Download Empirical Analysis of Financial Crisis and Enlightenments on China’s

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Empirical Analysis of Financial Crisis and Enlightenments on China’s
Enterprises’ Stepping Out
CHEN Wei1, YUAN Jing2
1. College of Foreign Studies, Shandong Institute of Business and Technology, Yantai, China, 264005
2. College of Statistics, Shandong Institute of Business and Technology, Yantai, China, 264005
[email protected]
Abstract: The subprime crisis occurred in America in August, 2007, spread so quickly that it became an
all-sided financial crisis. Financial stability of the whole world is being challenged severely by the
financial crisis, the real economy is being affected. Meanwhile, because of China’s fast economic
development, many China’s enterprises are qualified to step out to invest in international market.
Financial crisis brings great opportunities for China’s enterprises to step out in overseas market, but
there are also risks in their overseas investment. This paper aims to analyze empirically the causes of the
global economic crisis and the advantages of China’s enterprises’ stepping out in gloomy economic
situation. It tries to analyze global crisis’ effects on China’s stepping out, and thus to be enlightened by
the opportunities and risk in China’s enterprises’ overseas investment in order to step out successfully.
Keywords: Sub-prime crisis, Risk, Opportunity, China’s enterprise, Stepping out, Overseas investment,
Enlightenment
1 Introduction
The subprime crisis occurred in America in August, 2007 spread so quickly that it became an all-sided
financial crisis. It extended from virtual economy to the real economy, from developed countries to
developing ones, thus became a global economic crisis. After the financial foam, the unbalanced
economic crisis in some industries due to excessiveness is the direct display of economic crisis.
Economic crisis and financial crisis are co-related.
With China’s economic growth, many enterprises are with the factors to step out—to invest in overseas
market. Under the conditions of global crisis, there are both opportunities are risks in China’s
enterprises’ overseas investment.
This paper is to analyze the worldwide financial crisis empirically by showing macro-performance
indicator and the five major American investment banks’ changes of leverage ratio. It is to analyze both
the challenges and risks for China’s enterprises foreign investment.
2 Worldwide Economic Situations After Financial Recession and Factors that
Many China’s Enterprises have Achieved for Economic Growth
This worldwide financial crisis broke out because of the American sub-prime crisis. In general, there are
many factors that contribute to the American sub-prime crisis, among which the abuse of monetary
instruments of American Federal Reserve committee and the loss of financial market supervision of the
American government. Direct causes are the increased interest rate and the steady increase in housing
market, and people’s lack of realization in financial derivative instruments, these lead the sub-loan to be
converted to good assets by financial derivative instruments. Consequently, the problems may evolve
into crisis when the economic conditions change. The American financial crisis led to worldwide
financial storm because of dollar’s function of international currency and the especially important status
American economy is in worldwide economy. American financial crisis resulted in worldwide financial
storm.
Being affected by financial storm, during the second half year of 2008, the world economic situation fell
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down vertically. International institutions repeatedly decreased the long-term depression on world
economic growth. On the one hand, economy in developed countries faced whole recession, and the first
wholesale negative growth appeared after World War , such as Britain, euro area, Japanese and
America. On the other hand, although the rising economies’ high-speed increase has been paid close
attention to by international communities. But faced with financial crisis and global economic recession,
those rising economies cannot avoid slow increase, either, and some of them also declined. The rising
economies are with large market, cheap production input factors, potential market scale, and their
governments’ marketing consciousness of impel and capacity of adjustment. This basically enables them
to resist and go over the crisis. On the whole, being affected by financial crisis, the result (Table A)
shows that the leading position of America in international economic relationship has been reduced, but
it is still functional from the international macro-performance indicators its in 2007 and 2008.
