A GLOBAL / COUNTRY STUDY AND REPORT ON Role of Macroeconomic Factor in China

Submitted to K.P. PATEL SCHOOL OF MANAGEMENT AND COMPUTER STUDIES, KAPADWANJ IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In Gujarat Technological University Under the Guidance of Mr. Hitesh shah Asst. Professor Submitted by Patel Jalpen Panchal Rupen Machi rajesh Patel mukti Shah dhruvi Ms. Surbhi laddha 107240592049 107240592019 107240592042 107240592028 107240592029 107240592021

MBA SEMESTER III/IV K.P.PATEL SCHOOL OF MANAGEMENT AND COMPUTER STUDIES KAPADWANJ

Affiliated to Gujarat Technological University Ahmedabad November, 2011

Students Declaration
We, JALPEN,RUPEN,RAJESH,MUKTI.DHRUVI,SURBHI, hereby declare that the report for Global/ Country Study Report entitled Role Of

Macroeconomic Factor In China is a result of our own work and our indebtedness to other work publications, references, if any, have been duly acknowledged.

Place: KAPADWANJ Date

(Signature)
Patel jalpen Panchal rupen Machi rajesh Patel mukti Shah dhruvi Ms. Surbhi laddha

PREFACE
Being an M.B.A. student, it is necessary to prepare a global country report. Their object of practical training & knowledge is to develop atmosphere and all other business practices. The preparation of the whole report was a great opportunity for us to explore ourselves to the practical field. All analysis done by us regarding the CHINA country could make us all confident enough & prove ourselves. We could come out of the bookish knowledge. Preparation of such type of report calls for intellectual nourishment, professional help and encouragement. Due to report, we are exposed to the method and practices being use in the field of applications. With the help of companys information, we are come to know of style of functioning & operating activity of company. We also know how our knowledge is to be transformed to venality inform of company. It is indeed a golden opportunity for every in management.

Acknowledgement

Every student owes a great deal to others and we are no exception because learning is a process which entails give and take; exchange of ideas and value addition through discussions. So it gives us immense pleasure to be able to express our gratitude to one and all who have contributed to the successful completion of our project with a great learning. First and foremost, we would like to thank our project guide, Mr.Hitesh shah He gave us an in-depth knowledge of the working of the GCSR report and enhanced our understanding on its various aspects. His invaluable and significant guidelines improved our outlook and contributed in making our project a real learning experience. He also encouraged us to put in our best efforts and bring out the best of our abilities.

VI.CONTENTS

.No. 1

CONTENTS THE ROLE OF MACROECONOMIC FACTORS IN GROWTH

No. 1

2 3

ICT Industry in China MACROECONOMIC FACTOR WITH DESCRIPTION CONSUMER CONFIDENCE ABOUT CURRENT ACCOUNT CURRENT ACCOUNT TO GDP ABOUT GDP PER CAPITA (ADJUSTED BY CONSTANT PRICES) ABOUT GDP PER CAPITA ADJUSTED BY PURCHASING POWER PARITY ABOUT GOVERNMENT BONDS GOVERNMENT BUDGET GOVERNMENT DEBT TO GDP ABOUT EXPORTS IMPORTS CHINA'S INFLATION RATE EASES IN AUGUST INDUSTRIAL PRODUCTION

1 3 3 4 5 5

7 8 9 9 10 10 11

CHINA RAISES INTEREST RATES UNEMPLOYMENT RATE DEFINITION

11 12

THE ROLE OF MACROECONOMIC FACTORS IN GROWTH

It is now widely accepted that a stable macroeconomic framework is necessary though not sufficient for sustainable economic growth! In this paper I present international cross-sectional regression evidence that supports the view that growth is negatively associated with inflation, and positively associated with good fiscal performance and undistorted foreign exchange markets- I also present evidence suggesting that the causation runs in part from good macroeconomic policy to growth.

The view that a stable macroeconomic framework is conducive to grow this also supported by much striking non-regression evidence, In Latin America, the recovery of economic growth in Chile and Mexico was preceded by the restoration of budget discipline and the reduction of inflation.1 By contrast, the ongoing growth crisis in Brazil coincides with high inflation punctuated by stabilization attempts and continued macroeconomic instability. The fast growing countries of East Asia have generally maintained single or tow double-digit inflation, have for the most part avoided balance of payments crises, and when they have had them --as for instance in Korea in 1980 -moved swiftly to deal with them. The lessons of the case study evidence amassed in the major World Bank research project headed by Little, Cooper, Corded and Rajapatirana (1992), Summarized in Cordon (1991), support the conventional view. The notion that macroeconomic stability is aioli Sufficient for growth is supported by evidence from Africa, where most of the countries of the franc zone have grown slowly since 1980 despite low inflation.

