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Executive Summary

Financial markets provide the primary source of capital allocation both for the domestic

and international economy through trade, investment, and development aims. Financial markets

promote and enhance foreign and domestic business entities to raise funds to meet the set capital

requirement thresholds in any given market structure. Additionally, financial markets allow the

stability of domestic and global economic systems by allowing smooth and continuous

transactions with no breaks within the global market while minimizing the price of stocks.

Through financial markets, entrepreneurs and citizens from various countries have enjoyed the

investment and income opportunities created through financial markets.

United kingdom is one of the world's most established economies with a solid economic

performance in the last decade. The stability in United Kingdom's economy is illustrated through

its infrastructural developments, urbanization, and high living standards to its citizens. Therefore,

financial markets directly impact living standards, and it is not only about how domestic and

foreign investors interact with the market. The UK's banking system is divided into three

branches;

High Street bank; These are banking institutions that offer services to the general public

Business banking services; These are provided by high street banks in the United

Kingdom in ordinary accounts. The difference with the high street banks is that it involves

additional services and fees

Investment banking services that the other intermediate financial institutions facilitate on

behalf of High Street Banks, pension funds, and investment trusts.

According to the recent financial reports released by Moody's in June 2021, the outlook

for financial institutions and banks in the United Kingdom is relatively stable. Therefore it
reflects the country's intrinsic institutional and economic strength and positive indication that the

debt level will subsequently subside at its current level. For this analysis, especially in the first

task will major on the financial markets in the United Kingdom in relation to the roles and

contribution of top financial institutions in the UK such as Barclay's Plc, HSBC Holdings,

Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered Plc among other players

in domestic and global financial markets. The report also focuses on the UK's domestic economy

and capital allocation about their modes of operation to achieve their financial objectives through

fiscal and monetary policies. The second part of the report addresses the emerging economy of

China through evaluation of its gross domestic product (GDP) and gross national product (GNP)

Task One

Overview of Financial Markets in the United Kingdom

By simple description, financial markets are the marketplaces or transaction centers

where domestic and foreign derivatives and securities are traded. In economics and finance,

security is a collective term that refers to bonds, currencies, and equities, while derivatives refer

to contracts for various swaps. The financial markets can be expressed in terms of local/domestic

or global/international markets. Generally, financial markets are defined by fees and costs, rules

and regulations on trading, market forces, and transparent pricing that determines the trading

value. The overall structure of the financial market is as illustrated in the figure below
 Categories of Financial Markets (Mauro, and Hassan, 2019).

The structure of financial markets gives an indication of the business activities of a given

country. For instance, UK's Capital, the London Exchange market, through its Forex exchange

market, is the biggest financial market in Europe where approximately trillion pounds are being

traded daily. New York Exchange market is another stable market with an established active

physical finance market supplemented with a digital financial market platform.

Basic Structure of Financial Market

Debt Market; This refers to financial markets e where debt instruments are freely traded;

debt instruments refer to assets that demand fixed payment, usually with interest to the holder.

Debt markets make an essential component of domestic and international financial markets; for

example, bonds are traded both in local and global markets and are a perfect example of a debt

market element. As of July 2021, the United Kingdom was at approximately £36 billion in debt
securities, making it one of the deepest stock exchange markets in the world. An example would

be debt instruments include mortgages and bonds (corporate or government)

Equity Markets: The stock market is also known as the stock market, which refers to the

financial market where equity instruments are traded. Stock is trade securities that are often

claimed on the assets and earnings of a corporation. A perfect example of an equity instrument

would be stock shares like those traded on the New York Stock Exchange. Investors often

observe the price of the securities, invest in stock purchases to increase wealth. In the stock

market, firms provide a dividend to the investors

Primary Markets: In business economics, primary markets refer to markets where

securities are created. It's at primary markets where business firms and corporations float (sell)

their bonds and stocks to the interested public for the first time. A perfect example of a primary

market is the IPO (initial public offering). Here traders provide investors with varied

opportunities to purchase securities from the central bank that made the first underwriting for

particular bonds or stocks. An initial public offering market occurs when a private company

issues stock or bond to the public for the first time.

Secondary Markets: In economics, the secondary market refers to established stock

markets such as Nasdaq, FTSE 100, LSE, and New York Stock Exchange (NYSE), among other

established exchange markets around the globe. The distinguishing feature of secondary markets

is that investors trade and transact among themselves, unlike with the primary needs (Stefan,

2018). In other words, in secondary markets, previously issued securities are traded without the

company's involvement.

