Analysis of China as a Popular Investment Destination by Fund Managers - Essay Example

? An Analysis of China as a Popular Investment Destination by Fund Managers The rapid globalization in the recent decades has led tothe interconnection of the world economies. Accordingly, international investments have gained popularity since fund managers are able to look beyond their national borders for investment opportunities. The exponential growth of the Chinese economy in the recent past has made the region an attractive investment destination (Ahlstrom, Bruton, & Yeh, 2006). Although the era of double digit economic growth has ended in China, the rate of economic growth for the region is still high. Consequently, more fund managers from the United Kingdom have made efforts to invest in China since its economic growth rate is significantly higher compared to other countries in the world. It is imperative to note that investment fund managers are driven by the potential rate of return from a given region, and this is the motivating factor for choosing an investment destination. Advantages of Investing in China One of the advantages of investing in China is the magnitude presented in the potential of its market. Foreign ventures and businesses set up investments in order to serve a local market. The market size and growth rate opportunities are some of the key factors in the determination of an investment destination. Essentially, investors target unexploited markets that are of a significant size with potential for growth. Therefore, countries that have large markets and growth potential are viable investment destinations. The Chinese population of over one billion people offers a large market for any industrial products (Malkiel et al., 2010). In fact, the huge population has a great consumption potential that can be harnessed for business gain. In the recent past, the purchasing power of the Chinese population has also increased significantly, scaling up the uptake of goods and services. Therefore, the large population of the Chinese region attracts fund managers to invest in the region due to the potentially huge market that population offers. Imperatively, China is a prime location for any investor to pump financial resources into as the prospect of getting a market for the goods and services produced is high. The infrastructural development of a region has an influence on the economic growth of the place. The availability of roads, waterways and other forms of transport is a critical consideration in the evaluation of an investment destination. The Chinese administration has made significant investments in the transport infrastructure. In fact, popular investment destinations in China such as Beijing, Shanghai and Guangzhou have a world class transport infrastructure that offers a great environment for investment (Buckley, Wang & Clegg, 2006 p. 145). The availability of resources is an important factor in the selection of an investment destination. Human resource is a significant factor of production for any economic activity. The large Chinese population offers a huge pool of labor force that can be harnessed for economic production. The large population in China also implies that the cost of labor is significantly lower compared to other regions. One of the principles of business investment is the minimization of cost. The relatively low cost of labor in China makes the cost of business operations less than in countries in the European Union (Eichengreen & Tong, 2006). Hence, low costs of operations can offer a business an opportunity to obtain more profits in the long run. China also has substantial natural resources. Industrial production and manufacturing rely on natural resources to produce goods and products. China has its own oil reserves as well as the largest coal deposits on the globe. The supply of electric power is sufficient and affordable. It should be noted that the country has minerals and land which can be harnessed for economic gain. China has adopted policies that encourage openness to international trade as well as easy access to international markets. The export promotion strategy that has been implemented in China has made the country an attractive investment destination. The Chinese administration has adopted an open door economic policies in line with its export promotion policies that are geared towards improving its participation in international trade (Rajagopalan & Zhang 2008, p. 60). It should be noted that the country has made steps towards engaging in bilateral trade arrangements with several countries in order to encourage international trade. The country has also made policy changes aimed at reducing trade barriers on the global platform. China has opened its market to the international community and it has embraced the international trade system. Consequently, this has made it a top destination for investors who are interested in the international market. Notably, the international market is diverse and also growing at a significant rate. Thus, investments in China are likely to give more returns compared to other regions as the country taps the international market. China has progressively transformed. For instance, the region used to be under a communist regime and lacked the proper environment for investments. In fact, the country operated under isolation from the international community due to its political ideologies. However, China has evolved and amended its regulatory framework to accommodate foreign investors (Dexter, 2012). The country has implemented new laws that safeguard and protect the investments by foreigners. Thus, investors are confident that their money is safe and not liable to uncertainties. The country has relaxed some of its laws in relation to foreign ownership of property and enterprises. Specifically, state monopoly has been abolished in most sectors in order to allow for a level playing field. These changes in the regulatory framework have made the Chinese investment environment secure and accommodating for foreign investments. Investment protection has been given prominence in China and there have been no reported cases of investment expropriation for foreign investors. The Chinese administration enacted the Contract Law and the Joint Venture Law in order to protect investors’ interests (Rajagopalan & Zhang 2008, p. 62). The government has also made a significant effort to foreign investments by introducing special economic zones. Businesses operating in the special economic zones obtain incentives such as tax concessions and financial assistance from the government. These efforts by the government have made China an attractive investment destination for investors from various regions on the globe. The political environment in a country is also a key factor in determining the level of foreign