Investment under Event Risk in China Stock Market

Question: Describe about the Investment under Event Risk in China Stock Market? Answer: The Chinese economy have argued that the opportunities for investment-based growth have run their course and that major problems of underutilized capital equipment and unemployment of workers are inevitable, especially when the global economy slows down, unless the Chinese government switches from a strategy of investment-led growth to domestic market based growth on consumption expenditure. Do you agree with the above statement? Explain the costs and benefits of adopting such a strategy for a country like China. Hint: analyze this question in the context of the production possibilities frontier (PPF) of Text chapter 2. The immense GDP growth of China in recent years is considered as one of the impressive years to remember. From the year 1978 to 2007, the growth poses improvement as well as some serious problems which is serious in terms of destruction, rising inequality, destruction of environment and a consecutive problems of exploitation has been observed which includes forced labor, weak examination of product safety and migration of labor (Cai, et. al, 2007).In recent years, it was found that the huge export surpluses of china caught much attention globally. The external sources of demand cannot be measured by the surplus trade account of china. The market reform policy adopted by the government had achieved fast economic growth in the year 1978. It is seen that the rapid development of china was started from domestic frontier to raise the government and several households consumptions. However, the growth of china is highly based on the policy called fixed investment which played a major role on the growth of export (Liu, 2008).The economic growth only requires the growing demand which can drive the components to aggregate the demands based on investment, household consumption, external demand and government consumption. It is important to find the sources from which the economic drive gains its strength. Many believe that the growing aggregate demand is the sole reason to induce chinas economic growth. The dependence of china on external demand stands a threat for sustainability and also effect the fixed investment policy (Song, 2011).There is no such single perusal which has not supported the growth of economic market based on investment and export of china. They had started to maintain the economic growth by funding several investments from the year 1978 and propose many structural changes in the growth of the nation. Now china has both short run problems as well as long run problems because of the growing economic integration. Today, the economy of the world is inter connected, thanks to globalization, any major turnout can affect economic events and many political policies got turn down. Generally, the nation follows its economic policies made by their government. There can be no denying that China faces a huge crisis owing to their very large export surplus mainly because it is not sustainable for a very long period. If it somehow manages and attains some sort of a balance with its external account the ratio of the Exports to GDP presents serious threat. Questions often loom regarding why this should be a problem especially if the imports and exports were somewhat equal but this degree of economic integration brings along with it certain inevitable short and long run problems for the country. The basic short run problem pertaining to high export dependence is basically recession of the overall economy of the country. The main driving force of the Chinese economy has been private investment. Now it is well known that the simple macroeconomic model constitutes of the sim of private consumption and private investment without any government and foreign trade .Now since consumption interestingly is a function of income the levels of national incom e is found to be dependant on the levels of investment. But there can be no denying the fact that investment also happens to be one of the most volatile of all the components that constitute national income and brings in economic instability. Globalization seem to be considered on as one of unmitigated good by several well know economist, which force the Chinese government to switch from a strategy of investment led growth to a focused domestic market based growth on consumption expenditure. It is evident from the graph and previous research which help to provide a clear and precise idea about the statement. From the bar chart diagram it is evident that the china has shifted their strategy from investment led growth to domestic oriented market on consumption expenditure. Globalization transferred overall investment spending from developed countries to a less developed countries. Compared with other countries, domestic consumption expenditure in china has grown dramatically at aN exponential rate for a extended period (McElhatton and Jackson, 2012). The overall share of the domestic consumption in total expenditure in the Chinese economy is seen to be decreasing as the level of growth in the investment spending and the overall export has been even more exponential compared to consumption particular during 2000. Domestic consumption have growth exponentially in china over the past two decade, around 8 percent increase every year and rising at a rate of around 10 percent in the recent year. China real annual domestic consumption on average is around 3 percent point higher than the other emerging countries in Asia and 6 percent higher when compared to other G7 advanced countries. While domestic consumption has constantly show a generous growth in China, its share in GDP has considerable declined which resulted the Chinese government to shift their strategy form investment led to domestic market oriented which help to circulate and maintain a balanced economy. VAT on cars and number of other item has been decreased and several vouchers for certain durable goods purchase by the different rural sector have also been provided by the government (Rothstein, 2014). The government accomplished with several key strategies like lifting household consumption, imposing policies on the SME and increase in the social spending by the government and preparing several other strategies to decrease the focus on investment led growth. Consider the Chinese automobile sector for instance which at the moment is following a rapid growth curve. China happened to produce about 8.9 million motor vehicles which accounts to about one eighth of the total global production with an exponential growth rate of about 22% when during the same year the US market was found to shrink by almost 22%. According to Minsky (1986) capitalist market economy suffers from endogenous financial instability. Over the course of a business cycle, a robust financial structure tends to be replaced by a fragile financial structure. China has been gradually transforming and metamorphosing towards a market economy especially in the past two decades. The model of capitalist economy as per Minsky (1986) is C + I = WN + Where, C happens to be consumption and I is investment, followed by W which is representative of nominal wage rate, with N being the total labour force that is employed and is gross profits. It may thus be said that the framework of economic democracy is not supportive of growth of private enterprises. Promoting economic and social instability an environment may be generated in which the private enterprises will be able to grow along with public sector that is also growing at a steady pace. If the long run and long term future is taken into consideration then this system is more equipped to generate a long term success rather than a system that has its roots on neoliberal style capitalism. References: Cai, M., Wang, Y. and Wu, W. (2007). Investment under event risk in china stock market: A theoretical analysis. Economic Modelling, 24(4), pp.673-682. Liu, T. (2008).Impact of Regional Trade Agreements on Chinese Foreign Direct Investment.Chinese Economy, 41(5), pp.68-102. Song, H. (2011). Chinese Private Direct Investment and Overseas Chinese Network in Africa. China World Economy, 19(4), pp.109-126. McElhatton, E., and Jackson, B (2012). 'Paradox In Harmony: Formulating A Chinese Model Of Leadership'.Leadership8.4 (2012): 441-461. Web. Rothstein, Bo((2014):. 'The Chinese Paradox of High Growth And Low Quality Of Government: The Cadre Organization Meets Max Weber'.Governancen/a-n/a. Web. Minsky, M,L (1986).The Society Of Mind. New York: Simon and Schuster. Print.