China's Economic Performance Analysis

This assignment requires a thorough analysis of China's economic performance. Students must utilize provided World Bank and other reputable sources to examine key indicators such as general government final consumption expenditure (% of GDP), domestic credit to the private sector (% of GDP), tax revenue (% of GDP), unemployment rate, real interest rates, and average yearly wages. The analysis should delve into trends observed in these indicators, highlighting any significant challenges or opportunities facing the Chinese economy.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Author note

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Executive Summary
The paper aims at analyzing importance of different macro variables on long-term
investment for a business organization. While starting business in any nation the macroeconomic
condition should be taken for consideration. The idea is to choose an Australia originated
company and considers its investment in any of its major trade and investment partner. The
chosen Australian company is BHP Billiton and the target country for investment is China. In
both the nation mineral industry is considered a vital sector of the economy. Apart from a large
producer of minerals, Chin constitutes a large and sustainable demand for imported raw
materials. The consumption demand is growing at an exponential rate. Since the growth began,
the demand for different mineral rose. Leading mining consumer, China has most high demand
for products like thermal coal and iron ore. For the two products, the consecutive demand in
China is 49% and 58% of world demand respectively. Mining sector in China is seen as a
fragmented industry. However, thee re several companies operating in this area, they are unable
to meet the growing domestic demand. Therefore, Chins has to rely on imported items. Australia
plays an important role in meeting China’s mineral demand from very beginning. Mining
industry is a crucial industry for Australia as well. In different part of the country, mineral and
ores are mined and use to meet domestic demand as well as demand for export. In view of
immense of importance of the natural resources and mining industry,the sector is chosen. Doing
business in China now becomes easier as the nation initiated different policies in favor of
business. Chia is recently going through a phase of slow growth rate. This can be a matter of
concern. However, China has sustainable growth plan for future and hence, will yield a good
long-term investment return. With a slow growth rate, unemployment is growing and along with

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this average wage is growing. The real interest rate in China is declining because of a reduction
in nominal rates. There is ample fiscal stimulus in terms of raising government expenditure. The
taxation policy in China is well designed and segregated among central, local and custom offices.
Government has recently pull back some of tax facilities provided to foreign companies.
However, there are still scope for flourishing business in China.

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Table of Contents
Introduction......................................................................................................................................4
General business environment.........................................................................................................6
Economic Growth and business cycles............................................................................................8
Unemployment..............................................................................................................................11
Average wage rate.........................................................................................................................13
Human capital................................................................................................................................15
Inflation..........................................................................................................................................17
Real interest rate............................................................................................................................18
Government expenditures in the economy....................................................................................21
Domestic credit to private sector...................................................................................................23
Taxation policy..............................................................................................................................25
Government expenditures on infrastructure..................................................................................27
Exchange rate regime and exchange rate fluctuation....................................................................31
Monetary policies in China............................................................................................................34
Effects of Global Financial Crisis in China...................................................................................35
Conclusion and Recommendation.................................................................................................37
References......................................................................................................................................41

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Introduction
China and Australia maintained a good international relation in terms of trade and
investment. Economic growth in China propelled since 1970. The economic growth has brought
growth in different sectors including manufacturing, infrastructure and smoothen the path of
economic urbanization. Along with demand has created for different raw materials, energy
demand for transport and electricity and other building materials for manufacturing. Since then
Australia is in a well position to meet the demand for the emerging economies. China is regarded
as the largest exporter and importer of Australia. A significant investment relation is also hold
between the two nations. In the new growth phase the drivers of economic growth has also
changed. The driving factor of growth has transformed from manufacturing led growth to a shift
towards production of a complex goods and services. This moderates Australia’s resource
demand. There is a transformation of China’s demand from an earlier demand of raw materials to
a broader demand of service, manufacturing and expertise. Investment decision in any country
depends on the macroeconomic environment of the country of interest. Macroeconomic
environment is a broad spectrum. There is no single indicator for reflecting overall macro
environment. Rather a number of different aspects needs to be evaluated. First important aspect
that needs to be considered in the prevailing business environment of the country. A favorable
business environment include aspects such as method of dealing to obtain permit for
construction, advantages of property rights, credit facilities, protection of the interests of small
investors, payment of tax, cross boarder exchange, enforcement of business contract and
resolving in the area of insolvency.