Used the conventional approach of adding macroeconomic variables to the basic growth regression. In this paper, in Sections III through V, I develop an alternative approach due to Victor Elias (1992). a regression analog of growth accounting. I present both pure cross-sectional regressions as well as panel regressions, which exploit the time series as well as cr033-sectional variation in the data. I also explore non-sincerities in the relationship between inflation and growth. In Section VI I discuss the issue of the causality between inflation and economic

growth. Then in Section VII I identify and discuss some apparent exceptions, countries where high growth took place despite high inflation and/or large deficits, and conclude that the statement that macroeconomic stability is necessary for sustainable growth is too strong, but that the statement that macroeconomic stability is conducive to sustained growth remains accurate. The paper opens with a discussion in Section I of the notion of a stable macroeconomic framework, and of the theoretical considerations linking growth to macroeconomic policies. In Section II I briefly review recent evidence on the link between macroeconomic conditions and growth, most of it based on the standard mixed regression which includes among its repressors the rate of investment. ICT INDUSTRY IN CHINA China ICT industry has been an engine of the country's economic growth growing two to three times faster than GDP over the past 10 years. China's booming information industry is expected to maintain its robust health in the coming years. China imported USD$245.2 billion of ICT/Electronic products in 2007, approximately two-thirds of which were electronic components. Exports of ICT/Electronic products from China in 2007 reached USD$459.5 billion, accounting for 37.7% of the country's exports.

Overall revenues of ICT/Electronic products in 2007 increased by 18%, with computer manufacturing, communications equipment manufacturing and electronic components accounting for over 61.4% of revenues.2009 is expected to be a challenging year for both Chinas economy and Chinas IT market. IDC, global provider of market intelligence, recently lowered expectations for Chinas ICT market in 2009, adjusting the size of the market to US$71.16 billion, with the growth rate down from 13.5% to 9.1%.The ICT

market and its sub-sectors in China are enormous and continued growth is expected, but the industry is intensely competitive and there are many challenges in the regulation and management of the ICT industry which impact foreign participation in the market. There exists a strong bias toward large multinational companies with strong global brands and local presence. The Internet in China is strictly regulated by censorship, monitoring, and enforcement rules. The protection of intellectual property rights is of constant concern.China is focusing much effort and resources to improve its innovation capabilities. The State Council's Medium and Long-term Plan on S&T Development (2006-2020), calls for the government to actively take part to foster domestically-produced innovative technologies and reduce dependence on foreign technologies. This can present negative effects for foreign companies as the use of domestic standards and government procurement policies to favor indigenous innovation gives preference and protection to domestic industries.The regulatory framework of the ICT sector is complicated in China. The major watchdog is the Ministry of Industry and Information Technology (MIIT). Other government authorities involved in the ICT sector, depending upon the subsector, could include Ministry of Science & Technology (MOST), Ministry of Public Security (MPS), General Administration of Press and Publication (GAPP), and State Administration of Radio, Film and Television (SARFT). CHINA'S GROWTH STEADY AT 9.5% IN Q2 China's second-quarter GDP rose 9.5% from a year earlier, compared with 9.7% growth in the first quarter, the National Bureau of Statistics said on July 13, 2011. The rate of growth increased on a sequential basis. GDP rose 2.2% from the preceding quarter, the statistics bureau said, compared with 2.1% growth in the first quarter. Industrial production growth in June also came in much faster than expected, rising 15.1% from a year earlier, compared with 13.3% in May. Economists had expected it to slow to 13.1%.Many economists have said that they expect the central bank's latest rate increase earlier this month to be the last for the year, but the strong data calls that forecast into question for some. Non-rural fixed asset investment growth, a key gauge of construction activity, slowed slightly to rise 25.6% from a year earlier in the January-June period, compared with 25.8% growth

10

recorded in the January-May period. Retail sales in June rose 17.7% from a year earlier, compared with a 16.9% rise in May.

CONSUMER CONFIDENCE
Consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy. In essence, if consumer confidence is higher, consumers are making more purchases, boosting the economic expansion. On the other hand, if confidence is lower, consumers

ABOUT CURRENT ACCOUNT

Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. This means

Formatted: Font: 14 pt

11

that changes in the patterns of trade are key drivers in the current accounts of most of the world's economies. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Positive net sales to abroad generally contribute to a current account surplus; negative net sales to abroad generally contribute to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports. The net factor income or income account, a sub-account of the current account, is usually presented under the headings income payments as outflows, and income receipts as inflows. Income refers not only to the money received from investments made abroad (note: investments are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc. For example, the United States' net income has been declining exponentially since it has allowed the dollar's price relative to other currencies to be determined by the market to a point where income payments and receipts are roughly equal of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.

