Brazil versus China:
A comparative study of their relative attractiveness as destinations for multinational firm´s

Table of Contents Pg.

1.0 EXECUTIVE SUMMARY 4

2.0 INTRODUCTION 4

2.1 History of Economy in Brazil 5
2.2 History of Economy in China 6

3.0 COUNTRY RISK 7

3.1China Country Risk 7
3.2 Brazil Country Risk 8 3.2.1. Current Political Issues in Brazil
3.3 Risk factors analysis comparison and Key reasons to consider 9
3.4. Current Issues in China 10 3.4.1. Fiscal policy 10 3.4.2. Monetary policy 10 3.4.3. External sector 10 3.4.4. General Political Environment 11 3.4.5. Investment Environment 11 3.4.6. Political Violence 12 3.4.7. China Political Outlook 12
3.5. Current Issues in Brazil 12 3.5.1. Real Sector 12 3.5.2. Monetary 13 3.5.3. External Sector 13 3.5.4. Fiscal 13 3.5.5. Outlook 13 3.5.6. General Political Environment 14 3.5.7. Investment Environment 14 3.5.8. Political Violence 14 3.5.9. Brazil Political Outlook 15
3.6 China Corporate Governance Law 15
3.7 Brazil Corporate Governance Law 16

4.0 FOREIGN EXCHANGE RISK 17

4.1 Brazil Foreign Exchange Risk 17
4.2China Foreign Exchange Risk 18

5.0 EXPANDED OPPORTUNITY SET 18

5.1 Brazil Opportunity Set 19
5.2 China Opportunity Set 19

6.0 ECONOMICAL OUTLOOK 19
6.1 Country Currency (FOREX) 19 6.1.1. Brazil Currency Outlook 19 6.1.1.1. USDBRL- Brazil Real Exchange Rate 20 6.2.2. China Currency Outlook 21 6.2.2.1. USDCNY-China Yuan Exchange Rate 21
6.3 Interests rates 22 6.3.1. Brazil Interest Rate 22 6.3.2. China Interest Rate 23
6.4 GDP 23 6.4.1. Brazil GDP 24 6.4.2. China GDP 24
6.5. Country Debt to GDP 25 6.5.1. Brazil Government Debt to GDP 25 6.5.2. China Government Debt to GDP 26 6.6. Inflation 27 6.6.1. Brazil Inflation 27 6.6.2. China Inflation 28 7.0 CONCLUSION & RECOMMENDATIONS 29
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EXECUTIVE SUMMARY
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Brazil and China have been two of the major emerging market success stories of the past few years, with both countries having weathered the global economic downturn with relative ease. 2011 saw Brazil and China move up the global economic league table, with China overtaking Japan to become the world’s second richest nation in terms of GDP, and Brazil overtaking the UK for sixth place.
Their successes have been the result of similar economic models: cheap labor fuelling a competitive export sector. China’s export strength has traditionally been based on the manufacturing of consumer goods such as clothes, toys and household items, while Brazilian manufacturing has tended to specialize in cars and machinery. This new-found wealth has slowly filtered down to the masses, with both countries seeing a notable expansion of their middle class populations, leading to booms in demand for consumer goods, and further stoking their economies.
The outlook for both countries over the coming decade looks promising. Brazil’s recently appointed president Dilma Rouseff has introduced the second stage in the country’s infrastructure spending program, known as the PAC2. Meanwhile, China is expected to experience the strongest GDP growth of any major economy in 2012, with the International Monetary Fund (IMF) forecasting a figure of around 9 per cent.
From an export perspective, however, it looks as though China and Brazil are on course for increasingly different trajectories, with a possible trade war threatening to erupt between them. While Brazil has traditionally been able to rely on its competitiveness to drive its manufacturing sector, the increased strength of its currency, the real, over the past few years and a consequential rise in the price of its goods have started to become a concern. Cheap Chinese imports are flooding the domestic market and undercutting locally-made products. In contrast, China’s currency, the renminbi, continues to be weak – many believe that its value is being deliberately restrained by the Chinese government.
Economically, though, we find that Brazil is the best alternative for MNC seeking to get established abroad. The robust export trade is complemented by higher consumption of goods and services within Brazil, a country of 190 million people. More exports and local sales add up to more tax reserves to pay down the national debt, not to mention build infrastructure. Growing consumption and the positive economic climate in Brazil present an ideal framework for expansion and opportunity for corporations in Brazil.
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2.0 -------------------------------------------------
INTRODUCTION
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Many multinational companies are now realizing that they can no longer have emerging market strategies which solely look at those markets largest cities. Multinational companies seeking to gain a competitive edge and access markets with tremendous growth potential should be looking at opportunities for investment outside the traditional investment centers in economies like Brazil and China.
The People's Republic of China (PRC) is the world's second largest economy after the United States. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. The country's per capita GDP (PPP) was $8,394 (International Monetary Fund, 90th in the world) in 2011. The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of that economy.

The economy of Brazil is the world's sixth largest by nominal GDP and is expected to become fifth by the end of 2012. Brazil has moderately free markets and an inward-oriented economy. Its economy is the largest in Latin American nations and the second largest in the western hemisphere. Brazil is one of the fastest-growing major economies in the world with an average annual GDP growth rate of over 5 percent. With a population of over 190 million and abundant natural resources, Brazil is one of the ten largest markets in the world, producing tens of millions of tons of steel, 26 million tons of cement, 3.5 million television sets, and 3 million refrigerators. In addition, about 70 million cubic meters of petroleum were being processed annually into fuels, lubricants, propane gas, and a wide range of hundred petrochemicals. Furthermore, Brazil has at least 161,500 kilometers of paved roads and more than 93 Gigawatts of installed electric power capacity.
Brazil, together with Mexico, has been at the forefront of the Latin American multinationals phenomenon by which, thanks to superior technology and organization, local companies have successfully turned global. These multinationals have made this transition notably by investing massively abroad, in the region and beyond, and thus realizing an increasing portion of their revenues internationally. Brazil is also a pioneer in the fields of deep water oil research from where 73 percent of its reserves are extracted. According to government statistics, Brazil was the first capitalist country to bring together the ten largest car assembly companies inside its national territory. The annual Brazil Investment Summit takes place in São Paulo and is the largest gathering in Brazil of international investment experts covering opportunities in alternative vehicles, infrastructure, and advanced trading strategies.
With still high levels of inequality, though it has diminished in the last years, the Brazilian economy has become one of the major economies of the world. According to Forbes 2011, Brazil has the 8th largest number of billionaires in the world, a number much larger than what is found in other Latin American countries, and even ahead of Japan. By the end of 2011, Brazil's economy had become the world’s sixth-largest.

