the most popular
comparisons are the use of energy per capita, the share of green energy used, the retail petrol
prices, and the energy used per unit of GDP.

Compare countries: health and education. The country comparison could be multi-
dimensional looking at inputs such as health spending per capita and outcomes such as
birth/death rates and disease prevalence. Similarly, one can look at the inputs to education
including spending and the outputs including literacy rates and school completion rates.

Over the past year, the Chinese economy has undergone a period of financial market
volatility and economic slowdown. Deep-seated structural problems, including continued
overreliance on public investment and exports for growth, a state-controlled financial sector,
and regulatory inefficiency, have become more acute. Debt at various levels of the economy
has been piling up as well, posing risks to long-term economic expansion.

Economic Freedom Snapshot

2016 Economic Freedom Score: 52.0 (down 0.7 point)

Economic Freedom Status: Mostly Unfree

Global Ranking: 144th

Regional Ranking: 31st in the AsiaPacific Region

Notable Successes: Trade Freedom

Concerns: Property Rights, Corruption, and Labor Freedom

Overall Score Change Since 2012: +0.8

Land

China is located at the east coast of the largest continent (Eurasia) as well as the western
margin of the largest ocean (Pacific). It has a land area of about 9.6 million square km,
occupying 6.5 percent of the total land area of the world. From the confluence of the Heilong
River and its tributary, the Wusuli River, westward to the Pamir Plateau, the distance is more
than 5200 km. From midstream of the Heilong River north of Mohe, southward to Zengmu
Shoal of the Nansha Islands near the equator, the distance is more than 5500 km. Its
population of more than 1.3 billion accounts for approximately one-fifth of the world
population.

China has more than 32000 km of coastline (including the mainland shore more than 18,000
km and island shore more than 14000 km), and a boundary line of more than 20,000 km,
bordered to the north-east by DPR Korea, to the north by Russia and Mongolia, to the west
and south-west from north to south by Kazakhstan, Kyrgyzstan, Tajikistan, Afghanistan,
Pakistan, India, Nepal, Sikkin, Bhutan and to the south by Burma, Laos and Viet Nam.

The country is marketed the following geographical co-ordinates: Latitude from about N53
31 to about N3 50 Longitude from E73 40 to 135 05

Land Reforms in China

Following the liberation of China in 1949, the central government of the People's Republic
of China published a Land Reform Law on June 30, 1950. The law abrogated ownership of
land by landlords and introduced peasant landownership. During the winter of 1950-51, land
was confiscated from former landlords and redistributed to landless peasants and owners of
small plots, as well as to the landlords themselves, who now had to till the land to earn a
living. The reform liberated productive forces, increased the productivity of agriculture, and
laid the basis for the industrialization of China. The law defined the principles and methods
for the expropriation and re-allocation of land. It protected the interests of rich peasants,
middle peasants (meaning self-sufficient peasants) and renters of small plots, as well as the
national bourgeoisies, so as to preserve and develop the productive forces as rapidly as
possible.
Nearly 310 million people were involved in carrying out land reform movement in the newly
liberated areas. Around 300 million peasants who had little or no land were assigned some
47 million hectares of land plus farm implements, livestock and buildings. The peasants
were relieved of rent payments equivalent to 35 billion kilograms of grain per year.

By the spring of 1953, with the exception of Taiwan and the ethnic minority regions of
Xinjiang and Tibet, land reform was basically complete, and the peasants had achieved
genuine liberation. The feudal system of landownership that had existed for more than 2,000
years was completely destroyed and the landlord class was eliminated.

Real Estate Sector

Real estate in China is developed and managed by public, private, and state-owned red chip
enterprises. In the years leading up to the 2008 financial crisis, the real estate sector in China
was growing so rapidly that the government implemented a series of policies - including
raising the required down payment for some property purchases, and five 2007 interest rate
increases - due to concerns of overheating. But after the crisis hit, these policies were quickly
eliminated, and in some cases tightened. Beijing also launched a massive stimulus package to
boost growth, and much of the stimulus wound up flowing into the property market and
driving prices upward, resulting in investors increasingly looking abroad.

