The purpose of this paper is to employ the knowledge gathered about global capital markets to analyze the presence of China in these markets using its state banks as a case study to develop the discussion. The aim of this paper is to understand more about the relevance of global capital markets and their impacts on countries/corporations. The discussion ends with a conclusion that sums up the findings.
China is a developing economy and therefore, its access to global capital market is a strategic move to realize further economic developments. The Chinese government has developed policies that allow public firms to issue their equity in global capital markets although under its control. In this regard, it is questionable as to whether these public firms are transparent enough to equip foreign investors with the required knowledge about how they are governed and how they perform financially. The significant growth of China’s economy enabled by its economic reforms, those local firms that have made use of the global capital markets to access funds have earned some good reputation and would attract more reforms in the country. Nonetheless, the Chinese government determines which public firm is to issue its equity in the global capital market. Despite this condition, many Chinese firms are issuing their equities in the international capital markets and this trend is projected to continue. Such developments have been seen to influence the interests of foreign investors (U.S. Government Printing Office, 2004).
In China, the government developed policies to act on those public assets that were not valuable in the banking industry. The aim of this move is said was to commercialize the assets in order to make them have better returns for the public banks. The government managed to do this using the modern way of reviving those assets, which was the use of capital markets. The government preferred to make use of capital markets in order to reduce the cost it would incur to revive the assets. More so, the government needed the institutions to have better governance (Steinfeld, 2001). Steinfeld (2001) and Hill (2010) point out that global capital markets have principles that before resolving the financial problems of a public firm there should be reforms made in the governance structure of the firm as well as on the national government. More so, a public organization cannot restructure before the government reforms. The poor performance of the public banks in China is blamed on the failures of the government by controlling the banks excessively and hindering the market forces to influence their operations (Steinfeld, 2001). Steinfeld (2001) argues that failures caused by the government are those that are different from those caused by the market and those that are caused by the government are those that are more costly than those caused by the market are. Hence, the reform needed in the public banks, the Chinese government needed to reduce its controls and allow the market forces to influence their operations. The change is required in order to ensure capital is used efficiently.
Corporations list their stocks in the equity markets to raise capital. Comparing domestic equity markets with the global equity markets, corporations raise the capital in the global equity markets because of the better conditions they have than the domestic equity markets do. However, Lieberman and Kirkness (1998) argue that a corporation should not use global equity markets as a replacement of the domestic equity markets. Rather, should use them together in order to promote the development of the domestic market by attracting more local investors among other reasons.
Siddaiah (2009) informs that developing countries have been realizing significant economic growth through their equity markets which foreign investors look for to spread their risks by diversifying their investments. Today, there is increased globalization of investments and because of the efforts of developing the global economy, the domestic equity markets are being moved by the global conditions more than the local ones. One of the global conditions is deregulating the equity markets to ease future mergers and acquisitions.
Thanks to globalization, investing in global equity markets has been enabled and through deregulation of the equity markets, firms are now free to choose to raise capital from domestic equity markets or from the international equity markets. The choice to raise funds in global capital markets a company extends its ownership internationally and to list stocks in foreign markets enables it to take advantage of the liquidity of those markets. By doing this, the firm is able to get more funds and reduce its costs of capital. The additional funds can be used by the firm to make more investments and even compensate its local workers and such opportunities attract local investors. Global capital markets operate with certain international standards and a firm that is able to participate in these markets increases its transparency to its stakeholders. The domestic equity markets are not able provide the funds a firm needs for its business needs and, it is costly and riskier to only depend on these markets only. At the global capital markets, firms are able to borrow money at lower interests than from the local equity markets. If the domestic market realizes an economic challenge, the firm is affected unlike when it has diversified its investments in different countries (Aswathappa, 2008; Hill, 2010).
ICBC being a public bank, needed capitals to revive its assets to make them have better returns. The bank also needed better governance in order to improve its performance. The government found it costly to finance the bank and the global capital markets offered the solutions the bank needed. That is, more funds to revive its business and foreign investors that are more knowledgeable to run the bank would bring better governance in the bank. The standards of the global capital market would also enable it improve its governance/transparency to make it more attractive to foreign investors and local stakeholders. The presence of ICBC in the global capital markets improves the governance of the government as well as the local business environment The disadvantage of sourcing capital from global markets, makes the Chinese government to share the ownership of the bank with foreigners (Steinfeld, 2001; Hill, 2010; Aswathappa, 2008).
To enter the Chinese market, many foreign investors are entering the market through joint ventures but through the presence of ICBC in the global capital market, the investors may be able to enter the industry through mergers and acquisition. The foreign investors may also be attracted by investing in ICBC as a way of diversifying their investments in order to reduce associated risks (Hill, 2010).
The fact that ICBC is controlled by the Chinese government, a foreign investor may not have all the information required to make informed investment decisions. For example, the investor may not know about any financial assets that may have been used inappropriately in favor of the government that may hinder its future growth (U.S. Government Printing Office, 2004).
Using China and the state of its public banks as an example to understand the importance of the global capital markets was successful. From the study, it has been established that global capital markets are there to provide better sources of capital for organizations and they do so by improving their governance as well. Global capital markets improve the reputations of firms and foreign investors are attracted more on equities listed in these markets. China has a political system that is not conducive for its local businesses and this has affected their performance. To revive the firms, capital is required and to make the change required, their presence in the global capital markets is a necessity. Thus, ICBC may have benefited a lot from global capital markets just as other state enterprises already in the market have.
Aswathappa (2008). International business: International finance management. Berkshire: Tata McGraw-Hill Education.
Hill (2010). Management: international business 8th ed.: The global trade and investment environment. New York: McGraw Hill.
Lieberman, I. R. and Kirkness, C. D. (1998). Privatization and emerging equity markets, page 961: American depository receipts, global depocitory receipts, and other new financing instruments. Washington DC: World Bank Publications.
Siddaiah, T. (2009). International financial management: An international perspective. New Delhi: Pearson Education India.
Steinfeld, E. (2001). China’s program of debt-equity swaps: government failure or market failure? Retrieved< https://sites.hks.harvard.edu/m-rcbg/Conferences/financial_sector/China%27sProgramofDebt-EquitySwaps.pdf>.
U.S. Government Printing Office (2004). China’s presence in the global capital markets. Retrieved< https://www.uscc.gov/sites/default/files/transcripts/4.16.04.pdf>.
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