investment. Political stability is a key factor that is necessary for any society to develop. Most investors evaluate the political environment in a given country to ascertain the risks and opportunities that are associated with the country. Suffice to say, no investor may be willing to pump his or her money into a country with a volatile political environment. China has a very stable political environment. The leadership of the country is run by the Central Politburo of the Communist Party of China. The Central Politburo is very stable and the transitions of leadership are smooth (Eichengreen & Tong, 2006). Therefore, China has the appropriate political stability that is required for long term investments. Investors can safely make long term investments without worries that a regime change may lead to sweeping changes in policy. Although China has issues in regards to its commitment to democracy, the present political structure is favorable for investors. The centralized form of government and its inherent tight control of the entire country give a unified economic approach throughout the country. Imperatively, there are different investment regulations in each of the provinces in China. The investment laws and regulations are controlled by the central government, thus they are uniform in all places in China. Disadvantages of Investing in China In as much as China has become an attractive investment destination for United Kingdom investors, there are some disadvantages or issues affecting foreign investments in China, such as intellectual property theft (Buckley, Wang & Clegg, 2006 p. 151). Cases of counterfeits are rampant in China. There are many companies that thrive by copying technologies of leading companies and making counterfeit products. Essentially, these companies steal the technologies of innovative companies and manufacture products that are similar. These counterfeit products eventually find their way into the local and international markets. This means that the genuine investors may not be able to reap any benefits from their investments. The other issue that negatively affects the investment environment in China is the low per capita income of people. According to the World Bank, China is still a developing country with a per capita income of $4, 940 in 2011 (Lumsden, 2012). This implies that the purchasing power of the people is significantly hampered since what is earned will cover the basic needs first. This means that although companies may be able to produce plenty of products, the local market may not be able to purchase all the products that are manufactured. Even though the legal framework in China has undergone changes in the recent past, there are still some legal barriers that negatively affect foreign investment. For instance, the Chinese legal framework does not allow for the operation of a one hundred percent foreign owned company (Rajagopalan & Zhang, 2008 p. 64). This means that a foreign company must have a significant local ownership of shares in order to be allowed to legally operate in China. This is a retrogressive requirement for other countries allow for the operation of foreign companies as long as they pay the requisite tax. In as much as there is a sufficient amount of labor in China, some areas lack quality labor force that is required for specialized industries. Some investment areas in China are situated in remote locations where it is difficult to find professionals who can run a company. This is a challenge that has negative implications on the smooth and effective running of an investment. Opportunities and Threats China has the fastest growing economy in the world. This implies that the financial service sector in China has tremendous opportunities for growth. Numerous investors are moving to invest in China, and this offers an opportunity for fund managers to provide specialised loans (Carson, 2012). Corporate financing is an opportunity that fund managers can take advantage of as most of the companies that seek to invest in China require long term financing. Although the global recession has impacted negatively the stock market, Chinese companies are gaining a limelight in the international scene. Hence, investment in the Chinese stock market is an opportunity that can be harnessed for future benefit. The retail sector is also an opportunity for investment. The huge Chinese population of over a billion people offers a large market for consumer products that can be sold. The government has increased the minimum wage in China, and this has led to increasing purchasing power of the people (Connon, 2011). Therefore, the retail sector offers a lucrative investment opportunity for international fund managers (Carson, 2012). The slowdown of the Chinese economy in the recent past is a point of concern in regard to the viability of China as an investment destination. Although the Chinese government has pumped in billions to mitigate the national economy from the global economic recession, the declining economy may pose a threat to the potential returns on investments in China. Also, the property boom that has been witnessed in the past decade may generate fears that the economy may implode. This is a challenge since other economies such as Japan experienced similar trends before their economies panned out. The inflating bubble is a worrisome trend as it affected the bank lending and inflation. The basic cost of food stuff has also been an upward trend similar to the rate of inflation. The increase of the minimum wage also poses a challenge to the operational costs of enterprises as they have to factor in the increased costs of labor. Conclusion China is a significant investment destination for foreign fund managers. The rapid growth of the Chinese economy in the past decade has made China an influential country in international trade. Heavy investments in infrastructure as well as availability of resources have played an important role in encouraging foreign investors to set up shop in China. The large population also provides a ready market for the manufactured products and goods. However, China faces challenges such as intellectual property theft, inadequate legal protection of investors and recession, which may discourage foreign investment. Although China faces challenges, there are lucrative investment opportunities in the financial, retail and logistics sectors. Bibliography Ahlstrom, D, Bruton, GD & Yeh, K. 2007. ‘Venture capital in China: Past, present, and future,’ Asia Pacific Journal of Management, vol. 24, no. 3, pp. 247-268. Buckley, J, Wang, C & Clegg, J. 2006. ‘The impact of foreign ownership, local ownership and industry characteristics on spillover benefits from foreign direct investment in China,’ International Business Review, vol. 16, no. 2, pp. 142-158. 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