Macroeconomics Assignment Analysing The Market Situation Of China

Question

Task: Macroeconomics Assignment Analysing The Market Situation Of China

1. analyse current macroeconomic policy issues such as GDP growth, government debt, budget and current account deficits, inflation-targeting policy and changes in the cash rate

2. understand macroeconomic theories at an intermediate level focusing on both the short- and long-run topics; together with popular debate and specific policies and their outcomes

3. evaluate the monetary and fiscal policies aimed at stabilising the economy utilising the aggregate demand and supply framework

The report (3000 words) should use graphs and tables to discuss how changes in major macroeconomic variables and fiscal and monetary policies in the target country would influence your company’s long term investment decision. Based on analyses and justifications, your team needs to recommend to the CEO of the company if the country is a favourable one for long-term investment

The macroeconomic variables and policies that you need to consider are as follows:

General business environment (Links to an external site.)(starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency).
Economic growth and business cycles(Links to an external site.).
(Links to an external site.)
Average wage rate(Links to an external site.).
Human capital(Links to an external site.). (e.g. higher education).
(Links to an external site.)
Real interest rate. (Links to an external site.)
Government expenditures in the economy.(Links to an external site.)
Domestic credit to private sector. (Links to an external site.)
Taxation policy in the target country(Links to an external site.)
Governement expenditure on infrastructure(Links to an external site.) (e.g. internet, road, water, electricity).
Exchange rate regime and exchange rate fluctuation. (Links to an external site.)
Two examples of monetary policy in your target country in recent years.
Effects of the Global Financial Crisis (GFC) on your target country.

You do not need to present and analyse all above mentioned variables, but your set of selected and analysed variables need to describe the target country and industry well. The report should include five sections: (1) Brief Summary, (2) Introduction, (3) Analyses and Discussions, (4) Conclusion and Recommendations and (5) References List (Harvard)

Answer

Executive summary
The macroeconomics assignment aims to analyse the market condition for the Australian brand, which is aimed to expand its business in China. As per the finding it can be seen that during the last few decades, the Chinese economy has been facing astonishing growth that made it the second largest economy in the world. Back in 1978, China started its economic reformation, and at that time, it was the ninth largest economy in the world. During 1978 to post recession period in 2009, the Chinese economy has gone through various ups and down to become where it is now.

Compared to most of the country’s china weathered the recession period of 2008 to 2009 well owing to various reasons. For instance, the government policy of this country was outstanding, and the forecasting was right, that helped both the secondary and tertiary sector to hold a steady growth rate. Moreover, infrastructural development and time-to-time stimulus programs from government helped the economy to survive the economic crisis. Following the outcome of the analysis, it was recommended that the Australian firm is to consider different marketing and contingency plan as the Chinese market has been going through varied growth in recent days.

Introduction
This study of macroeconomics assignment discusses the market situation of China, which a weathered trade partner of Australia. The Australian company, which is aimed to expand its business in the Chinese market, need to know the market situation of the new place in order to determine the country specific marketing, pricing and segmentation policies. As per Hua et al. (2016), China is one of the largest developing economies in the world, which is located in Asia, with a population of 1.39 billion. According to the nominal GDP, China is the second largest economy of the world and the first if Asia is considered. Nominal Gross Domestic Product (GDP) of China is 11.8 trillion US$ according to the World Bank data, and the value reaches to 23.2 trillion US$ if Purchasing Power Parity (PPP) is taken into consideration (Hawthorne 2016). Since the initialisation of economic reforms back in 1978, this country has transformed itself to become where it is today. With the economic reforms of 1978, this country has become the manufacturing of the world. Share of the secondary sector in GDP is almost 45%, and the most significant chunk goes to the tertiary sector with 46.1%; meaning the country is developing at a large scale (Hua et al. 2016).

With the highest population count, China did well during the world recession back in 2008 and held a steady growth rate. Later in the year 2008, to safeguard the country’s interest in future, the Chinese government has unveiled a 585 billion US$. This stimulus has given enough funds to the market to raise excellent infrastructures and investment projects, which may seem as ‘Asset Bubble’ leading but it gave the country a growth rate of 9% (Pothen and Schymura 2015).