Ⅱ
Table A: 2007-2008 World Chief Economy’s macro-performance indicator
GDP
(by Per capita GDP(by means GDP occupied in
GDP
of
GDP
of
purchasing
world share (by
Growth means
parity,
means of
rate( %) exchange rate, (American power
billion
dollar)
billion American
purchasing
American
dollar)
power parity, %)
dollar)
Brazil
2007
5.4
1 313.6
6 938
1 837.1
2.8
5.2
1 664.7
8 676
1 975.9
2.8
2008
China
2007
11.9
3 280.2
2 483
7 034.8
10.8
9.7
4 222.4
3 180
7 890.3
11.4
2008
India
2007
9.3
1 100.7
942
2 996.6
4.6
2008
7.9
1 237.4
1 043
3 305.4
4.8
Japan
2007
2.1
4 381.6
34 296
4 292.2
6.6
0.7
4 844.4
37 940
4 405.2
6.4
2008
Mexico
2007
3.2
1 022.8
9 717
1 486.3
2.1
2.1
1 142.6
10 747
1 550.3
2.0
2008
Russia
2007
8.1
1 289.5
9 075
2 089.6
3.17
7.0
1 778.7
12 579
2 285.2
3.24
2008
America
2007
2.0
138 076
45 725
13 807.6
21.34
2008
1.6
143 340
47 025
14 334
20.86
European 2007
3.11
169 056
—
14 753.9
22.73
Union
1.65
191 951
—
15 293
22.34
2008
Source of data: http://www.inf.org/external/pubs/ft/weo/2008/02
Popula
tion
(billio
n)
0.189
0.192
1.321
1.327
1.169
1.186
0.1278
0.1277
0.1053
0.1063
0.1421
0.1414
0.3020
0.3048
2.273
2.234
Under the conditions of China’s constant economic growth and China’s enterprises expansion, many
China’s enterprises are with good overseas investment preconditions, and there are many successful
cases in China now. After the year 2009, when the whole world is facing effects of financial crisis,
China’s central enterprises step out in overseas market by means of buying assets or enlarging interests.
On February 18, 2009, the Reuters news agency announced that by February 17, 2009, the purchase toll
from various overseas places of China’s enterprises have increased by 40% compared with the
corresponding time period in the last year. This involves the amount of money of $21.8 billion, which is
just second to Germany.
Along with America’s subprime crisis evolving into worldwide financial crisis, some China’s
enterprises’ overseas investments have incurred great losses. For example, China Investment
Corporation and CTTIC PACIFIC have faced great losses. Another typical example is the loss of Pingan
Insurance Corporation’s investment on Fortis Group in Europe—Pingan Corporation invested 28billion
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RMB and the investment decreased to 1billion RMB or so. It is obvious that besides the opportunities
for China’s enterprises from global financial crisis, there are also great risks. To know the present
financial situation well, to find risks and opportunities in financial crisis, and to take
on-time-countermeasures are of practical significance in guiding China’s enterprises’ overseas
investment.
3 Enlightenments on Opportunities in China’s Enterprises’ Stepping Out in
World Economic Depression
Being closely related to global economy, China’s economy is developing fast. International financial
crisis effects China’s stepping out—overseas investment, import and export, financial securities and
insurances, real estates, tourism, employment, economic growth and economic status –significantly.
Thus brings rare opportunities for China’s enterprises’ stepping out.
3.1 International financial tsunami devalued the stock market overseas, thus the capital prices are
decreased greatly
Some of the corporations’ stock value has reached the lowest order in history. In order to overcome the
financial difficulties, some of the corporations sacrifice their corporations’ assets or right of exercise
control. Some countries lowered the threshold of foreign investment. All those provide direct or indirect
potential opportunities for China’s corresponding corporations to step out. To some extent, the longer
the duration of international financial crisis is, the larger its destructive degree will be. The slower the
economic revival is developing, the more potential overseas investment opportunities will be.
3.2 There are the basic conditions of China’s enterprises’ overseas investment provided by China’s
sufficient storage of foreign currencies
A certain amount of storage of foreign currencies is an important means for a country to adjust its
economy and balance domestic and abroad economy. Under the background of the global financial crisis,
Iceland and Pakistan are nearly facing national bankruptcy because of being devoid of storage of foreign
currencies. While China’s economy is, and at least by far it is, being managed well in general.
3.3 Funds in great demand in the international market
The world financial crisis, originated from Wall Street in the United States, spread over the whole world
quickly. Countries in the world, both developed countries and developing countries, have been affected
in different degrees by this financial crisis. The American financial circles (Table B) shows that, by 2008,
the five major American investment banks—Morgan Stanley, Merrill Lynch, GoldmanSachs, Lehman
Brothers, and Bear Stearns Cos.—are all closed or converted to other forms.
