Milestone 3: McDonald’s Corporation
Maria Plumb, Macroeconomics
ECON 230
Dr. Jeff Bajah
December 5, 2021
McDonald’s fast-food chain maybe one of the largest globally; however, it is still highly regulated by monetary, which is the Federal Reserve and fiscal policy in the United States and its key market, China. What is Federal Reserve? Federal Reserve is a monetary system and “central bank of the United States that conducts monetary policy and provides financial services to the U.S. government” (Amadeo, 2021, para. 1). Its role is to regulate and stabilize the economic growth and structure of the country, as well as its U.S businesses in the world. While the United States have the Federal Reserve that provides our financial services, China, on the other hand, does not have a Federal Reserve. However, a central bank is the “People’s Bank of China and does not have a single primary monetary policy tool” (Lee, 2013, para. 1). The monetary and fiscal policy in both U.S. and China can influence the financial growth of McDonald’s. However, unexpected events and changes in economic and fiscal policy can impact McDonald’s stability in both United States and its key market, China.
Federal Reserve and Central Bank Policy
As previously mentioned, the U.S. Federal Reserve does play a role in McDonald’s market stability. It oversees the market situation such as inflation and unemployment due to unpredictable situation such as the coronavirus that affected most businesses, particularly, McDonald’s in the U.S. and China. In 2020, fast-food chains like McDonald’s have shut down their regular operation, as their restaurant and other fast-food chains were empty due to the fear of coronavirus and only allowed drive thru and curbside pick-up in the U.S. As a result, McDonald’s revenue in its home country declined from an estimated $21.3 billion in 2019 to $19.2 billion in 2020 (McDonald's Revenue 2006-2021, para. 1). As the impact of the pandemic worsened, McDonald’s sales declined to 22 percent in the U.S. and “nearly 35 percent internationally” on the first quarter (La Monica, 2021, para. 2). With the dramatic drop in its sales, stocks and revenue, the Federal Reserve stepped in and offered financial support, which McDonald’s franchisees accepted (La Monica, 2020, para. 16) to keep their restaurants operational. The Federal Reserve procured debt, as well as bond purchases from huge companies such as McDonald’s as a mean of “unprecedented rescue” to support the economy’s financial institution and the “corporate America” (Dayen, 2020, p. 2) from the economic disaster resulting from the coronavirus and bailing out investors in the process. In March 2020, the Federal Reserve purchased $6.5 billion worth of McDonald’s debt/bonds. In addition, the Federal Reserve created the Coronavirus Aid, Relief, and Economic Security “(CARES) Act”, which became a law on March 27, 2020, to support the affected businesses, including McDonalds, other companies, as well as providing stimulus to those affected by the coronavirus (Dayen, 2020, p. 3).
Like the Federal Reserve in United States, China’s monetary policy is called the People’s Bank of China (PBOC), which is the central bank of China that serves the same purpose as the Federal Reserve relating economic growth, financial stability, and supporting small and big businesses. However, China’s central bank does not provide cash relief to people and enterprises during hardship. Instead, PBOC lends money to companies to strengthen “liquidity, support and equity financing, and reduce fees and taxes” (Maiello, 2020, para. 2) to keep businesses afloat, help with employment and other essentials that will assist in supply production and keeping workers employed. PBOC acts as a lender and a creditor allowing impacted companies to borrow money without being penalized and loosening up credit rules and requirements, making it easier for businesses to borrow money, most specifically those who uses “stocks as collateral” (para. 3). China’s central bank operate independently and uses several management methods, unlike the U.S Federal Reserve. During the coronavirus pandemic, Chinese shares fell, resulting in Shanghai Composite Index” closed nearly 8% lower. It was reported that goods and services were negatively impacted (BBC News, 2020, para. 1-2), which mean, it had affected McDonald’s goods and services as well, as the supply of materials, and manufacturing slows down, so does the operation of McDonald’s. As the coronavirus spread throughout China, PBOC attempts to help the economy by “lowering short term interest rates” to the borrower (para. 4). McDonald’s would likely have to adapt to China’s implementation of digital currency as China’s central bank prepares to start using digital payments and having McDonald’s participate in the “digital currency trial” (Cheng & Kharpal, 2020, para. 4) that PBOC wants to implement in the year 2020 during the pandemic, allowing the consumers to make digital payments once it officially launched (para. 11). China “instructed McDonald’s to expand its digital RMB payment across the country”, which is the Chinese currency just in time for the 2024 Olympic Games in Beijing and pressed “US companies to put in place a system that would allow “consumers to pay for their products in digital RMB” (Menten, 2020, para. 1-2).