Labor

Labor force; total in China was last measured at 806498521 in 2014, according to the World
Bank. Total labor force comprises people ages 15 and older who meet the International
Labour Organization definition of the economically active population: all people who supply
labor for the production of goods and services during a specified period. It includes both the
employed and the unemployed. While national practices vary in the treatment of such groups
as the armed forces and seasonal or part-time workers, in general the labor force includes the
armed forces, the unemployed, and first-time job-seekers, but excludes homemakers and
other unpaid caregivers and workers in the informal sector. This page has the latest recorded
value, an historical data chart and related indicators for Labor force - total in China.

GROWTH

Over the last 20 years China has got an extremely high savings rate, averaging around
40 %, Chinese economy has enjoyed one of the highest growth rates in the world.

At the beginning of the nineties there was an incredible increase in GDP, from 4% in
1990 to 12.7% in 1994.

In the ranking of GDP, in 2007 China surpassed Germany and in 2010 Japan.

Of course the gap whit the United State is still very large.
 In 2010, China is expected to score a gross domestic product amounted to 5000
billion dollars, while the U.S. is at an altitude of 15 thousand.

In the last years the country has been able to rapidly build up its capital stock and shift
a massive pool of underutilized labour from the subsistence-agriculture sector into
higher-productivity activities that use capital.

The Chinese economy expanded an annual 6.7 percent in the September quarter of 2016, the
same pace as in the previous two quarters. The figure was in line with market expectations,
supported by an increase in government spending, fixed asset investment and retail sales
while industrial output eased. For 2016, the Chinese government is targeting the economy to
grow between 6.5 to 7.0 percent. A year earlier, the economy expanded by 6.9 percent, the
weakest since 1990. On a quarterly basis, the GDP advanced 1.8 percent, the same as in the
June quarter and matching consensus. GDP Annual Growth Rate in China averaged 9.79
percent from 1989 until 2016, reaching an all-time high of 15.40 percent in the first quarter of
1993 and a record low of 3.80 percent in the fourth quarter of 1990.
INFRASTRUCTURE

INFLATION TARGETING, INTEREST RATES AND THE EXCHANGE RATE

THE BOOM IN CREDIT

Over the past two decades, Chinas nonfinancial sector debt has grown rapidly from a small
base. According to Bank for International Settlements (BIS) data, the government, corporate,
and household sectors collectively had $ 26.6 trillion in outstanding debt as of 2015. At 255
percent of GDP, China now has one of the highest leverage ratios among emerging
economies.

Rising leverage is a phenomenon observed in a number of emerging economies, not just

China, after the 2008-2009 global financial crisis. Still, judging by the rate of credit growth,
China clearly stands out in the past decade. Credit growth slowed after 2010, but the
outstanding balance of nonfinancial sector debt continued to increase by an annualized 18.1
percent between 2010 and 2015, consistently outpacing nominal GDP growth (Figure 1).
GROWTH AND EQUITY

Since initiating market reforms in 1978, China has shifted from a centrally-planned to a
market-based economy and has experienced rapid economic and social development. GDP
growth has averaged nearly 10 percent a yearthe fastest sustained expansion by a major
economy in historyand has lifted more than 800 million people out of poverty. China
reached all the Millennium Development Goals (MDGs) by 2015 and made a major
contribution to the achievement of the MDGs globally.

Yet China remains a developing country (its per capita income is still a fraction of that in
advanced countries) and its market reforms are incomplete. According to Chinas current
poverty standard (per capita rural net income of RMB 2,300 per year in 2010 constant
prices), there were 70.17 million poor in rural areas in 2014.

