Geeli Harvard Case Solution & Analysis

Geeli Case Solution

Question.1)
From the perspective of US investors, what are the opportunities and challenges of investing in an emerging market economy like china? How does this compare to a Chinese investor investing in China? How does this compare to a Hong Kong investor investing in China?

Introduction

China is the most populated country with about 1.35 billion inhabitants. It has the fastest growing economy and some observers speculated that it could become world’s second largest economy with the growth rate that it has in two or three decades. It is also the biggest holder of foreign currency reserves having reserve of US $818.9 billion as per stats by the end of 2005 up 34.4% from $609 billion in 2004. China has gained much of its growth through exports. Since then there is an increasing trend of local residence migrating from rural infrastructure to cities and towns,which boosted the local consumption of goods and growing effect on the middle class, providing significant growth to the economy.

China is one of the emerging countries, which has a rising trend in consumption per capital (pc) with pc $1222 according to statistics in during 2001-2005. China is working on three aspects for his growth,which are:
• Restructuring the economy
• Boosting domestic demand
• Spurring green growth

Currently in China’s 12th five year plan a targeted growth rate was set at 7% for period from 2011 till 2015 with the aim of doubling China’s GDP by 2020.
Shifting towards Domestic consumption
China’s economy expansion has largely been driven by 3 domestic pillars:
• Investment
• Growth
• Domestic consumption

On the other hand,the country is increasingly relying on the imports of oil and minerals for its energy and resource needs. Costs of labor, land, water and resources are also on the high. Domestic consumption has been the weakest; growth in workers’ salaries is lagging constantly behind that of GDP. The rising cost of education, housing and health care, population of China is more towards savings over spending.

Concern for Investor

Doubling per capital income has two aspects for investors; firstly that labor cost will continue to rise, which may also affect inflation. However, the  Central bank of China will make efforts to bring inflation rate to 4%. Secondly, China’s domestic market will expand in the coming years.

According to the latest survey, three most problematic factors for doing business in China were Corruption, Inadequate Infrastructure and limited access to financing.
Opportunities of investing

The key sectors for investment include Agriculture, breeding, forestry and fishing, extraction, manufacture and services. High potential sectors are Chemical industry, insurance and bank, high technology, renewable energy, environment with some investing opportunities in monopolistic sectors.

Domestic stock markets

China has two domestic exchanges namely The Shanghai stock exchange and Shenzhen stock exchange established in 1990 and 1991 respectively with total market capitalization of $640 billion at the end of 2005.

There were three types of listed shared issued by Chinese companies:

Class A-shares: these are RMB Yuan denominated shares that are domestically purchased directly by the domestic investors and easily tradable.
CLASS B-shares: these are RMB denominated shares that foreign investors can directly purchase but using foreign currency either through HK$ or US$.
CLASS H-shares: these are Chinese company shares listed on the Hong Kong stock exchange that also purchasable by the foreigners through foreign currency.
The practice of Chinese is to have a Memorandum of Understanding MoU with each international stock exchange. Foreign investors can invest in the domestic market through domestic investment funds offered by the domestic institutions and through status as Qualified Foreign Institutional Investor (QFII). QFII is a program that China has introduced to allow, on a selective basis, foreigner investors in its RMB denominated markets........................

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