Classification of Financial markets

 There are several financial markets globally, and every country and state is home to at

least one type of financial market, although they vary in size. Some are local, while some are

global or internationally known. These subgroups are as shown in the diagram below

Classification of Finacial markets (Stefan, 2018)

Financial markets are classified into four subgroups depending on;

i. Maturity of Claim

ii. Nature of Claim

iii. Timing of Delivery

iv. Organizational Structure

Classification by Nature of Claim

Financial markets are classified in terms of claims households and investors have on the

commodities of trade and investment. In economics, there are two main types of claims; residual

claims and fixed claims. By nature of claims, there are two types of markets; Debt market and

Equity market (Mauro, and Hassan, 2019). These two markets have been discussed in the

previous sections
Classification by maturity of Claims

While investing on securities of trade in the stock market, the maturity period is of the

essence since the value of the investment depends on the period and time horizon of trade. There

are two types of the financial market based on claim maturity;

Money Market; Refers short-term fund market where investments on stock securities are

for a period not longer than one fiscal year. In general, it deals with monetary assets like

commercial papers, treasury bills, and certificates of deposits. Investments in the money market

have reduced risks due to a short investment period

Capital Market; in this market, bonds, shares, and stocks of medium- and long-term

maturity are the trade items. It is associated with maximum interchange of money as it assists

companies to access more capital through preference share capital and equity capital (Stefan,

2018). It also allows traders to invest in the equity share capital of the corporation or company

and be entitled to profit realized by the company

Classification by Timing of Delivery

Timing of security delivery can also be used to categorize financial markets. This concept

of classification prevails in the stock or secondary markets. The two categories are; future market

and cash market

Cash Market; is the type of market where delivery or settlement of commodities or

securities are done in real-time, and the total amount of investment is to be paid by investors

either by cash or any other accepted borrowed capital.

Future market; Unlike the cash market, here settlement of commodities of trades are set

for a future date. In future markets, transactions are generally through cash instead of the
delivery settlement approach. Traders are not compelled to pay the full investment amount but

must meet the specified % in the total investment amount.

Key Players in the UK's Financial Markets

Key players in UK's financial markets are the banking institutions, primary dealers, stock

exchanges, financial institutions, brokers, foreign institution investors, merchant bankers and

custodians, speculators, hedgers, margin traders, and arbitrators. The UK's stock market has been

on the rise in the past few years due to perfect coordination of trade among the highlighted

stakeholders

UK market shares until 2019

 Projected trend on the global market in post-Covid-19

Domestic Economy & Capital Allocation

Banking institutions form the central network systems of financial markets as they

provide financial advice and support to firms and people who participate in the stock exchange

trade. They organize the payment channels such as loan provisions, taking deposits, and assisting

investors in making their desired investments such as mortgage or purchase of homes.

Role of Central Bank (UK)

In the United Kingdom, just like most countries, the central bank is the regulator and

controller of all banks and financial institutions across the county. It institutes and provides

monetary policies, issues national currency. For instance, it is the role of the Bank of England to

monitor the operations of all financial institutions in the UK and issue the national currency

(Mauro, and Hassan, 2019). Other functions include the role of the Bank of England to supply

money and currency to all commercial banks within the country in the event of a financial crisis.
Bank of England manages UK's reserves and control the money circulation in the economy. As a

regulation of monetary policies, central banks set the standard interest rate on loans used by other

financial institutions and lenders.

Monetary policy

Monetary policy is the set of guidelines that governs and controls the money supply

within an economic system. One of the primary roles of the central bank is to set monetary

policies to be used by banking and financial institutions. The four aspects of monetary policy are;

Inflation; is the increase of commodity prices to devalue state currency. Inflation

adversely affects the economy; high inflation results in a high cost of living and devalues the

country's currency in the international stock market. For instance, as of October 2021, the UK's

inflation rate was at 2.6%, implying the country's economy is in good condition.

Interest rate; It is another critical aspect of monetary policy set by the central bank to

control domestic money circulation in the economy. For instance, the Bank of England increased

the interest rate from 0.5% to o.75% to encourage the deposition of money to control money

circulation (Shenkar, and Luo 2020).

Employment; A country with low unemployment is said to have a good economy.

Therefore, the central bank is mandated to set monetary policies that favor local and foreign

investments to offer employment opportunities to its citizens (Shenkar, and Luo 2020). For

instance, as of October 2021, the UK's unemployment rate was at 4%, a decline by 0.03% from

the previous year's (2020) rate. The drop is attributed to low-interest rates that encourage

entrepreneurs to take loans from banks to self-employ and create employment for others.

Regulations on Financial Systems

Domestic Money Market

 Loans: Loans are borrowings allowed on lenders for the nourishment of their business or

initiate investments. Regulations allow that loans be provided on a long-term basis. For example,

in the UK, loans on the land, property, mortgages, or businesses are provided for five years or

more.