2.1 History of Economy in Brazil

According to the World Economic Forum, Brazil was the top country in upward evolution of competitiveness in 2009, gaining eight positions among other countries, overcoming Russia for the first time, and partially closing the competitiveness gap with India and China among the BRIC economies. Important steps taken since the 1990s toward fiscal sustainability, as well as measures taken to liberalize and open the economy, have significantly boosted the country’s competitiveness fundamentals, providing a better environment for private-sector development. The owner of a sophisticated technological sector, Brazil develops projects that range from submarines to aircraft and is involved in space research: the country possesses a satellite launching center and was the only country in the Southern Hemisphere to integrate the team responsible for the construction of the International Space Station (ISS). It is also a pioneer in many fields, including ethanol production.
Its real per capita GDP has surpassed US$ 10,500 in 2008, due to the strong and continued appreciation of the real for the first time this decade. Its industrial sector accounts for three fifths of the Latin American economy's industrial production. The country’s scientific and technological development is argued to be attractive to foreign direct investment, which has averaged US$ 30 billion per year the last years, compared to only US$ 2 billion per year last decade, thus showing a remarkable growth. The agricultural sector, locally called the agronegócio (agrobusiness), has also been remarkably dynamic: for two decades this sector has kept Brazil amongst the most highly productive countries in areas related to the rural sector. The agricultural sector and the mining sector also supported trade surpluses which allowed for massive currency gains (rebound) and external debt paydown. Due to downturn in Western economies Brazil found itself in 2010 trying to halt the appreciation of the real.
The country's growing market for goods and services is complemented by one of the world's most modern and efficient banking systems. Large banks with a growing presence in Brazil include Citibank, HSBC, Spain's Banco Santander, and Deutsche Bank. These financial institutions complement Brazilian banks like Banco de Brasil, Bradesco and Itau, all much larger now following years of industry consolidation.

2.2 History of Economy in China

In the 1949 revolution, China's economic system was officially made into a communist system. Since the wide-ranging reforms of the 1980s and afterwards, many scholars assert that China can be defined as one of the leading examples of state capitalism today.
China has generally implemented reforms in a gradualist fashion. As its role in world trade has steadily grown, its importance to the international economy has also increased apace. China's foreign trade has grown faster than its GDP for the past 25 years. China's growth comes both from huge state investment in infrastructure and heavy industry and from private sector expansion in light industry instead of just exports, whose role in the economy appears to have been significantly overestimated.
In 2010, there were approximately 10 million small businesses in China. The PRC government's decision to permit China to be used by multinational corporations as an export platform has made the country a major competitor to other Asian export-led economies, such as South Korea, Singapore, and Malaysia. China has emphasized raising personal income and consumption and introducing new management systems to help increase productivity.
The government has also focused on foreign trade as a major vehicle for economic growth. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated despite the lack of full convertibility of the RMB. Nevertheless, key bottlenecks continue to constrain growth. Available energy is insufficient to run at fully installed industrial capacity, and the transport system is inadequate to move sufficient quantities of such critical goods.
The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 percent of the labor force and produce more than 60 percent of GDP.

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3.0. COUNTRY RISK
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In banking and investment, it is the probability that unexpected events in a country will influence its ability to repay loans and repatriate dividends. It includes political and credit risks.

3.1 China Country Risk

The policy environment in China is defined by a generally effective policymaking framework and limited information transparency. Reforms conducted and policies implemented over the past three decades have translated into a long period of steady and substantial increase in Chinese average income. In our view, the global financial turmoil in the past few years does not appear to have changed the political will to push ahead with structural reforms. Financial liberalization measures continued to be rolled out regularly in the past two years.
The state council's annual document on structural reforms emphasized the growth of the domestic private sector, industrial restructuring, and price reforms. However, political power is not centralized to the extent that such changes are easily implemented. Efforts to deepen structural reforms in domestic industries, for instance, are often delayed or disrupted by local governments, administrative monopolies, and various economic interest groups. Moreover, information flows remain restricted in the country. The lack of detailed statistics not only impedes external analysis of the economy but could also increase the risks of policy mistakes as the Chinese economy increases in complexity.
Additionally, the politicians and their parties have themselves become major political issues. Corruption among some DPP administration officials has been exposed. In early 2006, President Chen Shui-bian was linked to possible corruption. The political effect on President Chen Shui-bian was great, causing a divide in the DPP leadership and supporters alike. It eventually led to the creation of a political camp led by ex-DPP leader Shih Ming-teh which believes the president should resign.
In 2006, due to the Pacific Sogo Department Store scandal, the pro-KMT Pan-Blue Coalition moved to impeach the President but failed to obtain the requisite number of votes in the legislature. This failure led to a "Down Ah-Bian" campaign, which sought to pressure the president to resign from office. While the protests have been largely peaceful, there have been isolated incidences of violence associated with the campaign, including fist fights between Pan-Blue and Pan-Green (pro-DPP) legislatures. The "Up Ah-Bian" event was organized to counteract the "Down Ah-Bian" campaign. On 13 October 2006, the Pan-Blue Coalition attempted again to pass a recall motion against the ROC President Chen Shui-bian, which also failed to garner sufficient votes in the legislature.
On 3 November 2006, prosecutors in Taiwan stated that they have enough evidence to indict Chen's wife on corruption charges in connection with her handling of a secret diplomatic fund. According to the prosecutors, while Chen would not be indicted while in office, there is a possibility that he would be indicted after he leaves office.
In February 2007, Mr. Chen Shui-bian said that Taiwan will have to upgrade its weaponry to maintain the military balance with mainland China. He believes that Taiwan's advantage is slipping against mainland China's rising military prowess.