Effects of Fiscal Policy
What is fiscal policy? “Fiscal policy is federal government policy on taxes, spending, and borrowing designed to influence business fluctuations” (Cowen & Tabarrok, 2018, p. 789). Any changes in fiscal policy imposed by the government can impact any businesses and big corporations such as McDonald’s. Change in fiscal policy will affect McDonald’s company’s operations in the United States. However, it will also affect its franchisees globally, including McDonald’s China, as the government regulates spending “to control inflation” and support economic growth (Circle of Business, 2021, para. 1). The role of the government regarding fiscal policy is more to balance the budget “through spending and revenue changes” (Weinstock, 2020, para. 1). Implementation in spending and revenue changes can ease the burden on the impact of recession on people, business operations and its finances as “aggregate demand” contribute to the economy’s downfall, resulting in to increase in unemployment, a decline in revenue, stocks, and investment (para. 3). When hardship occurs under unexpected circumstances, such as recession, “policymakers”, which consist of Congress in the United States, would congregate to assess the seriousness of recession, and find a way to alleviate overall spending. Congress would then implement a plan to increase “government spending” and “decrease tax revenue” to encourage economic growth. An increase in government spending of goods and services, materials to manufacture products will help the economy as people spend more money (para. 5). In the case of McDonald’s, effects would be increase in sales and revenues; however, too much of “expansionary fiscal policy” can also have a negative effect, such as high inflation (para 6). As inflation rise, so does goods and services, discouraging people from spending money.
As far as McDonald’s China, changes in U.S. fiscal policy will impact McDonald’s franchisees based on the fluctuations in interest rates and taxes imposed as talks of trade and tariff between the United States and China continues (Lucas, 2019); this will have a huge impact on the McDonald’s business operation.
Although the United States and China may have different monetary and fiscal policies, they both have the same interest regarding McDonald’s business operational. Changes in both countries’ economic and fiscal policies will affect’s McDonald’s financial outcome.
Reference
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BBC News. (2020, February 3). Coronavirus: China shares in biggest fall in four years. BBC. Retrieved from https://www.bbc.com/news/business-51352535
Cheng, E. & Kharpal, J. (2020, April 24). McDonald’s is reportedly part of China’s digital currency trial. CNBC. Retrieved from https://www.cnbc.com/2020/04/24/china-digital-currency-mcdonalds-starbucks-part-of-pilot-program.html
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Dayen, D. (2020, May 27). How the Fed Bailed Out the Investor Class Without Spending a Cent
Just announcing $4.5 trillion in future spending to support securities markets was enough to keep owners of capital protected from the downsides of the coronavirus. https://prospect.org/coronavirus/how-fed-bailed-out-the-investor-class-corporate-america/
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Lee, Y.N. (2018, August 5). China’s monetary policy is complex and shifting. Here’s what you need to know. CNBC. Retrieved from https://www.cnbc.com/2018/08/06/china-monetary-policy-how-pboc-controls-money-supply-interest-rate.html
Maiello, M. (2020, April 7). China’s Economic Response to COVID-19 Has Helped, for Now Retrieved from https://www.chicagobooth.edu/review/chinas-economic-response-covid-19-has-helped-now
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Weinstock, L.R. (2020, December 3). Introduction to U.S. Economy: Fiscal Policy. Retrieved from https://crsreports.congress.gov/product/pdf/IF/IF11253