FIE454 Business and Finance in China
Autumn 2018Spring 2019
China is an economic superpower - two-thirds the size of the US economy, and three times the size of the next largest economies (Japan and Germany). Its vastly superior growth rate means that China will become even more important over the next decade. But China is capital-poor compared to Western economies. Thus both macro finance (central bank policy, exchange rates, fiscal stance) and micro finance (banks, stock markets, foreign investors) have a particularly important role to play in supporting Chinese growth. Moreover, the relationships between these elements are unusually complex. For example, Government budgets are significantly financed through the profits of State-Owned Enterprises (SOEs) and Township and Village Enterprises (TVEs), which also absorb the majority of bank lending. This generates a peculiar set of issues and unusual incentives (for firms, banks and the Government).
The course begins by outlining the onset of Chinese industrialization, starting with Deng Xiaoping's 1978 reform plan. The success of that plan generated both a lot of economic growth in the past and a lot of challenges today, such as how to reform the SOEs and free up capital for private enterprise. We then examine the situation of banks, which we consider through the record-breaking IPO of the Agricultural Bank of China (ABC) in 2010. This segues naturally into a consideration of local government finances, which are intimately bound up with the lending practices local banks and credit cooperatives, and with the success of the TVEs. The resulting limited volume of bank lending to private enterprise has spawned a massive shadow banking sector, which we then analyse through the travails of China Risk Finance. Stock markets are the other standard source of firm finance, and we look at Chinese stock markets through the lens of Venture Partners (the biggest hedge fund manager in Asia). We round out our consideration of the Chinese macro financial situation by looking at the Yuan exchange rate (which has been held artificially low for a decade or more) and Chinese overseas investment trends, both private and in the form of internationalization of SOEs.
We then focus on the problems of business finance. The explosion of Chinese economic growth has created many profit opportunities, but it is difficult for foreign firms to enter the Chinese market to realize them.Chinese corporate governance is poor by international standards, as we see in the China Netcom case. Thus entering China indirectly (by taking a local partner) involves the problem of monitoring to avoid expropriation, as evidenced by the electrical equipment supplier Realton. Yet entering at arms length (taking a financial stake in a Chinese company) involves the problem of valuing assets and detecting fraud: we learn through the Longtop Financial Technologies scandal that Chinese accounting practices provide only shaky foundations for such decision-making. But entering China directly, by setting up sales or production units, involves the challenge of managing relationships with Chinese workers (as the Japanese firm Sunshine Fashion found to its cost) and with the Chinese Government (as the Canadian wine importer ASC discovered). But not entering China can still be a problem: for example, intellectual property rights can be violated by Chinese firms selling copycat products, as Pfizer found with Viagra.
Upon successful completion of the course, the student will have attained:
- of the development of China since 1978
- of the current state of finance and business in China
- of the challenges, opportunities and modalities of doing business there
- to analyze business problems using theory and evidence
- to navigate business-to-business and business-to-government relations in China
- to consider ethical problems in a nuanced and culturally-sensitive way
- to work in small groups
- to prepare discussion points and present arguments in a meeting
The format is a class discussion, in which all students are required to participate fully every week. Students are encouraged to work in small groups to prepare for each class. Each week, every group member should read (at least) one of the items on the reading list, in addition to the case, and then discuss it in view of the assignment questions - with the rest of their study group. In this way, most or all of the reading materials assigned each week will be covered by every group before the class. The group can then use this knowledge in their discussion of the assignment questions, which serve to guide their analysis. In total, there are 15 classes of 90 minutes over the semester.
Requirements for course approval
Participating regularly in class. ("Participating" means actively engaging in conversation and debate, not just being present.)
A written 3-hour final exam; grading of class participation over the course. The overall grade will be based two-thirds on the final exam and one-third on the participation.
The exam, the participation and the overall grade will be graded on a scale of A to F
First, each week's class discussion will revolve around a business case; the case collection should be purchased online by the students. Second, the cases will be supplemented each week by a selection of research papers that are freely downloadable from the web or J-Stor. Third, parts of textbooks may be assigned, where appropriate.
- ECTS Credits
- Teaching language
Liam Brunt, Department of Economics