3.2 Brazil Country Risk

The large number of political parties present in the Congress makes troublesome coalitions a natural feature of Brazilian politics. Tensions between the ruling Workers’ Party and its main coalition partner PMDB threaten to halt several of the president’s proposed reforms.

A total of seven ministers resigned from the cabinet during Dilma Rousseff’s first year as president of Brazil. Six of these faced accusations of corruption, including Rousseff’s chief of staff and the ministers of transport, defense, agriculture, tourism and sports.
President Rousseff, however, perceives herself as the first president to seriously combat corruption, through what she calls a housecleaning. The tactic proves popular among Brazilians, leaving her government with a record high approval rating of 72% in December, despite the seemingly never ending political scandals. Furthermore, an expected cabinet shuffle early in 2012 gives Rousseff the opportunity to replace several of her 32 ministers.
Important legislation, such as the long awaited tax reform, a pension reform, and the pending reform of the oil laws, requires a large coalition in Congress. But the relationship between Rousseff’s Workers’ Party and the main coalition partner, the Brazilian Democratic Movement Party, PMDB, proves strenuous. The expected cabinet reshuffle in early 2012, however, could provide Rousseff with an opportunity to ease tensions in the coalition, thus allowing the approval of legislative reforms.

3.2.1. Current Political Issues in Brazil

* Brazil’s labor minister resigns early December, amid accusations of corruption. * A total of seven ministers resigned from the cabinet during 2011. * President Rousseff’s tough stance on corruption brings her record approval ratings.
The large number of political parties present in the Congress makes troublesome coalitions a natural feature of Brazilian politics. Tensions between the ruling Workers’ Party and its main coalition partner PMDB threaten to halt several of the president’s proposed reforms. * A proposed reform of Brazil’s oil laws would alter the distribution of oil royalties in favor of non-producing states. The state of Rio de Janeiro is vehemently opposed to the bill, claiming it would disrupt the preparations for the 2014 FIFA World Cup and 2016 Olympics. * The first auction of pre-salt oil blocks awaits the approval of the oil reform.

3.3 Risk factors analysis comparison and Key reasons to consider

Brazil Risk Factors to Consider * The Brazilian real was up 32.67% in 2009 and 5.01% in 2010 against the U.S. Dollar. * Brazil’s unemployment rate increased for the first time since May 2010 to 6.1% in January 2011. * As an emerging market, Brazil’s economy and the value of the real can be susceptible to the fluctuation of global risk aversion
China’s Risk Factors to Consider * China's high savings rate is expected to fall substantially in coming years as its workforce shrinks, the population ages, and social security spending increases, according to a Bank for International Settlements (BIS) report. * One demographic consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world. * Deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table, is a long-term problem. * Recent data show China’s economy is slowing, with growth in industrial production and new bank loans trailing economist estimates. * In early 2011 China recorded its first quarterly trade deficit since 2004 .

3.4. Current Issues In China

3.4.1. Fiscal policy: Despite the current economic slowdown, EDC Economics does not anticipated the government to return to an expansionary fiscal policy in 2012, with the 2012 deficit forecasted to improve to 1.1% of GDP, compared to 1.6% in 2011. The 12th Five-Year Plan calls for greater spending on social program, including affordable housing, infrastructure (particularly transportation and energy) while emphasizing greater energy efficiency and conservation. The government’s fiscal position remains sound, with a debt to GDP ratio of 27%.

Even after considering potential contingent liabilities of local governments and future bank NPLs from the rapid credit expansion during the crisis, the central government’s debt situation would remain manageable.

3.4.2. Monetary policy: With inflationary pressures rapidly abating and economic indicators slowing, the central bank has now moved to a loosening bias, easing on reserve requirements for the first time since December 2008. Inflation has eased considerably since peaking at 6.7% y/y in July 2011, with the price of food falling from double-digit rate. The slowing economy has also opened up an output gap, allowing a more generalized easing of inflationary pressures across the board, with falling wholesale prices indicating additional easing down the pipeline. The monetary tightening of early 2011 had resulted in a marked slowdown in loan growth and M2. Although December showed an uptick, it is largely related to the recent cut in reserve requirement.

3.4.3. External sector: The European debt crisis and depreciating euro have weakened export growth to China’s main export market. The European banking sector problems in Q4 contributed largely to the first quarterly decline in FX reserves since 1992, mainly through capital repatriation and valuation losses. The renminbi’s appreciation has crawled to a halt since the beginning of Q4 due to global uncertainties, with markets pricing a small depreciation on Hong Kong’s NDF market. China continues to attract record amounts of FDI, which have totalled US$ 194 billion through Q3, despite a record amount of FDI outflows, to the tune of US$ 72 billion in the same period.

3.4.4. General Political Environment: China is a one-party state with the Chinese Communist Party (CCP) controlling the government. The nine-person Politburo Standing Committee is the top decision-making body in China. Even though the CCP remains firmly in control of society, maintaining social stability and CCP power continue to remain primary objectives.

The current political environment is dominated by the upcoming leadership transition. The fourth generation of political leaders – including President Hu Jintao and Premier Wen- who came to power in 2002 will step down in 2012 during the 18th CCP Congress. The succession of the fifth generation of political leaders is already underway; during recent legislative meetings held CCP leaders in addition to announcing the 12th Five-Year Plan for economic and social development made key politburo appointments. As such, it is widely expected that current Vice President Xi Jinping and Vice-Premier Li Keqiang will take over from President Hu and Premier Wen.