12

CURRENT ACCOUNT TO GDP

Current account balance as a percent of GDP (current account to GDP) is the current account a country has in percentage of its Gross Domestic Product. The current account is one of the two most important components of the balance of payments; the other is the capital account. The current account is the sum of the balance of trade (exports minus imports), net factor income (interest and dividends) and net transfer payments (foreign aid). Current account balance as a percent of GDP indicates the nature of a country's foreign trade. Usually, countries recording a strong current account surplus have an economy heavily dependent on exports revenues, with high savings ratings but weak domestic demand.

Formatted: Font: 14 pt

13

ABOUT GDP PER CAPITA (ADJUSTED BY CONSTANT PRICES)

The GDP dollar estimates given on this page are adjusted for inflation. The term Constant Prices refers to a metric for valuing the price of something over time, without that metric changing due to inflation or deflation. The gross domestic product per capita is the value of all final goods and services produced within a nation in a given year divided by the average (or mid-year) population for the same year. The gross domestic product (GDP) is one of the measures of national income and output for a given country's economy. GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the periodthat is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus.

Formatted: Font: 14 pt

ABOUT GDP PER CAPITA ADJUSTED BY PURCHASING POWER PARITY

Formatted: Font: 14 pt

14

The GDP dollar estimates given on this page are derived from purchasing power parity (PPP) calculations. Using a PPP basis is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income. However, economies do self-adjust to currency changes over time, and technology intensive and luxury goods, raw materials and energy prices are mostly unaffected by difference in currency (the latter more by subsidies), despite being critical to national development, therefore, the sales of foreign apparel or gasoline per liter in China is more accurately measured by the nominal figure, but everyday food and haircuts by PPP. The gross domestic product per capita is the value of all final goods and services produced within a nation in a given year divided by the average (or mid-year) population for the same year. The gross domestic product (GDP) is one of the measures of national income and output for a given country's economy. GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the periodthat is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits).

15

ABOUT GOVERNMENT BONDS

A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. The first ever government bond was issued by the English government in 1693 to raise money to fund a war against France. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes to redeem the bond at maturity. Some counter examples do exist where a government has defaulted on its domestic currency debt, such as Russia in 1998 (the "ruble crisis"), though this is very rare. As an example, in the US, Treasury securities are denominated in US dollars. In this instance, the term "risk-free" means free of credit risk. However, other risks still exist, such as currency risk for foreign investors (for example non-US investors of US Treasury securities would have received lower returns in 2004 because the value of the US dollar declined against most other currencies). Secondly, there is inflation risk, in that the principal repaid at maturity will have less

Formatted: Font: 14 pt

16

purchasing power than anticipated if the inflation outturn is higher than expected. Many governments issue inflation-indexed bonds, which should protect investors against inflation risk. Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. However government bonds are instead typically auctioned. A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds. Bonds must be repaid at fixed intervals over a period of time.

GOVERNMENT BUDGET
A government budget is a legal document that is often passed by the legislature, and approved by the chief executive-or president. For example, only certain types of revenue may be imposed and collected. Property tax is frequently the basis for municipal and county revenues, while sales tax and/or

Formatted: Font: 14 pt Formatted: Font: 14 pt, Not Small caps Formatted: Font: 14 pt

17

income tax are the basis for state revenues, and income tax and corporate tax are the basis for national revenues. The two basic elements of any budget are the revenues and expenses. In the case of the government, revenues are derived primarily from taxes. Government expenses include spending on current goods and services, which economists call government consumption; government investment expenditures such as infrastructure investment or research expenditure; and transfer payments like unemployment or retirement benefits. Budgets have an economic, political and technical basis. Unlike a pure economic budget, they are not entirely designed to allocate scarce resources for the best economic use. They also have a political basis wherein different interests push and pull in an attempt to obtain benefits and avoid burdens. The technical element is the forecast of the likely levels of revenues and expenses.

GOVERNMENT DEBT TO GDP

Government debt as a percent of GDP, also known as debt-to-GDP ratio, is the amount of national debt a country has in percentage of its Gross Domestic Product. Basically, Government debt is the money owed by the central government to its creditors. There are two types of government debt: net and gross. Gross debt is the accumulation of outstanding government debt which may be in the form of government bonds, credit default swaps, currency swaps, special drawing rights, loans, insurance and pensions. Net debt is the difference between gross debt and the financial assets that government holds. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and more likely the country is to default on its debt obligations.

