Nations with business or social activity in the process of rapid growth and industrialization are known as emerging markets or emerging economies. Emerging markets experience faster economic growth which is measured by increment rate of GDP and therefore investors are highly interested in them for the prospects of high returns. In addition to the high return, a risk is also involved due to domestic infrastructure problems, volatile currency, limited equity opportunities and political instability. Currently, some of the emerging economies which are considered worldwide largest are China, Russia, India, Brazil, Mexico, Indonesia and Turkey. These nations are in the process of moving from a closed economy to open market economy along with building accountability within the system. A brief discussion about China in terms of emerging markets along with opportunities and challenges for the investors follows in the sections below.
CHINA (a short description)
China is expected to be the world's largest economy by the year 2050. It is the world's largest country population wise with a population of over 1.4 billion and world's third largest country area wise with an area of 9.6 million square kilometers. GDP(Gross Domestic Product) of china was estimated to be 7.318 trillion USD in 2011 with a growth rate of about 9.1%. The graph below also shows the growth of GDP of china since 1990 and also compares it with the economy of Brazil, India, Russia and Mexico. Hence China is one of the biggest and fastest-growing emerging markets with significant long-term growth potential.
With such a rapid increase in its population as well as GDP, the middle class in china is also expanding, as a result creating a huge demand for real estate and a wide range of economic goods. It is reasonable to assume that a huge increase in demand will not be restricted to basic goods but result in greater demand for all consumer segments therefore making it even more attractive world market.
China is a communist nation and it maintains a tight control over people's lives while promoting private ownership, entrepreneurial ventures and international investment.
Opportunities for Investors in China
As China is one of world's largest emerging markets, it has plenty of space to grow before it can be considered as a developed economy. The factors which attract investors to invest in china are:
More than a billion consumers: The large population of china provides a strong consumer base making it the greatest opportunity to invest here. Most Chinese have a decent income by emerging-market standards. The per capita income of china (in US $) is also shown below in the chart over a period of last 12 years. With such an increasing per capita income, the Chinese population is waiting for the day when consumer products become easy to get.
A strong financial-services sector: The country's financial sector has evolved to meet the needs of a modern economy with global trade. Moreover, there is no burden of personal debt on government of china and bank lending is soaring following the scrapping of credit quotas and government pressure to finance building of infrastructure. The major problems like high inflation rate and an avalanche of speculative capital from abroad have disappeared. The graph below also shows the inflation rate of China over a period of last 12 years.
Privatization: The government of china encourages and supports private ownership structures, as a result many of china's largest industries have been privatized or on their way to privatization. With such private structure of its industries China is likely to see more growth and innovation. Also international investors will have more access to securities in order to get exposure to China.
Risks of doing business in China
While there is less scope for investors in developed economies, the emerging economies provide a broad scope for investment because of a number of good opportunities which may sometimes be followed by some troubles. The possible risk factors include:
Demographic imbalances: The government of china has imposed one-child policy in order to control its population growth rate. Considering such a policy, the preference for son as a single child contributes to imbalance in gender ratio of the country .This policy has also contributed to an aging of the population with the average age being 35. As the population starts to skew older and male, it will shrink, and that may cause the economy to shrink too as jobs are unfilled and the population of single men grows.
Environmental damage: A country directly or indirectly uses its natural resources for the development of its economy. The huge development of the economy of China is a result of excessive and careless use of its natural resources such as land, water, forest and air etc. As a result china is continuously losing its agricultural soil to erosion and to industrialization. The air quality is worsening every year and also water table is dropping causing limited access to clean water. Increased production and consumption is likely to exploit China's natural resources further. Any carelessness by government and its people towards improving the environment situation will eventually create an obstacle in growth of china.
Potential for unrest: China is a communist nation which means the government believes in classless, moneyless and stateless social order structured upon common ownership of the means of production, along with an ideology focused towards maintaining this social order. But most of the workers are not happy with the fact that they are underpaid for long hours of work producing goods that are exported for high prices all over world. This leads to the situations of strike and some companies have already experienced it. Also with the shortage of skilled workers wage rates are going up making other sources of cheap labor more appealing. And it is just a matter of time for how long the population of China accepts restrictions on speech and tight government control over their lives. As China does more trade with the world and has access to more ideas, the people may want more freedom.
Some Examples
Real Estate Industry
China represents a significant opportunity in real estate investment. All of the main drivers of real estate demand are strong i.e. economic growth, demographics, urbanization, rising per capita and household incomes, domestic investment as well as foreign direct investment (FDI). In near future, growth of this industry is expected to be driven mainly through consumer spending. Real estate investment is expected to become more dispersed around the country. Urbanization is one of the important factors for growth of real estate market. Estimates on urban population growth reach 200 million new urban residents by 2015, when 60 percent of the population is predicted to reside in urban areas which would initiate demand for housing, consumer goods and infrastructure. The consumer class is expected to grow prodigiously with higher wages and a declining savings rate.
There are also some factors which can be considered as risks for investors. There are risks of speculative excess. Moreover, developers generally operate with cash transaction, omitting out the possibility of a substantial profit for the tax authorities. Another risk includes the absence of a consistent legal and institutional framework as it is vague and arbitrary in terms of investment regulations, real estate rights and title. Real estate FDI in particular is perhaps the biggest risk involved currently in laws governing real estate. Foreign investors were really affected a lot with the sudden and uninformed changes to real estate FDI in July 2006. Such kind of unforeseen and sudden changes in the rules has the potential to severely affect the investments.
Entertainment Industry
China's two largest video-sharing sites are suing each other over copyright infringement. The conflict between NYSE-listed Youku and Nasdaq-listed Tudou stems from rights to entertainment programs, including many Taiwanese and foreign television shows. Chinese Web portals have competed fiercely for such programs, pushing up prices and cutting into profits. Despite rapidly rising revenues, both Youku and Tudou reported losses in the third quarter of 2011.
As government controls on traditional television continue to tighten, the Internet has become a popular venue for entertainment programs in China. While the dispute between Youku and Tudou is bringing more attention to copyright infringement issues, the increased visibility could result in more scrutiny from government censors.
