Early Warning System for Outward Chinese POEs

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2022 ZIBS Forum, on the theme of "Redefining the Triple Helix: Technology, Business, and Education in Digital Era", was successfully held on 5 Jan 2023. Scholars and subject-matter specialists presented their recent research findings on digital technology, innovation management, corporate strategy and sustainable development besides other fields of business studies.

The second part of the forum revolved around the integration of academia and industry in the new business era. In this session, ZIBS Postdoctoral Fellow ZHOU Dong presented his research work — "Early Warning System for Outward Chinese POEs", which was completed in collaboration with ZIBS Assistant Professor WANG Yiwei. Here's the review:

China POEs Globalization

There are over 140 million small and medium-sized enterprises in China. Most of them are private-owned enterprises and they contribute over 60% of the total GDP and 68% of exports. China's outward POEs have faced unprecedented challenges since early 2020, with the economic shock of the coronavirus pandemic.

Risk Ratings Landscape

We have studied full research about the POEs as they need risk ratings for their overseas expansions. The three most-watched credit rating agencies for country-specific risks are Standard & Poor’s, Moody’s, and Fitch Ratings. Other typical statistical rating indices include World Bank’s World Governance Indicators (WGI), Business Environment Risk Intelligence (BERI), Economist Intelligence Unit (EIU), etc. In China, we have Dagong Global Credit Rating, Country-risk Rating of Overseas Investment from China by the Institute of World Economics and Politics (CROIC-IWEP), SINOSURE’s Country Risk Reference Rating, etc. But these kinds of risk ratings are not suitable for POEs in China, because those companies’ demand is very special and should be customized.

Research Review

From the literature view, we have seen that country-specific risks cover a wide spectrum of China’s POEs conducting international trades and investments. Those risks can be categorized as economic, political, and social factors. Literature review indicates that qualitative and quantitative assessments or a combination of both are conducted with hundreds of factors being taken into consideration. In some cases, these risk factors can be intertwined.

Our Works and Contributions

Our research group builds a multi-dimensional comprehensive country-specific index system, based on which we can more scientifically assess the risks of various countries and industries. Our country-specific risk index is comprised of common risk factors, real-time risk factors, and industrial risk factors.

1

The first part is common risk factors. It includes 5 first-level indicators and 14 second-level indicators;

2

The second part is real-time risk factors. It includes exchange rate fluctuation, global stock market index, government bonds, etc;

3

The third part is industrial risk factors, including industrial production and imports and exports.

By combining three parts of the factors, we can apply the index for the POEs. This work is in cooperation with Zhejiang Federation of Industry and Commerce and Hangzhou Qiantang District.

China POEs Globalization

The common risk factors are comprised of global macro risk, economic risk, political risk, trade risk, and public health risk.

The first one is global macro risk and we introduced world uncertainty index (WUI). This index is provided by the organization of world uncertaintyindex.com. This is computed by counting the percent of the word "uncertain" (or its variant) in the Economist Intelligence Unit country reports. It's a word frequency, statistical technology. The WUI is then rescaled by multiplying by 1,000,000. A higher number means higher uncertainty and vice versa.

The second one is economic risk, and we choose GDP, inflation rate, unemployment rate, and gross debt position. These factors come from IMF and can be used in the index for providing economic risk worldwide.

The third one is political risk, which is comprised of control of corruption, government effectiveness, regulatory quality, political stability, and absence of violence. This path is coming from World Bank. We use it to describe how dangerous for our companies to enter the market of certain countries.

The fourth one is trade risk. The trade risk is from investment freedom, business freedom, and trade freedom. This data comes from the Global Economy, reflecting the trade risk annually and monthly.

The last one is public health risk. We know Covid-19 has been spreading worldwide. One of these indicators is confirmed cases and the deaths Covid-19. The other one is global health security index. 

For the real-time risk factors, we focus on three parts:

1

Exchange rate. The data comes from the State Administration of Foreign Exchange which provides daily exchange rate fluctuations. If the indicator exceeds our limits, we then give a warning signal to the companies;

2

Stock market index. This data comes from our cooperative partner iFinD. The APP provides our data, and they collect all the markets indexed, and if the percentage of the market is out the range, we give a warning signal;

3

Government bonds. It comes from Investing.com.

The last part is the industrial risk factor. The industry risk factor comes from the domestic market production and overall imports and exports of a certain company. The first one comes from the Ministry of Industry and Information Technology. We can analyze the status of industry through data on different industries, their productions, and their well-being. The data relating to imports and exports comes from the General Administration of Customs of the People's Republic of China. We use that to assess how the industry is imported, how many goods come from a certain country, and how much value they are worth.

Conclusion

By historical back testing and assigning weights for the factors discussed above, it is possible to provide a rating score indicating an overall risk level for a specific country. This index can give China’s POEs insights into the level of risk associated with business expansion in a specific country, and can directly provide support for corporate overseas business decision-making. Our index system can provide a reference, a manual for companies that want to expand international trade or international investment.

More reviews of the forum are coming soon, please stay tuned!

*This article is based on the speech made by ZIBS Postdoctoral Fellow ZHOU Dong at 2022 ZIBS Forum. The views and opinions expressed in this article are those of the speaker and do not necessarily reflect the views or positions of ZIBS.

ZHOU Dong

Postdoctoral Fellow

ZHOU Dong received his Ph.D. in Mechanical Engineering from Tsinghua University (2015). Prior to joining ZIBS, he worked as a Lecturer of Finance at the School of Economics, Zhejiang University of Technology, where he conducted research activities in the areas of Artificial Intelligence and FinTech with a special interest in machine learning for quantitative investing. He has published 12 papers in journals and conference proceedings, while 17 patent applications were granted in China for his novel research efforts. He is currently a member of Professional Committee of Natural Computing and Digital Intelligent City, Chinese Association for Artificial Intelligence (CAAI).

Writer｜KANG Yu (iMF 2022)

Editor｜LI Songjiao, XU Fan

Managing Editor｜CHENQI Lisha, ZHOU Dong

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