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Rate of economic growth is an important determinant of demand and return from
investment. There are fluctuations in economic activity with respect to different business cycle
phases. The extent of economic growth and business cycle fluctuation are therefore important for
selecting a destination country for investment. Scope of employment opportunities and average
wage rate prevailing in the industry determine the scope of expansion in the industry and
corresponding profitability. Availability of skilled labor force helps to attract foreign investment.
In today’s world, human capitals often considered more important than physical capital. Interest
rate is regarded as the cost of investment. Real interest rate is the inflation-adjusted interest rate.
Both inflation rate and real interest rate are useful indicators of macro environment. Government
is the central authority of any nation and expenditure incurred by government on improving
economic state of the nation indicate ease of doing business for investor. Government makes
investment in areas where private players do not find interest such as road, electricity, water and
internet. Along with government, position of private sectors also matters for determining the
business or competitive environment. The more is the flow of domestic credit to the private
sector, greater is the potential for private sector. An important instrument of government is tax. If
government is interested in encouraging private and foreign investors then it provides tax
relaxation for doing business. The government sets a rigid tax structure when government wants
to protect domestic economy from foreign competition. In case of foreign investment, exchange
rate is an important determinant of stability in the transaction process. Trends in exchange rate
helps to understand stability of exchange relation between nations. Monetary policy as designed
by the central monetary authority affects different macroeconomic variables such as Gross
Domestic Product, inflation and unemployment. Global financial crisis is a major
macroeconomic event that affects several nations at the same time. The extent of the effect

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depends on interim policy of nation to absorb external shock. Stronger the economy to resist
shock lesser is the impact of shocks.
In the report investment decision of BHP Billiton to one of the major trade and
investment partner, China is evaluated. BHP Billiton is one of the leading global companies of
metals, mining and petroleum based products. China constitutes large demand for Iron Ore. In
order to meet domestic demand China has to import Iron Ore overseas and often faces a very
high price. Therefore, BHP Billiton investment in China will help to explore Chinese mining
industry and at the same time will benefit the company as well. However, demand base is not the
only factor to be considered while taking investment decision. The macroeconomic environment
of the target country is the primary factor that determines the success of such investment. A
favorable macroeconomic environment ensures success of business investment and help to
sustain operation in the long-term. Therefore, recent macroeconomic condition of China is
critically analyzed to make the investment decision economically viable.
General business environment
This is the first and foremost important thing for business concern. While starting
business in a foreign country the business owner needs to get permission for setting up factories.
There should be easy availability of electricity and property rights needs to be well defined.
Apart from that other things come under a favorable business environment are access to credit
whenever needed, the structure of taxation that is whether a discriminatory tax practice for
foreign investors exists, facilities of cross border trade and legal arrangement for contract
enforcement . Whether China is a good investment destination for starting a business that
depends on these aspects.

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Table 1: Business Envirionment in China
(The World Bank, 2017)
The above table above shows the overall business environment in China as well as its
performance in different indicators that determine a favorable business environment. In an
overall measure of business environment China ranked 80 in 2016. In 2017, with reforms
undertaken for improving business condition rank improved by 2 points and now China holds the
position of 78.
China has made it easier to start a business there by simplifying different norms.
Business now can get code for registration, business license and tax registration only with a
single form. Availability of credit is an important thing for business. China has provided credit

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scores to commercial banks and financial institution and kept a track of payment histories. In
2016, China relaxes taxation norms for companies with a reduced payment for social
contribution. The mode of tax payment has now been made easier with availing facilities of
electronic filing system and payment of tax, adoption of new channels for taxpayer service. The
business owners enjoys less complex system of tax enforcement by amendment of civil
procedure code and a faster proceeding of court. China grants construction permit for business
with its simplified pre construction norms and approvals (Maro, 2014). Since its growth phase,
China always gives importance on establishing a good trade relation. To accelerate this trend
China has eliminated restrictions of trade credits in 2009. New legislation is made to enhance the
process of insolvency. Reforms in this section include introduction of reorganization procedures,
creditors’ committee formation, securing creditors’ right and establishment of a board of
bankruptcy administrators that deals professionally in case any inconvenience occurs.
Economic Growth and business cycles
Economic growth indicates a situation where capacity of the economy to produce goods
and services increase overtime. Gross domestic product of a nation reflects the monetary values
of goods and services that a country produces in the accounting period (Sherman, 2016). An
increase in GDP is an indicator of nation growth. Percentage change in GDP from one period to
another measures growth rate of a nation.
The economy does not always follow a smooth path of growth. The fluctuations in
growth rate is broadly explained in four phases- Boom, recession, slum and recovery. This is
known as business cycle fluctuation that describes the pattern of economic expansion,
contraction and recovery. Economic boom is defined as a phase of continuous progress and is

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characterized by high growth rate, high demand and greater employment opportunities. In times
of recession, there is contraction of economic activity as explained a declining demand, high
unemployment and low growth rate (Ilut & Schneider, 2014). A persistent recession results in
economic slump. In the recovery phase, the economy gradually recover from slow down phase
and move towards economic boom.
Figure 1: Phases of Business cycles
(Ilut & Schneider, 2014)

