Business with china

Business With China

Why China?

Why China?China: It is a special market

- A market of significant Size - A market of significant Growth- A market of significant Resiliency- A market with increasingly Normal business environment but

not without Risk* Maturization of reforms and opening up* China’s entry into WTO* Business friendly government policies

- A global market with virtually all major MNCs present- A global low cost manufacturing base- Large reservoir of high quality low cost engineering talent,

skilled labor and a developing management pool

Introduction• China is the largest market on the planet

• China’s immense diversity, variety, complexity, and is has enormous competitive intensity is unrivalled in the world

• China’s historical development, political structure and climate, & international relations influences its economy and foreign trade.

• China’s infrastructure and energy structure, legal framework pose a challenge to business

• China possibly has the toughest business environment in the world

Area & Population• Land area of 9.56 million square kilometers

• 3th Largest country in the world

• Largest Population – 1.35 Billion in 2012

• Population growing at 0.9% per year

• Two thirds of people live in eastern lowlands of yellow river, and pearl river valleys – population density of > 200 per sq km!

• 10% of china’s land is arable

• Vast sections of Northern, western & Tibet is sparsely occupied

Ethnic and Linguistic Group• Han is the dominant race – 91.9% of

population sharing common language.• 55 ethnic minorities• Major Religious groups are Daoist &

Buddhist • Muslim (1-2%) & Christian (1%)• Mandarin is the official standard language• There are also 50 minority languages

Communication and Transport• Communication and transportation are well developed

in China. • The Internet is used widely: telephone and mobile

phone services are also well developed. • There are about 135 civil airports mainland in China, of

which about 39 are international airports. • China has 8 out of the top 10 container ports in the

world. • China also has a strong expressway network and

railway system, which are improving all the time.

Legal Systems

• The judicial system comprises four levels of courts, from county level up to the Supreme Court, with escalation and appeal processes.

• These courts deal with both civil and criminal cases.

Domestic Savings• China has the highest level of family savings – A

whopping 40% saving rate• High domestic saving is channeled to fund

inefficient SOE via state owned banks (94% of all bank loans goes to SOE(State Owned Enterprise))

• In 2003-2004, Banks are changing priority of loans to housing, cars and other public consumption goods – Driving recent surge in demand for cars and consumer goods

• Privatization of Banks will encourage local business growth – channel loans to local businesses

Business Environment of China

Economic Reforms• China embarked on free market reforms in

1978 with agricultural reforms• Farmers were allowed to own land, grow any

crop and the selling price for agricultural produce was increased dramatically

• In 1981 prices of industrial products was liberalized and private enterprises were allowed to setup factories in rural areas

• By mid 1980’s a substantial portion of rural countryside had private farms and had developed basic industries

Economic Policy• China initiated economic reforms in 1978• Flexibility and pragmatism is the hallmark of economic

reforms• CCP and leadership acknowledge that reforms are

irreversible – and need faster/more reforms to sustain the current growth

• CCP and Government are concerned about the future economic challenges

• Policies are aimed at minimizing boom-burst cycles, controlling inflation and maintaining growth

Political Structure• Centralized unitary Government• Single Party with one legislative house• CCP (China Communist Party) and the Parliament

has separate constitutions• All national legislative power is vested with the

parliament (CCP controls the parliament)• CCP – Communist Party controls all the law

making and other important decisions• President is the head of CCP, national Legislature,

and the Army – CCP thus has overall control

China Communist Party (CCP)• CCP has legislature and Executive branches

• Legislature is the National People’s congress represents 58 million party members and meets every 5 years

• CCP Executive branch called Central Committee (CC) has 151 full time members and 191 alternate members

• Executive meets twice a year

• Politburo (PB) represents the Central Committee and consists of 20 members

• Politburo standing committee(PBSC) is the most authority to deal with any issue with which it wants to deal

• The seven members of PBSC are the seven most important men in the country

Role of CCP• CCP is the all powerful entity in China – 58

million members• CCP controls the government at all levels of

hierarchy – central, provincial & municipal• CCP sets the strategic direction and monitors

the implementation of policies• Government bureaucracy executes the policies• CCP controls all the key government job

appointments

CCP and Government• It is difficult to isolate CCP from the government• Functions, responsibilities and authority often

overlap between CCP and bureaucracy• Many government official are also CCP members• Independent Government institutions do not

really exist in China – Judiciary, Army and Executive are all under CCP control

• CCP controls all the key appointments in all branches of Government

!! In short CCP is the Government !!