Rapid economic ascendance has brought on many challenges as well, including high
inequality; rapid urbanization; challenges to environmental sustainability; and external
imbalances. China also faces demographic pressures related to an aging population and the
internal migration of labor.

Significant policy adjustments are required in order for Chinas growth to be sustainable.
Experience shows that transitioning from middle-income to high-income status can be more
difficult than moving up from low to middle income.

Chinas 12th Five-Year Plan (2011-2015) and the newly approved 13th Five-Year Plan (2016-
2020) forcefully address these issues. They highlight the development of services and
measures to address environmental and social imbalances, setting targets to reduce pollution,
to increase energy efficiency, to improve access to education and healthcare, and to expand
social protection. The annual growth target in the 12th Five-Year Plan was 7 percent and the
growth target in the 13th Five-Year Plan is 6.5 percent, reflecting the rebalancing of the
economy and the focus on the quality of growth while still maintaining the objective of
achieving a moderately prosperous society by 2020 (doubling GDP for 2010-2020).
The pros of doing business in China

China is the worlds workshop, with the people manufacturing or assembling a wide
range of products in demand around the globe. Already an emerging-market success,
the country has plenty of room to grow before its considered a developed economy:

A strong financial-services sector: The countrys financial sector has evolved to

meet the needs of a modern economy with global trade. In addition, the Chinese are
savers, the national government has no debt, the banks have a good track record for
responsible lending, and consumers keep saving money so the banks have funds to
lend out to new businesses.

One billion consumers: Chinas large population is its greatest opportunity. Most
Chinese have a decent income by emerging-market standards. The Chinese have been
making money and saving it, waiting for the day when consumer products are easy to
get a day thats coming soon.

Privatization: Many of Chinas largest industries have been privatized, and the
government is working hard to convert more companies to private ownership
structures. As that happens, China likely will see more growth and innovation. And
international investors will have more access to securities in order to get exposure to
China.
 Over the last 20 years China has got an extremely high savings rate, averaging
around 40 %, Chinese economy has enjoyed one of the highest growth rates in
the world.
At the beginning of the nineties there was an incredible increase in GDP, from 4%
in 1990 to 12.7% in 1994.
In the ranking of GDP, in 2007 China surpassed Germany and in 2010 Japan.
Of course the gap whit the United State is still very large.
In 2010, China is expected to score a gross domestic product amounted to 5000
billion dollars, while the U.S. is at an altitude of 15 thousand.
In the last years the country has been able to rapidly build up its capital stock and shift
a massive pool of underutilized labour from the subsistence-agriculture sector into
higher-productivity activities that use capital.

Sectoral Break-Up
Since the introduction of the economic reforms in 1978, China has become the worlds
manufacturing hub, where the secondary sector (comprising industry and construction)
represented the largest share of GDP. However, in recent years, Service became a leading
sector who covers more than 50 %.
Agriculture
China is one of the world's largest producers and consumers of agricultural products.

Today Agriculture contributes for around 10% of China's GDP.

In the nineties we assist to a crises in the rural world.

The profitability of the grain cultivation decrease because the prices, state-controlled,
increase less than the production costs.

Many farmers leave the grain cultivation for other activity and between 1979 and
2000 the sowed surface decrease of 12%.

To finance the social service and the infrastructure the government multiply the taxes,
and the campaigns suffer insufficient investment: the poor regions miss the
agricultural means and the rich regions the resources are invested in industrial
activity.

Industry
China is the largest producer of steel in the world.

Since the founding of the People's Republic, industrial development has been given
considerable attention.

Machine-building and metallurgical industries have received the highest priority.

 China has emerged as an international hub for manufacturing activities,

with its cheap labor and deregulation reforms

China has been the largest recipient of FDI in the world. The countrys authoritarian
regime allows it flexibility to implement policy to incentivize

FDI from foreign companies and multinational corporations (MNCs). To further

incentivize FDI, China has liberalized and privatized some of its state-owned
enterprises, selling them at significantly less than market value.