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Figure 2: GDP growth rate in China
(The World Bank, 2017)
Figure 1 describes the GDP growth trend in China. From 2000 to 2007, a sharp increase
in GDP growth rate is accounted for China. In 2008, the recorded GDP is very low as compared
to previous year reflecting a sudden downfall in its growth rate. This phase stayed for two years.
In 2009 and 2010, growth rate slightly recovered. China again enters in a declining growth trend
from 2010 and this continues.
Several factors are responsible for economic slowdown in China. The most significant
factor is excessive debt. The aggregate debt in China has reached to a level as high as 250% of
GDP since 2008. However, it initially helps China to recover from global financial crisis but
imposes a heavy burden of repayment. Most of these credits have been channeled to property

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market. With a fall in property, the economies of China affected severely. The slowdown of
Chinese economy is more of a result of cyclical fluctuation than structural change. The trend
economic growth is subject to correction of business cycle fluctuation. Al the cycles created are
not equal. With a closed financial system, China escapes from acute crisis but it made Chinese
economy vulnerable to bad debts.
Unemployment
Unemployment is a state when some potential members in the labor force are unable to
find jobs at the prevailing wage rate. This is an important macroeconomic indicator and related
with pattern of growth. In the phase of economic growth, with expansion of economic activity,
new job opportunities are created and unemployment rate is low (Pigou, 2013). At times of
contraction, business laid off workers and this increases unemployment in the economy. The
pattern of unemployment is thus related with pattern of GDP growth.

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Figure 3: Trend in Unemployment rate
(The World Bank., 2017)
The unemployment trend in China shows that unemployment rate fell sharply from 2000
to 2007. This is consistent with growth statistics of China. This is the phase when China’s
economy was experiencing a boom following a growth in manufacturing sector. Growth slows
down from 2008. During this time, unemployment rate rose sharply. In between 2008 and 2010,
unemployment fell but not as much as that in 2007. However, this trend does not sustain.
Unemployment started rising from 2011 and continues to rise though at a slower rate. The
problem of persistently rising unemployment has now become a major concern for Chinese
economy. China is a labor surplus economy. Earlier this has worked in favor of Chiba’s growth

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as labors are supplied at a comparatively low cost to manufacturing sector that fosters growth.
However, with technological advancement China has to use advance machines to compete
globally. The attempt to raise productivity results in a decline in employment growth. Effective
rate of unemployment is rate of GDP growth less growth of labor productivity (Fidrmuc &
Huang, 2015). The GDP growth rate in China fell short of growth of labor productivity. A
significant portion of labor force in China either are unemployed or under employed.
Unemployment has implications for new business. A new business always comes with
new employment opportunities. It is costly to make cross borders transition of labors. The
presence of unemployment implies existence of surplus labor in the economy. While making
investment in a foreign country the company require a minimal labor force strength. With
unemployment availability of labor increases. This is beneficial for both the company investing
and the target country. Mitigating unemployment is always a major policy goal of government.
Realizing limited scope of employment in the nation, government encourages foreign
investments and foreign companies. The government initiates to create favorable condition and
explores new business opportunities.
Average wage rate
Labor is an important factor of production. Labor receives wages as a return or
remuneration for the labor supplied. The wage cost constitutes a major part of business cost. A
rising wage cost means growing production cost and therefore a decline in the profit margin.
While deciding on business operation in a foreign country the company has to consider
prevailing wage rate in the country of interest. When wages are low then it seems profitable for

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the company to start business in that country. A high wage cost on the other hand might
outweigh the potential benefit of investment in the country.
Table 2: Earning of laborers in China (Men + Women)
(UNdata, 2017)
Figure 4: China’s average yearly growth rate

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(Trading Economics, 2017)
China is highly populated country. As a result, it is considered as a labor surplus
economy. The surplus labors were earlier available at a cheap rate. This contents the growing
manufacturing industry in China with supplying sufficient labor at a low wage. This is the reason
China maintains a low wage rate even in the phase of economic growth (Bian, Huang, & Zhang,
2015). However, trends in wage growth has now changed. In the last ten years, a considerable
increase in China’s wage growth is observed.
With a rapid growth rate in China, payment for employees goes up. Increased wage rate
is beneficial for the economy as it boosts average income and demand. The opposite side of the
story is high wage cost resembles to high production cost for companies. In view of high wage
cost, many companies have already shifted their business outside China. This contributes to job
loss for many workers and affects health of the economy (Yan, 2017). With rising wage cost,
many companies in China have now focused on using advanced technology and invested a
significant amount on in robots to adapt automation in the production technique. In China,
robotics market has grown to become largest in the world in 2013 and is still growing.
The rising wage is a concern for newly entering business organization. In the new
business environment, it becomes difficult for the company to sustain its operation with a high
wage cost.
Human capital
Today availability of human capital is equal or sometimes even more important than
physical capital. Human capital is described as the skills and knowledge that an individual
possesses. The more skilled the workers the more efficient is the production process. Human