Political Structure - Graph

Political Climate• China follows incremental reforms based on

clear consensus of the leadership• Reforms have introduced open, transparent and

responsive style of government• Maintaining order and stability is of highest

importance to Chinese leadership – which is managed by monopoly power of CCP

• Leadership believes that democracy at national level will throw China into chaos and endanger political stability – like in USSR(Russia)

Corruption & Lawlessness • China is fighting against Corruption and lawlessness• Public protest against corruption is tolerated • Government is becoming increasingly responsive to

people’s concerns• Protests against the political system and constitution is

not tolerated – dissidents are prosecuted • Legal procedures are evolving and courts have a wide

leverage in interpretation of the law • Corruption is still widely prevalent and a major

problem for businesses• CCP members and their family yield enormous

influence leading to corruption

International Relations• China believes in multi-polar world – sees itself

as a superpower • Foreign policy is dominated by territorial and

political integrity – Often the cause of friction with the US on issue of Taiwan and democracy

• China will maintain a strong military force to maintain its freedom and avoid any domination by the US

• China can project its military power far beyond its borders – invasion of Taiwan if Taiwan becomes independent

International Relations - Asia

• China sees itself as the power center of Asia• Seeks to maintain friendly relations with other

countries as long as they acknowledge China’s superiority

• China’s need for Oil is driving relations with Vietnam, Africa and the middle-east

• Relations with India, Japan and Australia is strained or cold at very best – because these countries represent alternate power centers in Asia

Macroeconomic Policies of China

Macroeconomic Policy in China

• After 1949, the Chinese economy experienced relative price stability for more than 30 years.

• Following the economic reform in 1979, price increases remained a substantial and common phenomena almost throughout the 1980s and mid-1990s.

• From 1978 to 1992, China’s liberalization was gradual with a fairly stable price level and extraordinary rapid output growth.

Contd…


• Since 1989 in Eastern Europe and the former Soviet Union, rapid liberalizations attempted in the face of falling real output generated much higher inflation.

• Yet, both regions’ fiscal policies were surprisingly the same. Like its socialist counterparts in Europe, the Chinese government’s revenue, as a share of Gross National Product (GNP), has fallen sharply.

Contd…


• How did China manage to avoid inflation while its government was such a heavy borrower from the state bank system?– It first liberalized the areas like agriculture

where subsequent productivity growth was rapid.

– In 1978, agriculture communes began to break up into small farm leases (household responsibility system with duration of 10-15 years).

Contd…


– Between 1979-1983, with over three quarters of the population still in agriculture, farm output surged by 8-10 percent per year.

– By 1984, the focus of rapid economic growth had shifted to rural light industry, which began to absorb much of the labor force released by productivity improvements in agriculture.

– Small-scale private traders flourished. Unlike the state firms, those market-driven town- and village-owned enterprises (TVEs) were outside of the official price and output control.

Contd…

Macroeconomic Policy in China China imposed very hard budget constraints on, and gave little

bank credit to the newly liberalized non-state sectors in industry and agriculture.

Along with the Household Responsibility System (HRS), state procurement prices paid farmers for compulsory quotas of grains and foodstuffs were sharply raised toward world-market levels.

The remaining surpluses could then be freely sold to private markets.

Together with the increase in output, the big improvement in the newly-independent farmers’ terms of trade greatly increased their cash flows. Contd…


• In the early 1980’s, the improved cash position enabled farmers to self-finance their on-farm investments.

• While building up their cash and saving deposits relative to their rising incomes, farmers (who were over three-quarters of the population) became big net lenders to the government through the state banking system.


• China set positive real interest rates on saving deposits.

• The resulting enormous growth in saving and stocks of financial assets allowed the liberalized sector to finance itself, the Chinese government, and the deficits of the slowly reforming state enterprises.

• From the mid-1980s to near present, this dramatic and voluntary buildup of savings by rural households was replicated throughout the rest of the economy as industry succeeded agriculture as China’s leading growth sector.