The resultant heavy inflow of FDI enabled China to develop infrastructure, becoming
the worlds leading manufacturer of many durable goods (Zhang and Felmingham
2001; Zhang and Song 2002), and gaining credibility from international financing
institutions by establishing relationships with strategic foreign partners.

In addition, China has increased outward FDI with state-owned firms normally
seeking to invest in markets with large sources of available natural resources (supply-
side argument) and private firms seeking to invest in order to grow their reach and
global market share by taking advantage of a previously untapped nichedemand-
side argument (Ramasamy, Yeung, and Laforet 2012; Kothari, Kotabe, and Murphy
2013).

# Opportunities and Challenges in Emerging Market:

Where Are the Emerging Opportunities?

According to Jim ONeill, the economist recognized for coining BRIC (which later became
BRICS) as an acronym, the BRIC countries are already closely watched. The group Im
studyinglets call them MINT economiesdeserve no less attention. Mexico, Indonesia,
Nigeria, and Turkey all have very favorable demographics for, at the least, the next 20 years,
and their economic prospects are interesting.

In addition to MINT, other emerging market groupings being bandied about are CIVETS
(Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) and EAGLE (Emerging
and Growth Leading EconomiesBrazil, China, Egypt, India, Indonesia, Mexico, Russia,
South Korea, Taiwan, and Turkey).

However, while the aforementioned countries have been loosely grouped together as
synonyms for new growth, there are numerous voices cautioning companies and investors to
avoid perceiving them as the next BRICS of the global marketplace. Rather, some economists
tend to use broader geographic terms to describe trending migration of international
commerce. Terms such as the Global East or Global South describe a new regional trade
phenomenon while reserving recognition of each countrys potential for growth as being
discrete and unique.

Pros:

China is the worlds workshop, with the people manufacturing or assembling a wide
range of products in demand around the globe. Already an emerging-market success,
the country has plenty of room to grow before its considered a developed economy:

A strong financial-services sector: The countrys financial sector has evolved to meet
the needs of a modern economy with global trade. In addition, the Chinese are savers,
the national government has no debt, the banks have a good track record for
responsible lending, and consumers keep saving money so the banks have funds to
lend out to new businesses.

One billion consumers: Chinas large population is its greatest opportunity. Most
Chinese have a decent income by emerging-market standards. The Chinese have been
making money and saving it, waiting for the day when consumer products are easy to
get a day thats coming soon.

Privatization: Many of Chinas largest industries have been privatized, and the
government is working hard to convert more companies to private ownership
structures. As that happens, China likely will see more growth and innovation. And
international investors will have more access to securities in order to get exposure to
China.

Challenges:

Chinas transition to a market economy has been huge and mostly trouble-free, but
that may not continue. Possible risks include:

Demographic imbalances: The governments controversial one-child program has

kept the populations growth rate in check, and the preference for sons contributes to a
growing gender imbalance. The policy has also contributed to an aging of the
population the average age is 35. As the population starts to skew older and male,
it will shrink, and that may cause the economy to shrink, too as jobs are unfilled and
the population of single men grows.

Environmental damage: Chinas economic miracle has come at a high cost to the land,
the air, and the water. The country is losing agricultural soil to erosion and to
industrialization. The water table is dropping, access to clean water is limited, and the
air quality is terrible.
 Increased production and consumption is likely to tax Chinas resources further. If the
government and the people dont commit to improving the environment, Chinas
progress could dry up literally.

Potential for unrest: Communism is theoretically a workers party, but many workers
are unhappy, feeling underpaid for the long hours the work producing goods that sell
for high prices overseas some companies have experienced strikes. A shortage of
skilled workers is pushing some wage rates up, which makes other sources of cheap
labour more appealing.

And how long the Chinese people accept restrictions on speech and tight government
control over their lives remains a question. As China does more trade with the world
and has access to more ideas, the people may want more freedom.