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capital is like an asset that further helps to create other forms of assets. With a more modernized
world, human capital has become increasingly important. Any plan towards further progress of
business starts from its human capital assets (Martin, McNally, & Kay, 2013). A company can
increase its human capital base from extensive training and education. However, the first step
towards having a skilled labor force is the basic educations. Educational attainment is a primary
determinant human capital base.
Figure 5: Gross enrollment ratio in China
(The World Bank, 2017)
Figure 5 describes the gross enrollment ratio in China. The gross enrollment ratio in
China constitutes an upward trend. This gives a positive contribution to human capital formation.

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Inflation
Inflation in an economy is described as a situation where there is a continuous rise in the
general price level. The two contributory forces for inflation are demand and cost. A rise in
demand given its price pushes prices up. This is called demand-pull inflation (Mankiw, 2014). A
sudden increase in production cost because of increasing cost of factor input compel producers to
set price at a high level. This is cost-push inflation. Demand-pull inflation is beneficial for firms
as it gives them opportunity to sell the same product at a high price and hence increases
profitability. A low to moderate rate of inflation works in favor of economic expansion.
Figure 6: Trend of CPI inflation in China
(The World Bank, 2017)

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Rate of change in consumer price index is an average measure of inflation. The trend
inflation rate in China shows a fluctuating trend. There is no stability in the level of consumer
prices. In 2009, the inflation rate went to a recorded low level and became negative. The
negative rate of inflation is termed as deflation. This is the time when the economy had gone
through a downturn in almost all of its major areas. GDP growth rate was at a significantly low
level, unemployment rose because of economic contraction (Zhang, 2013). All these contributes
to deflation in the economy. In the next two years, with economic recovery price also regained
and reached at a moderate level of 5% in 2011. The four consecutive years of 2012, 2013, 2014
and 2015 inflation rate fell and remained in the range of 1% to 2%. This is the time when price
level gradually attained a stable level. In the next year, inflation rose slightly and goes a little
above 2%, however below 3%.
The producer price inflation in China has accelerated to a level beyond expectation. This
is resulted from a noticeable gain in prices and raw materials. The high producer price inflation
ensures growth both for industries and for the economy as a whole. The industrial firms in China
asserts the view that profit will be enhanced in the future again with a rising demand generated
from economic boom. The steel industry in China has recorded expansion at the fastest pace
since 2016. In this environment, investment of BHP Billiton in China is beneficial for the
company.
Real interest rate
Real interest rate is the inflation-adjusted interest rate. In a world of inflation, value or
purchasing power of currency changes continuously. When inflation rate increases then

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purchasing power of money decreases and in the phase of declining interest rate value of money
increases. Borrowers normally benefitted from rising inflation rate they have to pay a relatively
small return in real terms. Lenders on the other hand suffers from rising inflation as the money
they received as loan repayment worth less than when they were lent (Keynes, 2016). Therefore,
the same amount of investment though earn same rate of nominal interest but a different rate of
real interest and hence a difference return. Therefore, real interest rate gives a more accurate
measure of interest rate.
Figure 7: Real interest rate trend
(The World Bank, 2017)

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Real interest rate is obtained as nominal interest rate less inflation rate. Therefore, real
interest rate depends both on nominal interest rate and inflation rate. The trend in real interest
rate is consistent with that obtained in the for inflation rate. The years that recorded a high
inflation rate accounted for a low real interest rate. Similarly, the years having a low inflation
rate or a deflation points to a high real interest rate. In 2009, inflation rate in China had reached
to very low level and consequently real interest rate had reached to a peaked level. When
inflation rate started regaining then real interest rate started falling. In the last, two three years
real interest has constituted a declining trend.
Government in China considers a downward revision of the interest rate with the
objective of reducing borrowing cost for the companies and boost economic growth of China.
Chinese economy was facing a considerable downward pressure. This prevent economic growth
in the nation. Price level was declining at a much faster rate than that expected. This makes real
interest rate higher than the average historical rate. Low inflation rate indicates a downward
pressure of domestic demand. China is also facing a depressed demand for its traded goods
(Song, Storesletten, & Zilibotti, 2014). To pull back the economy to the growth track production
and investment needs to be encouraged. With this objective, a reduction in the official rate is
considered that reduces the real interest rate faced by the business firms.
Cut in interest rate means a lower borrowing cost and hence, is beneficial for doing
business in any nation. This makes China an interesting place for business investment for BHP
Billiton.