Current macroeconomic performance analysis in macroeconomics assignment
Considered as the 16th fastest growing economy according to the World Bank’s Global Economic Prospect, China is presently going through a transformation stage after a long boom period from 2009 to 2014. One decade ago, the country leapt forward all the previous GDP growth boundaries and became the fastest growing economy depending on the rise in export. With the substantial amount of foreign investment and infrastructure development, this country has become where it is now today; second largest economy in the world, next to USA with GDP of11.2 US$ (Hawthorne 2016).

macroeconomics assignment

Figure 1: China terms of trade
Source: (tradingeconomics.com 2019)

China’s Terms of Trade (TOT) was steadily above 100 points since the year 2005 to 2007 due to the government’s policies. Owing to high demand from Asian countries and rise in export, the major shift in TOT for China was caused. In the year 2009 Chinese economy reached the highest ever TOT 118.33 points which were mainly caused by China’s joining with the World Trade Organization in the year 2001 (Pothen and Schymura 2015). Chinese economy faced a major drop in production during the recession period in the year 2008 to 2009 owing to reduction in demand. However, during the post-recession session, China’s strong Current Account (CA) helped the country to have a steady growth making it 16th fastest growing economy in the world.

macroeconomics assignment

Figure 2: China Real GDP growth
Source: (ceicdata.com 2019)

A quick glance at figure 2 will depict that the percentage change in real GDP growth rate for China. Observing closely the trend above in this macroeconomics assignment, it can easily be seen that the Chinese economy had a high real GDP during 1992, which declined until 2000 and then it starts to rise again due to reforms from the government. Again, in the post-recession period, it degraded drastically; however, it is stable now and floating at 6.48% with effective plans from the government (Selden 2016). Considering the upward sloping line in figure 3, it can be easily inferred that the country has been growing steadily since 2006. At present China, with 959.37 US$ has the second highest per capita GDP.

macroeconomics assignment

Figure 3: China Per capita GDP growth
Source: (tradingeconomics.com 2019)

Following the economic reforms since 2002, the Chinese economy started to soar, and in the year 2008, the said economy reaches its highest GDP, leading to 15.40% annual GDP growth rate. However, there were some serious crunches in the annual growth rate in next year following the recession of European and American market. As per the analysis done in macroeconomics assignment it is seen that in 2009, the country experienced lowest ever-annual GDP growth rate, but in with the effective government policy it started to rise gradually. Presently Chinese economy is growing at a 6.80% annual growth rate (Wiedmann et al. 2015).

macroeconomics assignment

Figure 4: China GDP growth rate
Source: (tradingeconomics.com 2019)

Coming to unemployment, it can be divided into three parts depending upon its nature. Firstly, it is structural and then comes the cyclical and the third one is frictional unemployment. When it comes to structural unemployment, then it is the most stimulus resistant and permanent form of unemployment. Structural unemployment comes into existence either because of excess supply of labour, mismatching or obsolete skills of the labour. The term cyclical unemployment is self-explanatory, that depicts mass unemployment owing to facts like recession (Hua et al. 2016). This kind of unemployment mainly related to the primary sectors, where farmers tend to lose job when there is a drought or flood or the season is over. Frictional unemployment is a form of unemployment which occurs during the transition period. It arises because of mismatch in skills, benefits, salary. The main difference observed in the macroeconomics assignment between frictional and structural unemployment is the level of dependency on skilled labour.

macroeconomics assignment

Figure 5: china unemployment
Source: (tradingeconomics.com 2019)

According to the reports of the Ministry of Human Resources and Social Security (MOHRSS), Chinese economy has now had the lowest ever unemployment rate at 3.95. Currently the Chinese economy is producing almost 10.97 million new jobs every year, which is expected to rise to 15 million by the end of 2020. Considering the figure 5, it can easily be seen that the unemployment rate was steadily falling since 2006 and it was as low as 4.20% meaning the economy was growing rapidly (Xiao et al. 2014). However, owing to the recession in the year 2008, the country faced drop in demand and output production leading to unemployment. Statistical data from MOHRSS display that the unemployment rate was falling at 0.2% annually, which states the effectiveness of the government taken to avoid the recession.