The Five-Year-Plan points to several shifts in government policy priorities, especially the concept of "inclusive growth" emphasizing "quality, not quantity" and focusing on more equitable growth. The focus on ‘sustainable growth’ emphasizing social and environmental sustainability also appears to be a key theme. Greater emphasis on developing the inland regions and the services sector, promoting high-tech and value-added technology, and a new industrialization drive are all envisioned with and end goal of transitioning China’s economy to be domestically driven. These policies appear to address several identified ‘major problems’ (social in nature) as noted by both President Hu and Premier Wen throughout much of 2010/11.

3.4.5. Investment Environment: China continues to be a top destination for global FDI and investments. At the same time, China's complicated commercial environment poses several challenges for foreign investors. Frustrations include the lack of legal protection for investor and intellectual property rights, inconsistent application of regulations, burdensome bureaucracy, and corruption. A slew of vocal complaints by some members of the international business-investment community about the alleged deterioration in the business environment for foreign companies highlight frustrations faced by some foreign companies doing business in China. In recent months, officials have sought to reassure foreign businesses of fair treatment.

Even though China has made considerable progress towards allowing foreign business to operate and own businesses, many obstacles remain. China continues to use a ‘foreign investment catalogues’ that states which sectors are not open to foreigners. Protection of local firms especially by regional officials is not uncommon. While China continues to move towards a more rules-based business environment, implementation and enforcement of new laws seem inconsistent across regions and industries.

These challenges are somewhat exemplified in the World Bank’s Ease of Doing Business Rankings. Overall China is ranked 79 (1 being the best) for Ease of Doing Business (ranked 78 in 2010); ranked 181 for dealing with Construction Permit, 93 for Protecting Investors, and 151 for Starting a Business. Corruption is entrenched at all levels of government in China. Apart from the economic impact of corruption, the issue also has wider political risk implications. Demonstrations against local-level corruption and land seizures remain regular occurrences. The CCP recognizes the importance of tackling corruption to ensuring its legitimacy and therefore will continue attempt to tackle corruption as witnessed by a slew of recent high-profile arrests.

3.4.6. Political Violence: Demonstrations against local corruption, land seizures, and environmental issues as well as protests related to unemployment, wages and working conditions are increasingly becoming commonplace and violent, but remain localized in nature. Ethnic tensions, on occasion have lead to violence and localized instability in some parts of China.

Clashes between ethnic Uighur and ethnic Han groups in Xinjiang province as well as violent demonstrations in Tibet resulted in property damage and number of fatalities in recent years.

China is deeply opposed to pro-independence sentiments in Taiwan. However, the recent (January 2012) re-election of Taiwan’s incumbent President who seeks greater economic integration with China and bi-lateral trade cooperation agreements signed between the two countries in 2010 are likely to greatly lessen risk of confrontation. Disputes over maritime boundaries in the East China Sea and South China Sea have led to a number of altercations (2011) between China and several of its neighbors including Japan, the Philippines and Vietnam.

3.4.7. China Political Outlook

Political stability is still priority number one for the Chinese central government which views continued and regionally-balanced economic growth as the key to such stability. The upcoming leadership transition will dominate the domestic political environment as CCP officials jockey for key positions. Managing economic growth while curtailing inflation as well as implementing elements within the 12th Five-Year-Plan are likely to take center stage on the policy front. Localized unrest over various social issues such as corruption, land seizers, wages, working conditions, are likely to continue and increase in number should economic growth slow. A sharp economic slow-down and resulting higher unemployment could raise the likelihood for unrest which may prompt the far greater state intervention.

3.5. Current Issues In Brazil

3.5.1. Real Sector: The Brazilian economy is decelerating. GDP growth slowed to an annual rate of 2.1% in Q3 2011, from 3.3% in Q2 2011 and 6.9% one year before. EDC expects supportive domestic economic activity over the forecast horizon, driven by Brazil’s main engine of growth, consumer spending, which currently benefits from historically low levels of unemployment, continued robust credit growth and poverty reduction initiatives. EDC economics estimates GDP growth was 3% in 2011 and forecasts grow of 3.5% in 2012 and 4.1% in 2013.

3.5.2. Monetary: Brazil’s inflation index, the IPCA, was on the upper bound of the central bank’s (BCB’s) target range of 6.5% in December. Although decreasing, EDC economics believes inflation will likely stay above the mid-point of the target range (4.5% +/-2%) through 2012. In response to decelerating economy and despite above-target inflation, the Central Bank has lowered the benchmark SELIC target rate from 12.5% in July to 10.5% in January. Such cuts are expected to help sustain growth while easing upward pressure on the exchange rate. The exchange rate policy of the Central Bank will continue to be characterized by heavy intervention on Forex markets. No monetary tightening is anticipated on the first half of 2012.

3.5.3. External Sector: The government has temporarily reduced import taxes on 99 capital goods and 6 IT and telecommunications products to 2%, with the goal increasing imports of goods that not produced locally but that are required for the manufacture of domestic goods. Massive capital inflows and FX intervention have allowed foreign exchange reserves to grow to around US$ 352bn in January which support a strong liquidity ratio with reserves covering the equivalent of more than 12 months worth of imports. EDC Economics does not anticipate any financing problems over the forecast horizon as Brazil’s external financing requirement is comfortably covered by net foreign direct investment (FDI) and portfolio inflows. Overall, Brazil's net external creditor position and strong external liquidity mitigate risk to external shocks.

3.5.4. Fiscal: Although the new government does not have a lot of room to cut spending, if it wants to accomplish planned investment ahead of the World Cup (2014) and the Olympics (2016), fiscal policy has been tightened in 2011. EDC economics believes the magnitude of the fiscal retreat is unlikely to be significant enough to sustainably curb inflation.