• The enormous increase in broad money holdings (M2) from about 28% of GNP in 1978 to about 97% in 1991.

• Because, Central Government continued ownership of the state banking system, it could offset its failing fiscal position by borrowing back these rapidly rising financial surpluses of urban and rural households or of the non-state sector generally.


Why were these so high savings kept in the banks?

1. No places to go: not in capital markets or precious metals or real estate or foreign investment;

2. Price control;3. More importantly, when inflation raised

(e.g., in 1988-1989, it was about 18%), the government responded by fully indexing some interest rates.

The Exchange Rate System• China may have the potential problem of so-

called “conflicted asset”: • As the stock of dollar claims cumulates, domestic

holders of dollar assets worry more about a self-sustaining run into the domestic currency forcing an appreciation.

• Foreigners start complaining that the country’s ongoing flow of trade surpluses is unfair and the result of having an undervalued currency.

Economic Development of Post Liberal Era


• China's goal was to develop a carefully planned, closely regulated but marketized economy that could gain the benefits of participation in the fast-growing global economy.

• The Chinese government would continue to own and to control most major Chinese industrial and economic sectors, like – Transportation– Communication– Energy– Mining– Manufacturing, and – Financial services.

• Agriculture is privatized.• Foreigners are permitted to participate in joint

ventures with Chinese companies.• Also allowed to open wholly owned companies

under Chinese regulations.• China’s economy has grown at an average annual

rate of 8-10 per cent annually since 1978.• China has become the largest recipient of direct

foreign investment in the world.


A Chronology of Events Affecting China’s Development Policies in the Last Three Decades

Time EventSept 1977 Chairman Mao Zedong dies. Hua Guafeng becomes

Chairman of the CCP and subsequently Deng Xiaoping returns from political exile.

Dec 1978 Increasing CCP support for Deng Xiaoping’s reformist agenda culminates in its basic acceptance by the 11th Central Committee of the CCP. It was argued that the reforms should begin with agriculture.

1979 Deng Xiaoping becomes Chairman of the Military Commission. He criticizes dogmatic approaches to policy and favours a practical approach

Contd…


Time Event1980 Hua Guofeng steps down as Chairman of CCP.Mid-1981 Under the influence of Deng Xiaoping, the CCP stresses

that China’s policies for modernization must be realistically based, systematic and staged, and take account of Chinese conditions.

1984 The CCP decides that the economic reforms commenced in agriculture should be extended to the whole economy. An end to the privileged position of state enterprises is signaled. Increasing emphasis occurs on greater economic openness as an instrument of development policy.

Contd…


Time Event1989 Chairman Jiang Zemin confirms the direction of China’s

development policies, such as extension of the market system and greater economic openness as well as measures to limit population growth. He saw the need for China to improve its science and technology policy because as China catches up with the rest of the world’s technology; it will need to do more to advance its own scientific and technological improvements.

2002 Jiang Zemin in his report to the 16th Congress of the CCP re-affirms China’s policies for economic development but expressed concern about growing economic inequality in China. Given changed economic conditions in China, it seemed that Deng Xiaoping ‘s principle of payment according to work (expounded in 1978) was going to be modified

Contd…


Time Event2007 Chairman Hu Jintao in his report to the 17th Congress of the CCP

then confirmed support for continuing earlier economic reforms but also indicated that policy must pay more attention to income inequality, approaching technological (and similar) barriers to China’s continuing development, and environmental and energy issues.

2008 China faced the challenge of the global economic crises and formulated policies to weather the economic storm. This has been described as ‘China’s greatest [economic] crisis since its reforms 30 years ago’.

Early 2009

Signs of recovery of economic activity in China as a result of Government intervention. China achieved 8% GDP growth in 2009.

Recent Financial issues

• In 1992, financial hub was designed in Shanghai with the spirit of ‘build it and they will come’.

• China had become the world’s second – largest recipient of FDI, still it is maintain the same position.

• China’s banking system had not become too integrated with the international banking system.

Who’s who in China’s financial sector• The regulator– People’s Bank of China (Central bank in 1979)– Ministry of Finance (Tax collector, Responsible for

China’s fiscal policies like national budget, raising capital from capital markets)

– China Banking Regulatory Commission (Setup in 2003 to takeover responsibilities of PBOC.