Well, though the Chinese economy faced crunches during the recession in 2008, leading to rising in unemployment, unlike the western economies soon it started to fall. Big thanks for this astonishing performance of the Chinese economy go to the Chinese government and their ability to forecast the market accurately (Pothen and Schymura 2015). After the recession government introduced stimulus packages to eradicate any chances of future rise in unemployment, moreover, the government reformed their labour market and tried to enhance the number of skilled labours to grow both the output and reduce the chances of frictional as well as seasonal unemployment. New infrastructures were built to generate jobs as many as 15 million yearlies in order to reduce the number of structural unemployment.

China’s inflation figures have changed over time gradually, and presently it is 1.93% with the necessary reforms. Since the year 2006, inflation tends to rise and reach 9% mark following the rapid boom in the Chinese economy since the year 2002 (Xie and Zhou 2014). Till now the economy was showing positive relationship between per capita GDP rise and inflation, but the scenario changed soon when the recession sets in during the year 2008.

macroeconomics assignment

Figure 6: China inflation rate
Source: (tradingeconomics.com 2019)

According to figure 6 provided in macroeconomics assignment, it can clearly be seen that during 2009 the inflation rate was negative and depicts an inverse relation between the inflation and the real GDP growth. According to the studies of Zhang Chengsi (2009), the Chinese economy had high economic fluctuations during 1979 to 2007, and the overall rate of inflation was as high as 2.03% in average (Hua et al. 2016). In his study he concluded that the cyclical fluctuation in the Chinese economy was caused from the year 1992 to 1997 due to raise in general Cost Price Index (CPI). Moreover, the reason for fluctuation of CPI in the year 2000 to 2008 occurred due to economic reforms in China. Inflation peaked during 2008 to almost 9.00% due to decrease in demand for the commodity from the western countries.

Following the recession in 2008, it is mentioned in macroeconomics assignment that a positive relation was seen, but it never lasted for long because the rate of growth of change of GDP annually slowed down. The CPI changed almost 24.08% from 1994 to 2002 as compared to 3.9% change in the year 2009 (tradingeconomics.com 2019). This depicts that though there was positive relation between GDP growth and inflation before, but the scenario changed in the post-reform period.

macroeconomics assignment

Figure 7: Government spending of China
Source: (tradingeconomics.com 2019)

According to figure 7 provided in macroeconomics assignment, it can also be inferred that the government spending of China, is ever rising since last one decade. In 2017, it was highest but if the rate of change in government spending is concerned, then from 2009 to 2010 it was the highest. This government funding acted as the subsidy to mitigate the effect of inflation.

Government policies and outcome in the short run as well as long run:

Welfare system: The government in china is highly interventionist in nature, and it prefers to control the economic performance of the nation. On the other hand, Australia has much liberal governmental policy, which has aided it to become where it is now (Xiao et al. 2014).

Education: Chinese government provide free education to primary level and, when it comes to Australia, it has 20% higher literacy rate compared to china (Ehrich et al. 2016). Female education is higher in Australia compared to china; however, skill development program is available in higher number in china.

Market involvement: The Chinese government still believes in protectionist program to enhance ability of higher production of domestic firms, where Australian government rather than minimum wage rate legislation does not prefer to intervene in market (Hua et al. 2016).

Governmental policy impact on economy: China fuelled its continuous breathtaking improvement with gigantic government spending. Administration of China possesses significant command over its organisation that influence the economic performance of the state. Most of the private organisation has higher productivity compared to government organisations, yet government backing enables them to work properly (Lardy 2016). Compared to the ease of doing business rank in Australia, China is in a much better position which is largely been enhanced by the government initiatives. Moreover, it was also found in this macroeconomics assignment that Chinese enterprises are largely free from the event of bribery that makes it one of the safest Asian country to enhance business. Nevertheless, government ownership empowered China to direct the associations to high-require adventures.