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Government expenditures in the economy
Government expenditure in a nation is an important determinant of Gross Domestic
Product. It has a positive contribution on GDP. Government makes expenditure on goods and
services to make the good available at a low price. All types of consumption, investment and
transfer payments incurred by the government included in government expenditure. These
spending are financed from the tax revenue earned by the government.
Figure 8: General Government Final Consumption Expenditure
(The World Bank, 2017)

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The figure above shows the government expenditure for final consumption expenditure
made by the government. The figure represents government consumption expenditure as a
percentage of GDP. Government expenditure for consumption has shown a declining trend more
or less. The decline for consumption expenditure means availability of more funds to make other
productive investment (Jia, Guo, & Zhang, 2014) There are different sectors in an economy
where private investors do not invest.
Figure 9: Total government expenditure in China
(Trading Economics, 2017)
Government expenditure for consumption has though declined but total government
expenditure has increased overtime. This indicates a shift in government focus from
consumption to investment. In recent years, because of a declining growth rate, government
needs to shift its focus from consumption expenditure and make productive investment.

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Domestic credit to private sector
Domestic credit supplied to the private sector measures the financial assistance given to
private sectors of the economy by different financial institutions in forms of loans, non-equity
security purchase, trade credits or any other receivable form. For a business, supply of credit
plays a crucial role (Dembiermont, Drehmann, & Muksakunratana, 2013). Especially for starting
up a new business, credit supply is very essential. It builds the capital base for the company. The
capital is used to purchase raw materials, purchasing machines and helps to recover its fixed
cost. Without sufficient supply of credit, it is not possible to continue business. Larger the
availability of credit more it is favorable for the firms.
Figure 9: Flow of domestic credit to private sectors in China
(The World Bank, 2017)

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The flow of domestic credit to the private sectors in China has increased sharply. The
credit ratio has reached to its peak level in 2003. In this year, China has experienced a high
growth rate. After that, growth rate fell and reached to the lowest level in 2008. One important
indicator of economic prosperity and development is the rising share of private sector
investment. The figure of domestic credit is expressed as a percentage of GDP. An increasing
trend in capital flow to private sector from financial institutions like bank and others imply
greater availability of resources for private sectors and hence greater opportunity for private
sectors. A flourishing private sector plays an important role for the economy. A strong private
sector secures efficient performance and a better health for the economy. In 2013, the ratio of
domestic credit given to the private sector and Gross Domestic Product recorded as 133.7%
(Chivakul & Lam, 2015). Giving opportunity to private sector is one factor contributing to
achieve a growth rate. China has allowed broader scope and opportunity to the private sector and
supported them with strong financing. This fosters economic growth in China and forms a mixed
economy going beyond communism.
Availability of credit to the private sector though is a positive sign for the economic
growth but this holds to a certain extent. A continuously growing credit to GDP ratio is
associated with a forthcoming banking or financial crisis. This is what China is experiencing in
recent years. As the growth trend of China shows recent years, China is suffering from a
slowdown in the growth rate. However, the credit ratio in continued to grow. Credit boom has
occurred in 2009 – 2010. The credit grow in China is associated with a steady economic growth
along with financial liberalization.

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Taxation policy
Apart from government expenditure, another vital component of fiscal policy tool is tax.
It is the only source of government revenue. Government designs separate tax structures for
individual and that for business firms. In times of economic contraction, government reduces the
tax rate. This indirectly raises the demand disposable income of the household and boosts
demand. This is called expansionary fiscal policy (Engström & Gars, 2015). During high
inflation, tight fiscal policy is adapted which corresponds to an increase in the tax rate. When tax
rate increases then people left with less disposable income and demand contracts, which controls
inflation. Expansion of business depend on the policy of taxation. If government imposes high
tax on corporate profit, then it seems less profitable to operate in the nation and business shifts to
nation having a less rigid tax structure. In order to encourage business government provides
concession of tax and other tax relaxations. This signifies favorable business environment.

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Figure 10:Tax Revenue as a percentage of GDP
(The World Bank, 2017)
The trends in tax revenue sharply increases from 2005 to 2009. Increasing tax revenue
means government has enough funds for public spending. In 2010, tax revenue decreases slightly
and remains nearly same for the next three years. In 2013 and 2014, tax revenue decreases
pointing towards an expansionary fiscal policy.
For a foreign company, while deciding on starting operation in a new country it is
important to have knowledge about the taxation laws and tax liabilities that it has to bear. In
China, collection of tax revenues are divided between 2 bodies of government – Central and
local. The highest authority of taxation is the State Administration of Taxation (SAT). It collects