Table B: 1998-2008 Five major America’s investment banks’ changes of leverage ratio
Source of data: sorted according to financial data of the 5 major America’s investment banks
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The unstableness of worldwide financial market is certain to lead to people’s lack of confidence in
investment, thus to result in their investment withdrawing. Meanwhile, being affected by the financial
crisis, the global stock market is declining severely. It should be mentioned that it is a great opportunity
for economically powerful China’s enterprises to step out in order to invest and merge in overseas
market.
3.4 The international society’s cooperation demand is the favorable political environment for
China’s overseas investment
The countries that are affected severely by this financial crisis, such as the United States and the United
Kingdom are at present in urgent need of financial support; the less affected developing countries, such
as Brazil, Chile are also in need of foreign investment, because China’s labor-intensive industries can
help them out of the unemployment problem; for the Middle East well-off countries that are with
abundant funds but devoid of dominant projects, are in urgent need of dominant projects’ pouring in, this
can helps them to make full use of sufficient scattered funds and realize the national asset
diversification.
3.5 The pessimistic expectation on world economy caused by the financial crisis leads to the
exchange rate of conversion from RMB to US dollars and Euros increases steadily
The export of China is diminishing rapidly, so stepping out to invest in overseas market has become a
choice for China’s enterprises to avoid exchange rate risk. By the look of long-term, changes of RMB’s
exchange rate are the trends of general adoption of the market principle. Besides exploring internal
potentials, the conditioned enterprises’ overseas investment is a good approach to disembarrass
themselves and seek for steady increase. China’s enterprises’ overseas direct investment can help sell
goods in international market, and avoid the adverse effects of appreciation of the RMB to a great extent.
And this can also help to round the target country’s trade barrier and other limitations, enlarge the
international market’s share effectively, and improve their own international competitiveness.
4 Enlightenments on Risks that China’s Enterprises are Faced with in Their
Overseas Investment
There is certain to be risks in overseas investment, and the global financial crisis originated from Wall
Street brings the world economic situation more uncertainties. Thus increases the risks for China’s
enterprises to invest in overseas market.
4.1 China is devoid of talents with transnational operation
In impelling China’s enterprises’ internationalization, the most difficult problem is how to spot talents
with overseas background and overseas operation and management. Besides the language skills, the
professional skills and industrial experiences, the field men sent abroad by their enterprises need to do
well in getting adjusted to the different cultures and interpersonal relationship. But at present, many
enterprises are lack of effective evaluation and training institutions. Most of the blindly sent field men
may result in failures.
4.2 China threat theory is the political barrier for China’s enterprises to step out
China’s economy is developing fast, and “Made in China” is extending volume growth in international
market. This is threatening the developed countries and the developing countries. The fluidity that has
been poured into financial market in USA and Euro area may devalue their currencies, thus brings losses
to the enterprises’ profits. And the countries that the investments belong to may give up or even resist
free investment especially during economic slump. They usually interfere in approving foreign
investment or take passive administration measures, which increases risks for the overseas-funded
enterprises. All those enlarge the risks of China’s overseas enterprises.
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4.3 The potential risks in overseas investment shouldn’t be neglected and the ability of controlling
investment risks is facing even bigger risks
The upgrade of the new trade protectionism, the rising global interest rate that might affect transnational
investment’s financing, and the changeable complicated international political situation affect the
overseas investment of China’s enterprises. Meanwhile, Economic Nationalism started from European
and American countries tends to spread in the whole world, and this worsens the global trade
environment, enlarges the risks and costs of transnational investment, and harms the normal national
market and fair competition. Besides, the financial crisis started from Wall Street increases uncertainty
of global economy, this undoubtedly challenges the overseas enterprises’ ability of controlling risks.
China’s enterprises’ ability in international operation and management, and ability of resisting and
tackling risks need to be strengthened. All those unquestionably affect China’s enterprises’ stepping out.
5 Conclusion
International financial crisis unavoidably affected China’s enterprises’ stepping out, but meanwhile,
there are potential fresh development opportunities. Enterprises’ stepping out needs governmental
political supports and corresponding services. This can bring conveniences for their stepping out on the
basis of equality. Faced with the unfavorable economic situation, China’s government and enterprises
should grasp the opportunities in crisis, and invest majorly on the newly emerging economies and
development countries. Under the premise of controlling risks effectively, choosing proper means of
investment and cooperative partners, entering the international market by many approaches, enforcing
the strategy of “stepping out” actively and reliably can help the enterprises reduce risks in overseas
operation and improve the quality and benefit of their overseas investment.
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