China: an Evaluation of Political Risk

Before making any decision about investing in another country, business people have always questioned whether such an investment could be risky due to political factors, such as a sudden change in regime, a revolution or a coup. However, while economic and financial risk analysis has received much attention during the past thirty years, and many techniques have been developed for this analysis, this does not appear to be the case for political risk. But what is political risk? Some have defined it as the risk of a political change or political instability. Others have seen it as the result of a change in politics and the probability that certain events will occur and, therefore, change the prospective profits of an investment. Even today, there is no agreement upon the definition of ‘political risk’. Political risk is sometimes considered as a particular aspect of the broader ‘country risk’ and sometimes as the ‘probability that a political event will intervene and modify the economic situation’ (which more correctly means an evaluation of an index of political stability). Other wise, it is thought of as the more general ‘possible trends in the international credit market’. Obviously, as the definition changes, so do the variables considered in analysing political risk.