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Value added tax (VAT), corporate income tax, consumption tax and other specific form of taxes
(Trade Commissioner, 2017). Below this level, there are local governments and bureau offices
collecting income taxes or other taxes. For imports and export concerns, there are custom duties,
Vat or consumption taxes collected by the custom administrative office.
Before starting business companies need to be registered to both Sat and local bureau and
custom office. The major taxes that are levied on business are corporate income tax; a tax
computed against profit, Withholding tax; tax imposed on derived income from China that
enterprises nor originated in China makes, VAT (Brean, 2013). Other forms of taxes prevailing
in China are consumption tax applicable on goods that are non-necessities or luxury items,
products having adverse impact on health and environment and different specialized taxes such
as land appreciation tax, stamp tax, deed tax, urban maintenance and construction tax and custom
duties.
In 2012, China revised its tax structures in favor of foreign companies. By this revision,
foreign companies are able to take a greater share of profit by paying a low tax rate. The
withholding tax rate is as small as 5%. However, since 2015 China has rolled back some of the
incentives given to foreign companies. The levied tax rate on foreign companies has also
increased. Coupled with this, intense competition from domestic companies and high labor cost
makes many companies to leave the nation.
Government expenditures on infrastructure
Infrastructure of the nation helps to determine the level of foreign investment. The overall
government spending of China’s government has increased overtime. In the composition of
government expenditure, the share of expenditure made on consumption has declined as shown

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above. Government has to make investment to make some basic facilities. These include the
spending on transportation and communication, electricity, water and other services needed for
country’s development. Nations having a good infrastructure provide a business friendly
environment.
Figure 11: Percentage of population having access to water resource
(The World Bank, 2017)

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Figure 12: Trend in electric power Consumption
(The World Bank., 2017)

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Figure 13: Fixed broadband subscription
(The World Bank, 2017)
The percentage of people having access to water resources has increased overtime. There
is a sharp increase in the number of people getting water. The consumption of electric power has
increased overtime.
The rising government expenditure in China gives a clear indication that the policymakers are
taking initiatives for improving economic growth of the nation. Annual government expenditure
has increased by more than 25% annually (Chow, 2015). The increasing government expenditure
provides fiscal stimulus and accelerates economic growth. In order to achieve a targeted growth
rate of 7% in the current year government spending on fixed asset has increased.

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The Chinese government has provided considerable support for the economy.
Government uses either fiscal or monetary policy tool to boost demand and growth. Government
expenditure and taxes are the two instrument of fiscal policy. Growth in the Chinese economy
has slowed down for several reasons. Change in fiscal policy earlier has made government
spending stringent and contributes to a slow growth rate in China. This along with other factors
contributes to a slowdown in Chinese economy. Considering this, government revises fiscal
policy and focuses on increasing its spending.
With a supportive government, it is favorable for the business firm to operate in a
country. The people in Chin smoothly enjoy different facilities such as access to water resources,
electricity consumption and broadband facilities.
Exchange rate regime and exchange rate fluctuation
Exchange rate between two countries is the amount of currency required to purchase one
unit of foreign currency. This is the most important determinant of trade relation between
countries. An increase in exchange rate means depreciation of domestic currency. This reduces
currency valuation of domestic currency (Ghosh, Ostry, & Qureshi, 2015). The depreciation of
currency always encouraged exports by making exported goods cheaper to the foreign country. A
decrease in exchange rate means the country has to pay less for one unit of foreign currency.
This means appreciation of currency. Whenever, currency appreciates imports become cheaper.
In a flexible exchange rate regime, the forces of demand for foreign currency and supply
of foreign reserves determine exchange rate. The movement of interest rate influences the
movement of exchange rate. A high interest rate means a high return for invested capital. This

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attracts foreign investment and raises the demand for home currency. The effect of high interest
rate on the exchange rate is offset in the presence of high inflation rate.
Figure 14: Trend of exchange rate between Australia and China
(The BIS, 2017)

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Figure 15: Recent trend in exchange rate
The graph above depicts movement of exchange rate between Australian dollar and
Chinese Yuan in last few years. No clear trend is observed in the exchange rate. As there are a
number of factors that influence exchange rate, the stability in the exchange rate is difficult to
achieve. Current regime of exchange rate in China is a combination of floating and fixed
exchange rate. Though there is no sharp increase or decrease in the trend exchange rate, an
overall decline in the exchange rate is observed. This is because of the Chinese government
policy or currency devaluation.
Export in China is seen as one of driving factor for growth. Currency devaluation is the
way of boosting export. During 2011, 2012, 2013 and 2014 the exchange rate was comparatively
high. During this time, China’s government has decided to keep its currency strong in order to
achieve an economic growth that results from rising domestic demand rather than export driven.
However, China failed to achieve its goal and in 2015, the actual growth rate fell 7% short of

