The Economic Virtuous Cycle:Similarities And Difference Between China And France

PurposeThe aim of this paper is to point out the difference of the economic virtuous cycle between a developing country,China,and a developed country which is France.The economic virtuous cycle stands that companies need to be financed either by foreign direct investment(FDI)or banks.FDI are providing equity to companies while banks are financing companies thanks to liabilities and especially loans.Thanks to these financial capital,firms are able to buy assets and develop their businesses.Since companies are growing,they are hiring more employees and the whole economy is boosted since the population has a better purchasing power than previously.Purchasing power and consumption are highly linked.Major economists such as Adam Smith,David Ricardo and John Maynard Keynes have proved that the more a population has purchasing power,the more it is willing to consume.Yet,consumption is a key driver of the economy and account for a high part of the economic growth of a country.So,people are consuming more but also save more:the whole economy is benefiting from the growth of companies.Indeed,when people have a surplus of money,they want to invest their money to earn interest.The deposits made by the customers to the banks are useful for the banks which used it as loans to develop the companies but also for the customer since they are receiving interest on their deposit.The second way to make money for an individual is to invest an amount of cash into financial markets.These institutions are also taking advantage of this situation because they are providing capital and more especially equity to the companies in return of dividends to the shareholders.As companies have many ways to finance their activities it is easier to survive,grow and be profitable than a century ago.Big returns on investment are calling new investors and a part of them are foreigners which are taking part of a national economy thanks to FDI.This virtuous cycle has been described in many studies conduct by well-known scholars but none of them have tried to link all the factors stated above.Moreover,any economic comparison between China and France has never been done so far.MethodologyWe are going first to focus on the paper published on these subjects to define what are the different components of the study and highlight their finding in order to base my own analysis on reliable fact.The second part is going to describe which data we used and how they will be treated.The model we used are the simple linear regression model and the correlation coefficient in order to see if the two factors compared are linked and the power of this relation.Correlation coefficient will be used for small data set(when we compare yearly variation)and the regression will be used for larger data set(when we compare quarterly variation)because this model is irrelevant for too short data set.In this paper some specific aspect of the economic cycle will compare the Chinese and the French economic situation over the time period 2010-2015 for a reason of data availability.This period was also more and less economically stable.we have selected five sets of data per country to compare potential relationship within the economic cycle above.The first one is the annual value of the Gross Domestic Product(GDP)of China and France.The second one is the annual value of FDI inflows received by China and France.The third set of data is the annual consumption of energy represented by coal,oil and nuclear for both countries.The fourth set of data is the quarterly balance sheet of China Construction Bank,Industrial Bank of China and Bank of China.we did use the exact same quarterly balance sheet of Societe Generale,BNP Paribas and Credit Agricole for the French banks.The fifth one is the daily price stock exchange of the index CSI300,where the 300 biggest Chinese companies are grouped.And finally,we used the daily price stock exchange of the index CAC40 which the 40 biggest French companies are forming.The third part of the dissertation will be analyzed the data collected by the chosen model(either correlation coefficient or the simple linear regression model)according to the size of the data set collected.All the components of the economy will be compared to the variation of the GDP in order to demonstrate a possible relationship between the factor(FDI,consumption,bank's assets and financial market return)and the GDP of the country.After the analysis we will emphasized on the difference or the similarities between France and China and describe how these differences can occur and be explained in the most rational way.Finally,the fourth and last part will present the conclusion of this study and emphasized on the difference among the findings.FindingsThe results concerning China are quite positive and describe a strong relation between the evolution of various factors compared to the GDP growth of the Chinese economy.First,foreign direct investments inflows and GDP variation are strongly linked,since the correlation coefficient is around 0,9 it means that the FDI are increasing in the same proportion that the GDP and so GDP is benefiting of the raising flow of FDI in China.The second component is the consumption of energy,and here again,China shows a strong correlation coefficient ration about 0,95 which stands that the more China is consuming energy,the more the GDP will increase.The third point of comparison is the variation of the three biggest banks' assets and the GDP.This regression displays a weak to moderate relationship depending on the bank.When CBC's ratio is around 0,29 ICBC's ratio is around 0,48.However,the regression's results are reliable enough to affirm that banks are supporting the economy and the GDP growth enables banks to make profit via lending money to individuals as well as companies.The fourth factor we have compared with the GDP growth is the financial market return(the evolution of the CSI300 among the 5year-time period).This regression exhibits a very weak link between these two elements since the ratio is around 0,23.Finally,the fifth analysis was about to compare the banks' asset variation and the FDI inflow in order to see if they are benefiting from each other.Indeed,the result correlation coefficient is showing a moderate to very strong relationship between them.BOC is the one which is the most connected with the FDI in china.It shows a ratio of 0,91 when ICBC' one is around 0,49.Overall we can say that the FDI are allowing the banks to increase their assets via the contracting loans and the banks solidity is attracting more and more FDI to China.French result are more balanced:none of the analysis display a correlation between the given factor and the GDP growth.The correlation coefficient comparing FDI inflow variation in France and the GDP change over the 5-year time period is about-0,6 which means that when the FDI drops,the GDP should increase.But this result is not insignificant since France record a dramatic decrease of more than-1100%in 2014 making the analysis not reliable.Concerning the second factor,the correlation coefficient between energy consumption and the GDP variation present a ratio around-0,1.This negative value imply the fact that when the energy consumption is going up,the GDP should go down.However,as this ratio is really low it is insignificant and there is no link between the two factors.The third point studied is the banks'assets variation with the GDP.This regression is concluding that banks are not related to economy because the ratio of the three banks are insignificant too,oscillating between 0 and a 0,07.These results are very surprising since 100%of the French have a bank account,a relationship should be found between these components.The fourth part is a regression of the financial market return and the GDP growth in France.One more time the result displays no relation and imply that GDP and financial market are not correlated moreover,their movement are totally independent from each other.The final analysis concerning the banks' assets variation and the amount of FDI inflow received by France is really mixed since BNP Paribas presents a ratio at 0 while SG presents a strong relationship around 0,75.These results can be explained by the ability of banks to provide new services to foreign customer in order to match as much as possible their needs.LimitationsThe thesis limitations are the data availability.It would be more relevant if we could use only quaternary data for all the components compared in my paper.we also could have gone further by analyzing deeper the international integration of the two countries by showing the main economic partner and the balance of payment which would provide the main products and services imported and exported.