The government has projected spending in infrastructure and social developments to be in the range of US$ 959 between 2011 and 2016. On the solvency side, the Lula administration has used the few years of solid global demand prior to the financial crisis to lower external indebtedness, smooth its debt maturity profile and improve currency and interest rate dynamics. As a result, external debt metrics are healthy and financing needs, although high, will continue to be absorbed by the domestic market.

3.5.5. Outlook: The outlook for the Brazilian economy is positive. Over the short-term, downside risks include uncertainty about the magnitude of the global slowdown as well as concerns associated to inflation reflecting in part domestic demand not being adequately met by domestic supply. The government also needs to prevent the formation of asset bubbles in the economy while banking regulators deal with rising household indebtedness and debt servicing costs relative to income. In the medium-term, both private and public consumption will continue to grow faster than GDP, posing pressures on domestic production capacity and prices. More investment will be needed to keep up with increasing domestic demand. Some structural reforms need to be undertaken to ensure sustainable growth and improve fiscal accounts. The FIFA World Cup and the Olympics will offer excellent opportunities for exporters and investors in Brazil over the next 5-7 years.

3.5.6. General Political Environment: Brazilian politics are characterized by a partisan fractiousness that mirrors the country’s diverse socio-economic make-up. Relations are generally difficult between the executive and the legislature, as well as between federal and state governments. In addition, a tradition of switching parties has made party politics and political strength in Congress fluid. In 2007 the Supreme Court barred members of Congress from party-hopping; however this has yet to forge stronger party loyalty.

Political progress requires constant horse-trading that slows the passage of fundamental reforms such as tax policies, widely considered necessary to maintain fiscal sustainability and to accelerate growth to a level that will continue to move Brazil forward. A difficult balancing between promoting business and making progress on social issues undermines the government’s ability to meet expectations on all fronts.
President Dilma Rousseff took office January 1st, 2011 and is backed by a ten-party coalition representing 70% of Congress. Like her mentor, former-President Luiz Inácio Lula da Silva, Rousseff faces challenges maintaining a cohesive alliance particularly with the centrist Partido do Movimento Democrático Brasileiro (PMDB). The PMDB will jockey for political posts since it holds the most seats in the ruling congressional alliance (across both Chambers) as well as in the Senate. However, in Brazil’s fragmented Congress the party’s absolute number of seats is fairly small. Rousseff is considered a competent technocrat but lacks Lula’s charisma.

The first months of Rousseff’s term were characterized by economic policy continuity, as her government is taking steps to keep inflation low and government spending under control. Although Rousseff is increasingly asserting her autonomy from Lula, balancing the former President’s power and popularity remains a challenge. Lula’s presence will certainly be felt if he has a serious interest in a 2014 presidential bid, as even he has himself hinted before leaving the presidency.

3.5.7. Investment Environment: Brazil is a poster child for the moderate left in Latin America, promoting policies that strengthen the investment environment. This said, Lula advocated for both government participation in the economy and respect for investors’ contractual rights; he actively promoted public-private partnerships, not privatizations, to attract private capital. Rousseff has continued this approach which functions as a moderate disincentive to investment. The government is adopting a model for oil investments that features a high level of government participation in exploiting huge new reserves.

Despite significant progress in the liberalization of the foreign exchange regime, important residual controls remain. Weak regulation and cumbersome bureaucracy are hallmarks. According to the World Bank’s 2011 Doing Business survey, starting a business in Brazil takes 120 days against a regional average of 56.7 days, an example of what is widely referred to as the “Brazil Cost” of doing business in the country. The judicial system is regarded as fair, but slow and complex.

3.5.8. Political Violence: The main source of violence in Brazil is criminal rather than political. Personal security is poor as there is an extremely high rate of criminal activity in major cities, where 25% of the population is believed to live in favelas or shantytowns. Lula’s social policies made marked progress towards reducing inequalities in Brazil, but only concerted work will improve conditions.

An imbalance in land distribution leads to episodic violence in rural areas, specifically in the Amazon. Land invasions are common and mostly affect the agriculture sector, although the scope of land so targeted is broadening. Protests by groups of landless individuals known as the Landless Workers’ Movement (MST) highlight the issue.

3.5.9. Brazil Political Outlook

State intervention in the economy is likely to increase with Brazil’s policy of supporting “national champions” – companies that can perform well in both the domestic and international spheres. Lula set Brazil on a path of regional leadership and increasing influence on the world stage. However, increased power will likely come with increased responsibility that will limit Brazil’s ability to appear as an ideal mediator that is friendly with nations of all ideologies. Major infrastructure spending and security demands loom in advance of the 2014 World Cup and 2016 Olympics. Rousseff needs to meet these challenges while delivering key social pledges in order to ensure that these issues have no serious effects on her popularity.

3.6. China Corporate Governance Law
Corporate governance (gongsi zhili) is a concept whose time seems definitely to have come in China. Chinese definitions of corporate governance in the abstract tend to cover the system regulating relationships among all parties with interests in a business organization, usually spelling out shareholders as a particularly important group. But Chinese corporate governance discourse in practice focuses almost exclusively on agency problems, and within only two types of firms: state-owned enterprises (SOEs), particularly after their transformation into one of the corporate forms provided for under the Company Law, and listed companies, which must be companies limited by shares (CLS) under the Company Law.
A fundamental dilemma of Chinese Corporate Governance Institutions stems from the state policy of maintaining a full or controlling ownership interest in enterprises in several sectors. The state wants the enterprises it owns to be run efficiently, but not solely for the purpose of wealth maximization. A necessary element of state control of an enterprise is the use of that control for purposes such as the maintenance of urban employment levels, direct control over sensitive industries, or politically motivated job placement.
This in turn creates several problems. First, many of these goals are not easily measured and there is no obvious way of balancing them one against the other. This creates monitoring difficulties.
Second, the policy of continued state involvement sets up a conflict of interest between the state as controlling shareholder and other shareholders. In using its control for purposes other than value maximization, the state exploits minority shareholders who have no other way to benefit from their investment.
The state wants to make SOEs operate more efficiently by subjecting them to a new and different set of rules — the rules of organization under the "modern enterprise system". Policymakers then find, however, that they must change and adjust the rules to take account of continuing state ownership. Moreover, the need to provide for the special circumstances of state-sector enterprises ends up hijacking the entire Company Law, so that instead of state-sector enterprises being made more efficient by being forced to follow the rules for private-sector enterprises (the original ambition), potential private-sector enterprises are hamstrung by having to follow rules that make sense only in a heavily state-invested economy.