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than that expected (The Conversation, 2017).The low growth rate has kept banks in China in
pressure and lack money to lend for investment in new equipment and establishing factories.
This puts further limit to demand drive growth and reliance remain on export sector.
A low valued Yuan helps the Australian company BHP Billiton to set up its factories at a
relatively cheaper rate. This would be beneficial for China as well because increased supply of
Australian dollar will push the exchange rate downward and help China to achieve a demand
driven growth as intended.
Monetary policies in China
Apart from fiscal policy, monetary policy is another major instrument of government
used to stabilize the economy. The primary objective of monetary policy is to control the
inflation rate and ensure price stability. The central monetary Authority controls inflation using
the tool of money supply. At time of inflation, central bank reduces the available money supply.
This increases the prevailing interest rate and reduces investment and demand. The low demand
brings prices down. In time of low inflation, demand needs to be stimulated. During this time,
Central Bank increases the availability of money supply. The increased money supply reduces
the interest rate boosting investment and demand.
The focus of monetary policy in China is to keep its currency RMB at a stable level and
foster economic growth. People’s Bank of China (PBOC) has implemented the objectives of
monetary policy. The target of PBOC is not limited to attainment of price stability and expansion
of employment opportunities. It intervenes in matters associated with low interest rate
differential in rural and urban region, prevents lending to some specific sectors, demand write off
for stranded assets with a change in policy prescription by central government.

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Recently, China has declared to adapt a tight monetary policy in terms of increasing
existing rates in the money market. The two most recent monetary framework includes
 Adaption of tight repo rate following a rise in MLF rate
 PBOC has shifted gears after the past impetus steadied economy
The central bank in China has implemented the tight monetary policy by increasing the interest
rate charged in operations in open market. The interest on funds lend through Standing Lending
Facilities has also increases it has the effect of checking the price of assets and inflation. The rate
for reverse repurchase repo has also been increased by 10 percent basis points. This is regarded
as the first increase ever since 2013. The recorded increase in SLF rate is 3.1 percent from an
earlier 2.75 percent. This is a surprising step of the monetary authority. However, PBOC has
given a string message of the tight monetary policy. The factory prices are rebounding in recent
years after facing some years of deflation. The policy intends to increase cost of borrowing in the
short tenure. Policymakers hold the belief that the current state of China’s economy demands a
combination of tight monetary policy and stimulatory fiscal policy. The low interest rate earlier
results in a raising the borrowing largely and raises the debt to GDP ratio (Chang, Liu, &
Spiegel, 2015). The current monetary policy scheme of implementing a tight monetary policy
through money market rates and lending facilities reflects the central bank‘s objective to achieve
a liberal interest rate.
Effects of Global Financial Crisis in China
The financial crisis originated in United States of America during 2007- 2008 is known
as Global financial crisis. Given the large size of USA, economy the crisis though initially began
in USA has its impact in many major economies across the globe and this makes the crisis

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global. The crisis had resulted from bursting of financial bubbles in housing market and investors
in USA lost their confidences. The effect gradually transmitted to other countries directly or
indirectly related with USA (Grant & Wilson, 2013). Some countries escape from the crisis
because of their crisis management technique while others severely affected.
China is regarded as one of few nations that escape from the adverse impact of financial
crisis. In the crisis time, China has experienced only a mild slight slowdown in its economic
activity. In the global financial turmoil, the closed financial system of China protects it from
financial breakdown. The partial impact of the crisis in China was derived from a declining
demand of export. China is highly depended on its export sector. Because of crisis, different
countries have reduced their demand of export. This affects China’s economy to some extent.
Despite that, China has maintained a relatively high growth rate even in the crisis period
(Constantinescu, Matto, & Ruta, 2015). A number of significant factors contributed the high
growth rate in the crisis period. First is its relatively strong fiscal position. The strong fiscal
position provide stimulatory package in the crisis time. The government of China adapts fiscal
and credit expansion during crisis. The budget deficit was relatively small and remained less than
3% since 2000 indicating strength of government budget (Breslin, 2016). China possesses a
large reserve of foreign exchange. In most of the emerging economies, tools of expansionary
fiscal and monetary policies create deficit in their balance of payment account. In this case, also
China points towards an exception. This allows China to undertake stimulus packages without
bothering about high cost of borrowing or possibility to end up with a crisis in the balance of
payment unlike most economies. In China’s economy because of restricted international capital