– China Securities Regulatory Commission (Setup in 1992 for supervising China’s securities and future markets)

– China Insurance Regulatory Commission (separated from PBOC in 1998 and its role is to supervise and develop insurance in China)

Who’s who in China’s financial sector• The payer– Big four state owned commercial banks• Bank of China• China Construction Bank• Industrial and Commercial Bank of China• Agricultural bank of China

– Shareholding banks• 13 share holding banks• Strategic investors to help amass capital and improve

transparency.

– City, regional and rural banks• 125 city commercial banks

China’s Ability to Cope with the Recession

• Its very high level of foreign exchange reserves• The fact that FDI in China is not as important

as a proportion of GDP as it used to be and therefore, China’s level of economic activity is less dependent on it.

• There is significant scope to expand domestic demand to replace the decline in foreign demand for China’s products.

EXTENSION OF THE ECONOMIC AND SOCIAL REFORMS

• There was recognition of the need to reduce bureaucratic centralised

management of the economy and eliminate bureaucratic and

political impediments to achieving economic efficiency and

development.

• The economic reforms should begin with agriculture because at that

time it was ‘the foundation of the national economy’.

• Particular attention was given to the ‘rule of law’.

• Decentralization and resource ownership in undertaking the

agricultural reforms.

• To work out payment in accordance with the amount and quality of

work done, and avoid equalitarianism.

INDICATORS OF CHINA’S ECONOMIC PROGRESS SINCE 1978

• China’s economic growth reached almost double digit levels. China’s real GDP was over 13 times higher in 2006 than in 1978.

• Controlled growth in population• Substantial reduction it has achieved in its

incidence of poverty which is now very low.• China has brought down the number of

people in absolute poverty from 250 million to 15 million in less than 30 years.

• The initial World Bank estimates for rural poverty population in China are – 1990, when it found 280 million (31.3%) of the

rural population to be in poverty. – 1998, around 106 million (11.5%) of the Chinese

rural population were in poverty and this fell to 88 million in 2002, less than 10% of the rural population


• Importance of state-owned enterprises has declined considerably.

• More than 60% of China’s GDP is now produced by privately owned enterprise.

• Open doors for foreign direct investment.

• China’s agricultural labour surplus is fully employed, this may place upward pressure on wages in China in the future.

• GDP in 1978 was 9.8% but this ratio increased constantly after 1978 to reach 40% of its GDP in 2008.


Retail issues in China• China is the world’s fastest-growing major retail

market.• China's retail sales are currently growing at 9

percent to 15 percent a year.• Around 35 of the world’s top 50 retailers are in

China.• Wal-Mart have more than 200 outlets in China.• KFC have 2,600 outlets and it was established in

1987.• Coca-cola is the top brand in soft drink industry.

It started its operations in China since 1980.

Facts about Exports of China• China Exports averaged 435.58 USD Hundred Million

from 1983 until 2013.

• Exports are reaching an all time high of 1992.30 USD Hundred Million in December of 2012 and a record low of 13 USD Hundred Million in January of 1984.

• Exports of goods and services constitute 30% of GDP.

• China major exports are: electromechanical products (57 percent of total exports) and labor-intensive products like clothing, textiles, footwear, furniture, plastic products, bags and toys (20 percent).

• China Imports averaged 381.31 USD Hundred Million from 1983 until 2013.

• The are reaching an all time high of 1830.13 USD Hundred Million in March of 2013 and a record low of 16.60 USD Hundred Million in July of 1983.

• China’s main imports are electromechanical products (43 percent of total imports).

• China’s main import partners are: European Union, ASEAN, Japan, South Korea and Taiwan

Facts about Imports of China

Economic Reforms• Rural reform

– Increase of agricultural production and rural income• Open-door policy

– Turnaround from an inward-looking, self-reliant economy to one that participates in the world economy (foreign trade, FDI, and SEZs)

• Industrial reform– Enterprise reform and price reform

• Financial reform– Company’s responsible for financial performance and borrow money

from banks; raise capital at the stock market • SOEs reforms

– Ownership restructuring