The People's Bank of China, the nation's national bank, solidly controls the yuan to dollar regard. It does this to manage the expenses of admissions to the United States. It needs them to be to some degree more affordable than those conveyed in America. It can achieve this since China's run of the mill cost for fundamental things is lower than the world. By managing its transformation scale, China can abuse this uniqueness. Government spending made a total obligation to-GDP extent of 260 percent (Huang et al. 2019). This consolidates commitment held by the organization, associations, and purchasers. Since the state has various organizations, it must be consolidated. Client commitment may have also made a favourable position bubble. Urban cabin expenses have taken off as low-advance expenses fuelled hypothesis. High advancement levels have come to the detriment of buyer prosperity. The open has tested sullying, sanitation, and expanding.

It furthermore made a class of ultra-rich specialists who need continuously solitary opportunities. They live in urban districts since that are the spot an enormous segment of the jobs is. In 2017, pretty much 60 percent of the people lived in urban domains. During the 1980s, it was just 20 percent. Close by governments are blamed for giving social organizations anyway aren't allowed to appraisal to help them. Accordingly, families are constrained to save. China doesn't offer favourable circumstances to people who've moved from the residences to the urban territories to work. Advance expenses have been low, so families don't get much profit for their speculation reserves (Kaplan 2016). Accordingly, they don't spend much. That keeps private intrigue low and moves back improvement.

Monetary and fiscal policies to stabilize the market: It is discussed in the macroeconomics assignment that during the present date, china has been facing significant issues in terms of slow growth rate and wage inflation along with the rising paid economics, political development as well as social pressure in china. Wages are rising fast in China as it has hit a stage in its development at which demand for labour starts to grow faster than supply, creating labour shortages and pushing up salaries (Gao and Hafs 2015). As the Chinese economy has faced dropped in its fertility rate, by 2050, there will be 2 labourers available against every worker, aged 60 retiring. This situation has made Chinese economy to face higher labour demand and rise in the price. Besides governmental control on wage has forced the firms to pay high in order to keep income equality controlled. Presently it is aiming to develop the economy with sustainable approach utilising the use of rising in price and higher growth generation. This can ultimately lead to a long run squeeze in profits of the manufacturers leading to falling in country’s business preference rank.

macroeconomics assignment

Figure 8: AD-AS model with labour market
Source: (Kirchherr et al. 2018)

The situation of the Chinese economy can be explained with the AD-AS model underpinning the Labour market. As the market is facing fall in labour, labour demand changes from right ward making labour wage higher and output too (Figure 8). This rise in income, inherently rises the aggregate demand from AD2 to AD1, with rise in price from P2 to P1 with rise in output from Y2 to Y1. This in short run can enhance the performance of the economy, however will lead to falling in debt trap in long run as rising price will increase inflation, which will result in fall in Balance of Payments too (Kirchherr et al. 2018).

In order to overcome the situation mentioned in the macroeconomics assignment, contradictory monetary policy can be utilised that will lead to a fall in the money supply in the market and fall in the aggregate demand. Though the unemployment will rise, yet, the exorbitant rise in the price and income inequality will be checked in the long run.

macroeconomics assignment

Figure 9: Contractionary monetary policy
Source: (Hsueh 2016)

As per the figure 9, it can be seen that as the contractionary monetary policy is utilised by the government, it will lead to falling in the aggregate demand in the short run and real output along with price will fall. However, in long run, inflation will be checked with better prospect, that will counter the rise in the labour market price as well (Hsueh 2016).