3.7. Brazil Corporate Governance Law
In Brazil, one major area of weakness involves boards of directors. Many firms have boards too small to be effective. Many have no independent directors at all, or a lone token independent director. Formal processes are limited. Audit committees are uncommon, but Brazil has developed a substitute body – the fiscal board – which does not require that the firm have independent directors to staff the audit committee. Financial disclosure is mixed. Some firms voluntarily provide English language disclosure. At the same time, many firms do not provide cash flow statements or consolidated quarterly financial statements.

Almost all Brazilian firms have a controlling shareholder or group. However, Brazilian corporate law provides relatively limited protection to minority shareholders. Bovespa has filled part of this gap, by providing several sets of optional governance rules which go beyond the legal minimums (Bovespa, 2008). Most recent IPOs have been on Bovespa’s higher levels, and migration to a higher level increases trading volume. Bovespa’s role in fostering stronger corporate governance is reminiscent of the role played by U.S. and U.K. stock exchanges in the early 20th century.

Many Brazilian public firms use dual-class structures, with insiders retaining voting common shares and outsiders holding primarily nonvoting preferred shares, which have economic rights similar to common shares. There is high concentration of voting power in Brazilian firms, due in large part to this practice.

Prior to 1997, Brazilian corporate law required a new controller, who acquired 50% of the common shares, to offer to buy all remaining common shares, at the per-share price paid when acquiring control. In 1997, Brazil removed this rule, but reinstated takeout rights in 2000, at 80% of the per-share price paid for the controlling shares.

Brazilian corporate governance is in a period of rapid change. Historically, Brazilian financial markets were heavily regulated, the Brazilian securities commission, Comissao de Valores Mobiliarios (CVM), was created and a new Corporations Law was adopted, which included rules governing public companies and stock exchanges.

During the 1970s and 1980s, the government granted tax incentives to firms that went public and investors who purchased shares in public companies, and required pension funds and insurance companies to invest in the shares of public companies. By the end of the 1980s, there were almost 600 publicly traded companies, but a significant number had gone public only to capture the tax incentives, and had no interest in having public shareholders or active trading of their shares.

In the late 1980s, the financial incentives for going public were eliminated; since then, many firms which went public due to tax incentives have returned to private ownership. The government also began an extensive privatization program. By the end of the 1990s, a large fraction of share trading involved privatized companies. Many large Brazilian firms cross-listed on the New York Stock Exchange (NYSE), and a significant portion of trading moved to the NYSE. Privatizations aside, there were almost no IPOs. Brazilian corporate law, on the whole, provides limited protection for minority shareholders. In 2000, Bovespa launched three new listing segments, Level 1, Level 2 and Novo Mercado, with stronger corporate governance rules than the legal minimum, while allowing existing firms to retain a regular Bovespa listing, with weaker governance requirements.

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4.0 FOREIGN EXCHANGE RISK
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4.1 Brazil Foreign Exchange Risk
Brazil from a fifteenth position has become the fifth among major destinations of Foreign Direct Investment (FDI), according to the World Investment Report 2011 of the United Nations Conference on Trade and Development (UNCTAD).
FDI in Brazil grew from US$ 25.9 billion in 2009 to US$ 48.4 billion. Only the US (US$ 228.2 billion), China (US$ 105.7 billion), Hong Kong (US$ 68.9 billion) and Belgium (US$ 61.7 billion) received more foreign investments.
Brazil expects to climb another position by 2013. It has been pointed out as one of the most quoted investment destinations, behind China, the US and India. Their global flows of FDI around the world grew 5% last year over 2009, reaching US$ 1.24 trillion.
Today, Brazil is one of the hottest destinations in the world for inbound foreign direct investment (FDI). Many multinational companies are seeking to enter with new or existing expanded FDI projects due to Brazil’s market size, growing middle class and the fact that it will host the 2014 World Cup and 2016 Olympics. In fact, according to UNCTAD’s Global Investment Trends Monitor it was the 10th largest recipient of FDI in 2010 with over $30 billion in new inbound FDI projects up from the 13th slot and $22 billion in new inbound FDI a decade ago.
The mayor FDI has traditionally been concentrated in the country’s South and Southeast states (Rio de Janeiro, Rio Grande do Sul and Sao Paulo). These two regions have tremendous room for future growth and investors are starting to realize these opportunities. For example, the Italian car manufacturer FIAT recently announced it is investing US $1.78 billion in an Automotive OEM manufacturing project in Pernambuco state and Nestle Brazil, a subsidiary of Switzerland-based Nestle launched a floating supermarket to service the riverside populations of the Amazon.

4.2 China Foreign Exchange Risk

Foreign Direct Investment in China, in 1980s was limited to only joint venture partnerships with the Chinese firms. The policies were basically export oriented. But after 1990, things changed gradually and steadily, as China allowed the foreign investors to manufacture and sell a wide range of goods in the Chinese domestic market. China saw wholly foreign owned enterprises, which can be called as the true form of foreign direct investment, producing goods for Chinese as well as foreign consumers. Today, half of the Chinese exports are produced by the foreign investors manufacturing in China and is considered one of the leading foreign direct investment recipients in the world.
Foreign direct investment in China is allowed for factories, manufacturing, real estate and other assets but the foreign investments in stock market and other financial instruments is still a dream for the foreign investors. The Chinese government is determined to encourage foreign direct investment in high-tech and renewable energy industries due to its deteriorating environmental conditions. The steps are taken seeing China’s commitment to reduce its carbon intensity and emissions as declared in Copenhagen in December 2009. The government has set the limitations on the industries causing high pollution and those whose supply is more than demand.