Savings: It is advised that saving be short-term and encourage the use of money on

investment projects to accrue profit instead of saving. Personal or bridge loans are provided for 2

weeks to 3 years by all commercial banks in the UK.

Stock Markets

The main financial market in the United Kingdom is the London Stock Exchange Market.

It is mandated to allocate monetary value for all capitals in the domestic economy. United

Kingdom's economy has survived most of the economic crisis because of the stable and well-

organized Stock Exchange market. For instance, in 2020, over 1.4 billion pounds have been

traded in the FTSE in LSE. Below is a typical model of the Stock market

Stock Market Model (Mauro, and Hassan, 2019).

 London Exchange Market works operate in two ways; engagement between investor's

broker and seller's broker. It recognizes purchasers under seller or purchaser brokers in its

financial market. Shareowners are allowed to make sales through seller's brokers, and investors

as well are allowed to purchase their representatives (purchaser's brokers)

Aim/Purpose of LSE for Small Businesses

Capital allocation and capital efficiency are the main roles of the economy. Therefore,

every economy needs to invest its capital in sectors to provide good profit (return on investment).

The UK's financial markets are the source of capital for its domestic market trades, development,

and investment purposes (Shenkar, and Luo 2020). London Stock Exchange Market works for

capital allocation within its domestic economy to boost economic investments, trade, and

development.

International Economy and Capital Allocation

International markets are the expanded forms of domestic markets. Hence they also work

for capital allocation for trade, investment, and development purposes.

Commercial Banks

Savings; Through the central bank, commercial banks are permitted to give short-term

loans to businesses in various countries or states. For instance, HSBC is a typical example of an

international commercial bank that offers personal or bridge loans for 2 weeks to 3 years to

enterprises using credit cards (ONS 2019).

Loan; Just like the domestic economy, the international economy through commercial

banks also allows long-term loans. For example, Barclays offers land property ownership loans,

house mortgages, or business loans for less than five years in the UK.
 Bond: Bond is another source of capital allocation within domestic and international

markets. Bond can be expressed as the fixed income on investment where a lender offers a loan

for a specified time. Bonds are widely used by states, governments, companies, and municipals

as a source of funds and revenue to support different economic projects. As of 2020, the UK's

financial market allocated over £ 45 billion in loans and grants through bonds

Eurobond: It is a denominated bond in a different currency rather than the domestic

currency in which it is issued.

Eurodollars; It is the foreign currencies that are deposited in foreign banks. When China

deposits US dollars in UK's bank, the deposit is called Eurodollars. In 2019, just before the

Covid-19, the Eurodollar market turnover averaged £ 140 billion, with the UK controlling about

17.4% of the Eurodollar market (ONS 2019). Eurodollar can only be utilized by banks and

MNCs that have capital allocation in the international markets.

Foreign Exchange Markets

It is the market space where investors, firms, or corporations can sell, buy or speculate

foreign currencies. In the UK, it is referred to Forex market, where trillions of pounds are traded

daily. Some of the popular forex markets globally are Tokyo, London, Kenya, Sydney, New

York, Paris forex markets.

Global Stock Market; It is the free financial market where foreign companies can freely

make sales of their securities within the host financial or stock market. In the UK, Bulldog is an

example of a global stock market, and in the US, Yankee is an example of a worldwide stock

market.
 Derivatives; Are financial securities with monetary value derived from a series of assets.

They are commonly applied to international exchange rates on securities. Over-the-counter is a

perfect example of a derivative.

Non-bank financial institutions are an umbrella name for financial entities that can only

lend but not offer other banking services like depositing cash. Examples are insurance

companies, leasing firms, and pension schemes.

Contributions of World Trade Organization

In the domestic and international economy sphere, WTO influences financial operations

as follows; it develops and enforces the set financial trade policies and standards to provide

fairness and equality in the international finance market. It acts as the referee in bilateral trade

agreements by providing necessary guidelines for smooth and effective fulfillment of trade

agreements. In addition, WTO offers financial advice, assistance, and training for developing and

least developed countries.

Contributions of OECD

Organization for Economic Co-operation and Development (OECD) is an

intergovernmental body formed in early 1948 with 36 member states. It impacted international

trade in the following manner; it develops economic policies geared toward eradicating poverty

and promoting economic growth for governments of its member states. It contributes to

environmental conservation and social development for its members (Mauro, and Hassan,

2019).. It allows free trades with subsidized tariffs for trade among member countries.
CHINA'S ECONOMY

China's economic development has surprised the world's superpower countries; within

four decades, China's economy has risen from a status of a developing country to a significant

economic powerhouse. Statistics reveal that between 1979 when China's government adopted the

economic reforms up to 2020, its gross domestic product grew by an average of 11% annually

(ONS 2019). According to the latest report released by the World Bank, China is the only

country that has experienced the fastest sustainable economic expansion within the shortest

period. It elevated over 800 million citizens out of poverty. Currently, China tops in the ranking

of world's economic size in purchasing power parity, merchandised trade, lean production as

well as holder of foreign exchange reserves

GDP; according to statistics shown by World Bank, in the year 2020, China's GDP was at

14722.73 billion dollars, representing 14.02% of the world economy. These figures were

obtained to measure its national income and output, equivalent to overall expenditure for all

goods and services produced in China in 2020.