Conclusion
It is to be concluded from the above analysis of macroeconomics assignment that the outstanding growth of China and its firm stand during the recession period in 2008 is something exceptional. Where most of the European countries and United States itself faced severe crunches in their GDP growth during the year 2007-2008, China grew its economy at a steady level of GDP growth. Much of the credit of this firm position of the country in the face of rescission goes to China’s government, who provided necessary stimulus to the market whenever necessary. In 2002, fourth generation of Jiang leadership became the paramount leader of the country, and since then the skyrocketing growth of the country set in. Government eradicated the trade barriers, established special economic zones, and allowed full foreign investment to give the economy much needed stimulus. China’s export industry has been providing necessary stimulus to the economy and to some extent, this is the main driving force that made china improving even in recession. Though the country was booming with the latest government planning by 2002, distribution of the wealth was not equal. Most of the wealth is concentrated on fewer people that forcibly keeping China under the upper-middle income group. Looking forward, china is working hard to bring parity in income distribution. Though the present GDP growth rate is 6.5% for this year, it is expected to rise by 0.1% every year till 2018. However, the present reforms in Chinese housing market, it is expected that the growth will reduce to 6.1% per year later in the year 2019. Besides this, the country is also trying to reduce its foreign debt by becoming self-reliant. Thus, for the new brand it would be ideal time to expand its business in the Chinese soil as the market is going through its growth stage, where the market demand for foreign companies is high.

Recommendation:
Considering the above analysis in this macroeconomics assignment following recommendation can be provided for the brand, which is aimed to expand its business in the Chinese market:

The Chinese market has been going through a transition as of now; where the market has high employee wage, low growth, however, government allows several special rebates and special economic zone facilities to the new brands. Thus, firm need to enter market as soon as possible for the input credit.
As a new entrant to the Chinese market, Australian firm needs to bring in a sophisticated and personalised marketing campaign to reach every prospect consumer.
Considering the contingency plan for the business development in the Chinese market is essential as the market is not in a very stable situation as of now owing to sloth in growth rate

Reference List
Ehrich, J., Howard, S.J., Mu, C. and Bokosmaty, S., 2016. A comparison of Chinese and Australian university students' attitudes towards plagiarism. Studies in Higher Education, 41(2), pp.231-246.

Gao, Y. and Hafsi, T., 2015. Government intervention, peers’ giving and corporate philanthropy: Evidence from Chinese private SMEs. Journal of Business Ethics, 132(2), pp.433-447.

Hawthorne, L., 2016. Labour market outcomes for migrant professionals: Canada and Australia compared.

Hsueh, R., 2016. State capitalism, Chinese?style: Strategic value of sectors, sectoral characteristics, and globalization. Governance, 29(1), pp.85-102.

Hua, Y., Oliphant, M. and Hu, E.J., 2016. Development of renewable energy in Australia and China: A comparison of policies and status. Renewable Energy, 85, pp.1044-1051.

Huang, Z., He, C. and Li, H., 2019. macroeconomics assignment Local government intervention, firm–government connection, and industrial land expansion in China. Journal of Urban Affairs, 41(2), pp.206-222.

Kaplan, S.B., 2016. Banking unconditionally: the political economy of Chinese finance in Latin America. Review of International Political Economy, 23(4), pp.643-676.

Kirchherr, J., Piscicelli, L., Bour, R., Kostense-Smit, E., Muller, J., Huibrechtse-Truijens, A. and Hekkert, M., 2018. Barriers to the circular economy: evidence from the European Union (EU). Ecological Economics, 150, pp.264-272.

Lardy, N.R., 2016. China: Toward a consumption-driven growth path. In Seeking Changes: The Economic Development in Contemporary China (pp. 85-111).

Pothen, F. and Schymura, M., 2015. Bigger cakes with fewer ingredients? A comparison of material use of the world economy. Ecological economics, 109, pp.109-121.

Selden, M., 2016. The political economy of Chinese development. Routledge.

Wiedmann, T.O., Schandl, H., Lenzen, M., Moran, D., Suh, S., West, J. and Kanemoto, K., 2015. The material footprint of nations. Proceedings of the National Academy of Sciences, 112(20), pp.6271-6276.

Xiao, L.D., Wang, J., He, G.P., De Bellis, A., Verbeeck, J. and Kyriazopoulos, H., 2014. Family caregiver challenges in dementia care in Australia and China: a critical perspective. BMC geriatrics, 14(1), p.6.

Xie, Y. and Zhou, X., 2014. Income inequality in today’s China. Proceedings of the National Academy of Sciences, 111(19), pp.6928-6933.

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