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5.0 EXPANDED OPPORTUNITY SET
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When firms venture into the arena of global markets, they can benefit from an expanded opportunity set. Firms can locate production in any country or region of the world to maximize their performance and raise funds in any capital market where the cost of capital is the lowest. In addition, firms can gain from greater economies of scale when their tangible and intangible assets are deployed on a global basis.

5.1 Brazil Opportunity Set
Reasons to consider * Brazil is an oil-independent country rich in natural resources. * Inflation in Brazil continued to rise in 2010 to 5.91% from 4.31% in 2009. * In order to combat rising inflation, Brazil’s central bank continues to raise its benchmark SELIC rate. The rate currently stands at 11.75%.

5.2 China Opportunity Set

Reasons to consider * China has overtaken Japan as the world's second-largest economy. * In April 2011, The Peoples Bank of China raised its benchmark 1-year lending rate .25% to 6.31% and its 1-year deposit rate from 3.0% to 3.25%. * China's savings rate is higher than most other countries in the world. * China controls nearly all of the world's supply of rare-earth—the 17 elements that produce powerful magnets, or improve a metal's ability to withstand high temperatures and are critical to high technologies such as hybrid-car batteries and wind turbines.

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6.0 ECONOMICAL OUTLOOK
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6.1 COUNTRY CURRENCY (FOREX)

6.1.1. Brazil Currency Outlook

The Brazilian real has fallen steadily since its record high in July of 1.53 against the dollar, the highest since the free-floating currency regime was adopted in 1999, ending December at 1.8634. Still, the real is considered to be one of the world’s most overvalued currencies. High interested rates attract heavy inflows from foreign investors, thus strengthening the real and making Brazilian goods less competitive. To reignite growth, the government is committed to keep the real below the July 12-year high. Over the last year Mantega implemented a number of taxes on financial instruments to deter speculative inflows, some of which were reversed by the recent tax cuts.

While both Mantega’s taxes and the interest rate cuts have eased the pressure on the real, the Euro crisis is the main contributor to its decline. Amid economic uncertainties investors flee from emerging markets to safer assets, causing a 18.5% drop in the real against the dollar from mid-July to mid-September. A weaker outlook for commodity prices also pushes the currency down. The recent tax cuts intended to boost investor inflows, on the other hand, are likely to strengthen the real. So would a potential progress in Europe.

Nonetheless, the real is expected to keep within the range of 1.70 to 1.90 against the dollar, as President Rousseff tackles the policy dilemma of spurring economic growth versus curbing inflation.

6.1.1.1. USDBRL- Brazil Real Exchange Rate

The Brazilian Real exchange rate depreciated 6.10 percent against the US Dollar during the last month. During the last 12 months, the Brazilian Real exchange rate depreciated 20.70 percent against the US Dollar. Historically, from 1992 until 2012 the USDBRL exchange averaged 1.78 reaching an historical high of 3.95 in October of 2002 and a record low of 0.00 in January of 1992. The Brazilian Real spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the BRL. While the Brazilian Real spot exchange rate is quoted and exchanged in the same day, the Brazilian Real forward rate is quoted today but for delivery and payment on a specific future date.
6.2.2. China Currency Outlook

China’s currency is the renminbi, also known as the yuan. For more than a decade, economists and officials in other countries have charged that the Chinese government has kept the value of its currency artificially low to make the country’s exports more affordable. As China’s economy recovered from the global recession of 2008 while the jobless rate in the United States has remained stubbornly high, Washington pushed for a revaluation.
With little fanfare, China’s currency began appreciating significantly, even as it remained a point of friction between the world’s two largest economies.
The rise of the renminbi — up 12 percent between June 2010 and February 2012 on an inflation-adjusted basis and 40 percent since 2005 — has helped American companies by effectively reducing the cost of their products in China. In the last two years, American exports to China have risen sharply.
The renminbi remains undervalued, relative to all other currencies, by 5 to 20 percent, according to various estimates. But many business executives and economists say that other issues, like intellectual-property theft and barriers to entering Chinese markets, are now a bigger drag on the American economy.

6.2.2.1. USDCNY-China Yuan Exchange Rate
The Chinese Yuan exchange rate appreciated 0.05 percent against the US Dollar during the last month. During the last 12 months, the Chinese Yuan exchange rate appreciated 2.97 percent against the US Dollar. Historically, from 1981 until 2012 the USDCNY exchange averaged 7.01 reaching an historical high of 8.73 in January of 1994 and a record low of 1.53 in January of 1981. The Chinese Yuan spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the CNY. While the Chinese Yuan spot exchange rate is quoted and exchanged in the same day, the Chinese Yuan forward rate is quoted today but for delivery and payment on a specific future date.
6.3. INTERESTS RATES
Are the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building.
Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the “lease rate”. When the borrower is a low risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.
6.3.1. Brazil Interest Rate
The benchmark interest rate in Brazil was last reported at 9 percent. In Brazil, interest rate decisions are taken by The Central Bank of Brazil's Monetary Policy Committee (COPOM). The official interest rate is the Special System of Clearance and Custody rate (SELIC) which is the overnight lending rate. From 1999 until 2010, Brazil's average interest rate was 17.22 percent reaching an historical high of 45.00 percent in March of 1999 and a record low of 8.75 percent in July of 2009.
6.3.2. China Interest Rate
The benchmark interest rate in China was last reported at 6.56 percent. In China, interest rates decisions are taken by The Peoples' Bank of China Monetary Policy Committee. The PBC administers two different benchmark interest rates: one year lending and one year deposit rate. From 1996 until 2010, China's average interest rate was 6.49 percent reaching an historical high of 10.98 percent in June of 1996 and a record low of 5.31 percent in February of 2002.