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flow, the foreign banks have little influence on domestic financial system. All these factor
together act to rescue the economy from the global crisis.
Conclusion and Recommendation
BHP Billiton is a global mineral company having it’s headquarter in Australia. The
company is recently planning to make investment in China, one of the major trade and
investment partners of Australia. The report evaluates the macroeconomic environment in China
to consider whether it is a wise decision on the part of the company to invest in China. The
business environment including different components such as dealing with construction permit,
getting electricity supply, the security of property registration, availability of credit, protection of
minority investors, taxpaying facilities, cross border trading, contract enforcement and attention
to insolvency problem. Overall, there is a favorable business environment in China. The country
has made improvement for providing different facilities to the business. The rank has improved
by two points. It now becomes easier for company to get business license, registration of tax, get
credits and other facilities. Apart from business environment, there are numbers of other thing
that matters for business. The next things that is considered is the economic growth. The growth
phases are explained using for phases of business cycles- phase of economic boom, recession,
slump and recovery. GDP grows sharply from 2000 to 2007. In 2008, growth slows down
because of global financial crisis but growth rate remains higher than most other economies.
Recently China is facing a slowdown in the growth rate resulted from a high debt share, crash in
property market and other business cycle fluctuation. With a slowdown in the growth rate, the
economy contract and job opportunities shrinks. This results in a rising unemployment rate in
recent years. A related aspect of unemployment is the wage rate. In the beginning of China’s

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growth phase, low wage rate works in favor of China’s growth rate. However, the situation has
changed now. The wage cost in China has now increased to a level higher than that in previous
years. Quality of the labor force is determined by the available human capital. Training and
education program makes positive contribution to increasing availability of human capital. Level
of education is viewed in terms of the gross enrollment ratio, which shows an upward trend
overtime. Rate of change in the price level or inflation is another aspect having direct
consequence on growth rate. The price level after facing a declining trend for three to four year
has regained since 2016 showing a hope to producers and business firms. Level of inflation
determines the actual rate of return on invested or borrowed capital through its impact on real
interest rate. With a fluctuating inflation rate, the real interest rare also constitutes a fluctuating
trend. However, from 2014 the real interest rate is decreasing. This is good news for business as
they can now borrow capital at a low rate of return. The fiscal position of China’s government is
strong. This allows government to make expenditure in needed sectors of the economy.
Government expenditure in China has increased significantly in the last ten years. Because of
which people now enjoys a greater access to water resources, electricity and internet connection.
The ratio of domestic credit to private sector has increased in China. This shows China’s reliance
on private sector as a driver of growth. The taxation policy in China is clearly designed and
distinct between central and local government. Any company, willing to start a business in China
has to be registered under all levels of tax authorities. Earlier China provided tax concessions to
foreign companies. However, many of which has rolled back now but some remains. China has a
hybrid exchange rate regime with having a combination of fixed and flexible exchange rate
system. Since, export is one of the key sectors in China government always intends to devaluates
currency to promote export growth. In addition to the fiscal policy, China is also giving focus on

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suitable design of its monetary policy. Recently, China has taken a tight monetary policy with
increase in different rates of money market and standard lending rates. The recent policy
stimulus of the government is an expansionary fiscal policy in combination with a tight monetary
policy. As far as the effect of global financial crisis is concerned, China escapes from the adverse
impact of the crisis. With a closed financial sector, the financial crisis has a less severe impact on
China. The export sector had faced a declining demand but the overall growth rate remain
positive.
China is believed to be one of the largest consumer of minerals. It constitutes a large,
sustainable demand for imported raw material. This makes China an attractive place for
investment in mineral industries. China has created favorable business environment. This
provides support to BHP Billiton decision to invest in China. Considering growing demand for
minerals in China, it is recommended for the company to pursue the decision of investment in
China. The slow growth rate in China in recent years can be a matter of concern but China is
taking adequate steps for recovering its growth rate. The growing unemployment statistics in
China indicates presence of a surplus labor in the economy. The company should set up plants
where it can easily employ theses surplus labor. However, it should also be kept in mind that
average wage of the labors are also growing. This can increases production cost and outweigh
the profits. Before setting up plants, it should have detail knowledge about the tax structure of
China. This will help the company to avail appropriate tax exemption and works in benefit of the
company. The company should set up factories in areas of special economic zone. In order to
maintain export growth China maintained a devalued currency. This woks in favor of BHP
Billiton both in terms of reducing its cost in China and can export products. However, monetary

40MACROECONOMICS
authority in China has declared to go with a tight monetary policy the nation maintains an
expansionary fiscal. The company should try to take advantage of the ease fiscal policy tool in
favor of business expansion in the new nation. China resisted the shocks of global financial
crisis and escaped from the severe recessionary shocks. The close nature of financial sector in
China protects it from external shock. Along with this, the strong fiscal position always helps the
nation to stay strong at times of crisis. This advantage works in favor of foreign investment in
China. Therefore, BHP Billiton should go for investment in China and carry out operation using
the favorable business environment.

41MACROECONOMICS
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