China’s economic growth from 2010-2020 (Shenkar, and Luo 2020)

 GDP breakdown (Shenkar, and Luo 2020)

GNP: Gross national product, referred to as gross national income (GNI), measures the

total sum of value added by all resident producers plus product taxes fewer subsidies. The trend

on China's GNI has been on the rise since 1957 through to 2020, with its GNI in 2020 valued at

$14880.7 billion, a 2.5% increase from 2019 despite the economic challenges imposed in the

world economy due to Covid-19.

Agriculture

Agriculture is one of the foundation pillars of China's economy. From the early centuries

to the present, agriculture has remained vital in economic sustainability, not only in China but

even in the rest of the world. Through a stable agricultural sector, China has fed its over 1.4

billion population without much aid from other international organizations. In 2020, China's

agricultural sector contributed to over 7.8% of the GDP. In the past five years, agriculture has

improved courtesy of increased technological innovations that have seen smart agriculture and

intelligent farming methods adopted in China. China also ventures in commercial crop

production that serves as export to other international markets, and in 2020, the exportation of

commercial crops was at 16% of the total exports.

China’s GDP by sector (ONS 2020)

Service Sector

As a country with the highest population, service is an essential commodity for survival.

The service sector is the highest contributor to China's GDP, with 54.5% of China's economy.
China's service sector include; transportation, IT, finance, hospitality, business services,

telecommunication, and personal services, among others

Manufacturing/Production

In the past 5 years, China has emerged on the top list of leading manufacturing countries,

specializing in heavy machinery, medical machines, telecommunication devices, and electronics.

The production sector contributed over 37.8% to the country's GDP. A significant contribution

came from telecommunication gadgets, technical equipment, and machinery production (ONS

2020). The government involvement has facilitated this to promote business and rapid

industrialization

International Trade

In 10 years, China has done exemplary well in international trade. China is a major

exporter of a variety of commodities to the international market and a kind importer of other

products from different countries. In 2019, China's export was valued at £98.4 billion, and it

increased to £164.9 billion in 2020. The increase in export and imports has achieved

approximately 150 billion just in a decade (Mauro, and Hassan, 2019). They are leading export

items to include military equipment, android smartphones, textile, automotive, electronics, steel,

and pharmaceuticals, among other items.

Critical challenges in China Due to Industrialization

Though China has projected a steady rise in economic growth, industrialization has

brought some challenges to the country's economy. Some of these challenges are;

Labor productivity; Industrialization has happened too fast, creating more opportunity,

but the country still doesn't have enough skill power to match the demand
 With hundreds of thousands of industries, environmental sustainability and climate

change has become the most significant challenge in China and its neighbors

The tax burden is a challenge in China; most entrepreneurs have complained of the high

tax burden on foreign investors in the country, thus hinder diversity and international trade

Conclusion

Financial investments and international trade both directly and indirectly impact domestic

and international financial markets. For countries or regions to achieve sustainable economic

growth, there is a need to improve the financial markets since they are the key sources of capital

allocation in the economy. Trade policies and industrialization, on the other hand, directly and

indirectly, affect domestic and international financial markets through economic growth.

Therefore, effective policies established by governments are essential in soothing challenges to

ensure smooth and continued economic growth in countries.

 References

Mauro, F. and Hassan, F. (2019). Financial markets and allocation of capital. London: Centre for

Economic Performance.

ONS (2020). UK foreign direct investment. Available at:

https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ukforeig

ndirectinvestmenttrendsandanalysis/july2019

Shenkar, O. and Luo, Y. (2020). International business. London: Routledge. Shutterstock.com.

(2020). Diagram of financial markets. [online] Available at:

https://www.shutterstock.com/image-illustration/diagram-financial-markets-116807821

Statista (2021). UK inflation rate forecast.Available at:

https://www.statista.com/statistics/306720/inflation-rate-forecast-consumer-price-indexcpi-

united-kingdom-uk/

Stefan, N. (2018). The liquidity premium of near money assets. The Quarterly Journal of

Economics. 131(4), pp. 127-171

World Bank (2020). Emerging Brazil-lessons from an economy in transition. Available at:

http://www.worldbank.org/en/news/feature/2014/12/10/emerging-Brazillessons-from-economy-

in-transition