Formatted: Font: 14 pt

18

ABOUT EXPORTS
Export goods or services are provided to foreign consumers by domestic producers. It is a good that is sent to another country for sale. Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon and eBay has largely bypassed the involvement of Customs in many countries due to the low individual values of these trades. Nonetheless, these small exports are still subject to legal restrictions applied by the country of export.

Formatted: Font: 14 pt

Formatted: Font: 14 pt, Not Bold, Not Sma caps Formatted: Font: 14 pt

CHINA'S INFLATION RATE EASES IN AUGUST

Inflation rate in China rose 6.2 percent over a year earlier, cooling from 6.5 percent in July, the National Statistics Bureau said on September 9.

Formatted: Font: 14 pt

19

IMPORTS
An import is any good or service brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Imports, along with exports, form the basis of international trade. Import of goods normally requires involvement of the Customs authorities in both the country of import and the country of export and is often subject to import quotas, tariffs and trade agreements. When the "imports" are the set of goods and services imported, "Imports" also means the economic value of all goods and services that are imported. The macroeconomic variable I usually stands for the value of these imports over a given period of time, usually one year.

Formatted: Font: 14 pt

20

INDUSTRIAL PRODUCTION
Industrial Production is an economic report that measures changes in output for the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of GDP (Gross Domestic Product), they are highly sensitive to interest rates and consumer demand. This makes Industrial Production an important tool for forecasting future GDP and economic performance. Industrial Production figures are also used by central banks to measure inflation, as high levels of industrial production can lead to uncontrolled levels of consumption and rapid inflation.

Formatted: Font: 14 pt Formatted: Font: 14 pt, Not Small caps Formatted: Font: 14 pt

CHINA RAISES INTEREST RATES

People's Bank of China increased interest rates for the third time this year on July 6, making clear that taming inflation is a top priority even when as the economy slows.

Formatted: Font: 14 pt

21

Benchmark one-year lending rates will be raised 25 basis points to 6.56 percent, and benchmark one-year deposit rates will be raised 25 basis points to 3.5 percent. Abundant liquidity and elevated commodity prices drove China's inflation to a 34-month high of 5.5 percent in May, unsettling Beijing which worries rising prices may stir social unrest.

UNEMPLOYMENT RATE DEFINITION

The labor force is defined as the number of people employed plus the number unemployed but seeking work. The participation rate is the number of people in the labor force divided by the size of the adult civilian no institutional population (or by the population of working age that is not institutionalized). The nonlabour force includes those who are not looking for work, those who are institutionalized such as in prisons or psychiatric wards, stay-at home spouses, kids, and those serving in the military. The unemployment level is defined as the labor force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labor force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of

Formatted: Font: 14 pt

22

working age). In these statistics, self-employed people are counted as employed.

Variables like employment level, unemployment level, labor force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over duration of time. Changes in the labor force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements from the labor force. Changes in unemployment depend on: inflows made up of non-employed people starting to look for jobs and of employed people who lose their jobs and look for new ones; and outflows of people who find new employment and of people who stop looking for employment. When looking at the overall macro economy, several types of unemployment have been identified, including: Frictional unemployment This reflects the fact that it takes time for people to find and settle into new jobs. If 12 individuals each take one month before they start a new job, the aggregate unemployment statistics will record this as a single unemployed worker. Technological change often reduces frictional unemployment, for example: the internet made job searches cheaper and more comprehensive. Structural unemployment This reflects a mismatch between the skills and other attributes of the labor force and those demanded by employers. If 4 workers each take six months off to re-train before they start a new job, the aggregate unemployment statistics will record this as two unemployed workers. Technological change often increases structural unemployment, for example: technological change might require workers tore-train. Natural rate of unemployment This is the summation of frictional and structural unemployment. It is the lowest rate of unemployment that a stable economy can expect to achieve, seeing as some frictional and structural unemployment is inevitable. Economists do not agree on the natural rate, with estimates ranging from 1% to 5%, or on its meaning some associate it with

23

"non-accelerating inflation". The estimated rate varies from country to country and from time to time. Demand deficient unemployment In Keynesian economics, any level of unemployment beyond the natural rate is most likely due to insufficient demand in the overall economy. During a recession, aggregate expenditure is deficient causing the underutilization of inputs (including labor). Aggregate expenditure (AE) can be increased, according to Keynes, by increasing consumption spending (C), increasing investment spending (I), increasing government spending (G), or increasing the net of exports minus imports (X?M). {AE = C + I + G + (X?M)}

24

25

Bibliography 1. www.google.com 2. www.tradingeconomics.com 3. www.livemint.com

26