6.4 GDP

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

6.4.1. Brazil GDP

Brazil Gross Domestic Product is worth 2088 billion dollars or 3.37% of the world economy, according to the World Bank. Historically, from 1960 until 2010, Brazil's average Gross Domestic Product was 430.15 billion dollars reaching an historical high of 2087.89 billion dollars in December of 2010 and a record low of 15.17 billion dollars in December of 1960. Brazil is one of the fastest growing emerging economies in the world. With large and growing agricultural, mining, manufacturing and service sectors, Brazil economy ranks highest among all the South American countries and it has also acquired a strong position in global economy.
6.4.2. China GDP

China Gross Domestic Product is worth 5879 billion dollars or 9.48% of the world economy, according to the World Bank. Historically, from 1960 until 2010, China's average Gross Domestic Product was 839.37 billion dollars reaching an historical high of 5878.63 billion dollars in December of 2010 and a record low of 46.46 billion dollars in December of 1962. China's economy is the second largest in the world after that of the United States. During the past 30 years China's economy has changed from a centrally planned system that was largely closed to international trade to a more market-oriented that has a rapidly growing private sector. A major component supporting China's rapid economic growth has been exports growth.

6.5. COUNTRY DEBT TO GDP

Government debt as a percent of GDP, also known as debt-to-GDP ratio, is the amount of national debt a country has in percentage of its Gross Domestic Product. Basically, Government debt is the money owed by the central government to its creditors. There are two types of government debt: net and gross. Gross debt is the accumulation of outstanding government debt which may be in the form of government bonds, credit default swaps, currency swaps, special drawing rights, loans, insurance and pensions. Net debt is the difference between gross debt and the financial assets that government holds. The higher the debt-to-GDP ratio, the less likely the country will pay its debt back, and more likely the country is to default on its debt obligations.

6.5.1. Brazil Government Debt to GDP

The Government Debt in Brazil was last reported at 72.3 percent of the country´s GDP. From 2000 until 2010, Brazil's average Government Debt to GDP was 65.94 percent reaching an historical high of 72.30 percent in December of 2010 and a record low of 60.70 percent in December of 2007. Generally, Government debt as a percent of GDP is used by investors to measure Brazil's ability to make future payments on its debt, thus affecting Brazil's borrowing costs and government bond yields.

6.5.2. China Government Debt to GDP

The Government Debt in China was last reported at 17.7 percent of the country´s GDP. From 1984 until 2010, China's average Government Debt to GDP was 10.94 percent reaching an historical high of 19.60 percent in December of 2007 and a record low of 1.00 percent in December of 1984. Generally, Government debt as a percent of GDP is used by investors to measure China's ability to make future payments on its debt, thus affecting China's borrowing costs and government bond yields.

6.6. INFLATION Is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

6.6.1. Brazil Inflation The inflation rate in Brazil was last reported at 5.2 percent in March of 2012. From 1980 until 2010, the average inflation rate in Brazil was 445.98 percent reaching an historical high of 6821.31 percent in April of 1990 and a record low of 1.65 percent in December of 1998. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

Inflation rose 6.64% through November, down from 6.97% in October 2011, but still exceeding the official target ceiling of 6.5%. The government’s inflation target is 4.5%, plus or minus 2 percentage points. The 0.52% increase in consumer prices is attributed to rising food prices, especially meat. This is higher than the 0.43% rise seen in October, but lower than last November’s 0.83% rise. The central bank expects inflation to fall down to the official target during 2012, as a result of the deteriorating global economy. Analysts, however, doubt that inflation converges to the 4.5% target during 2012, mainly because of a 14% rise in the minimum wage due in January. As inflation slowed, the central bank continued to slash its rates, with the third consecutive cut of 50 basis points reducing the rate to 11%. Brazil was among the first countries to react to the Euro crisis when its central bank cut its rate from 12.5% to 12% in August. The central bank announced further moderate cuts to mitigate the effect of the Euro crisis, which should bring the interest rate down into single digits during 2012. 6.6.2. China Inflation The inflation rate in China was last reported at 3.6 percent in March of 2012. From 1994 until 2010, the average inflation rate in China was 4.25 percent reaching an historical high of 27.70 percent in October of 1994 and a record low of -2.20 percent in March of 1999. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well-known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

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7.0 CONCLUSION AND RECOMMENDATIONS
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The Chinese economy has been growing at about 10% annually for around 20 years. Chinese market is an almost irresistible lure for MNCs, with its cheap labor force and vast potential internal market. Chinese business is taking advantage of the fact that many MNCs are investing large amounts of money into China without understanding the Chinese market, Chinese culture and Chinese history. However, there is little transparency or weak regulatory enforcement. Foreigners should be careful of behavior in the Chinese business environment.

In just a single generation, Brazil has emerged from political instability, hyperinflation and a massive debt load to stand alongside China and India as one of the booming emerging market economies. In 1985, Brazil replaced a dictator with a democratic government that has reined in foreign debt, implemented key monetary and other fiscal reforms, cultivated and nurtured a growing lower middle class, and invested in much-needed infrastructure projects. Also, with massive oil and gas deposits, the country is assured of energy independence.

We recommend MNC´s to invest in Brazil instead of China due to the following reasons: * Brazil is a democratic nation, not communist. * Brazil is far less reliant on exports. Only 14% of Brazil's gross domestic product (GDP) comes from exports, compared to 35% from China. * Their cultural difference: Chinese are notorious savers while Brazilians love to spend. * It possesses all the natural resources necessary to support its booming economy. Meanwhile, China needs to go out and gobble up foreign assets to ensure it can keep feeding its economic machine with enough oil, gas, coal, iron ore, and other commodities to keep its motor running. * Lower cost labor. * Well-developed agricultural technology.

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