Chinese Business

Hung-Gay FUNG

University of Missouri-St. Louis

China

• The word China in the Chinese language literally means “middle kingdom.” The Chinese are thinking that China is the middle (center) of the world.

• This mentality is similar to the US (in fact we are thinking that we are the universe).

The map of China

Beijing

Beijing

Shanghai

Shenzhen

Xi’an

A small town in western China

A primary school in western area

Village

Weaving woman

Economic Data1998 2000 2001

• Population 1.24b 1.26b

• Population growth 1.2%

• Urban population 30%

• Life Expectancy 71 years

• Literacy rate 81.5%

• GDP (US$ b) 960.9 1,073 1,196.4

• GDP growth 7.8% 7.4.% 7.4%

• Current account (US$b) 29.3 11.8 1.83• Foreign reserves (US$b) 149.2 163.9 212.2

• Exports (US$b) 183.8 191.3 249.9

• Imports (US$b) 140.2 163.8 228.1

• Inflation (CPI) -0.8% 0.4% 1.6%

China 's Top Trade Partners in 2000 (US$ Billion)

Rank Country Total trade % Total Trade % GDP

1 Japan 83.17 17.54 7.75

2 US 74.47 15.70 6.94

3 HK 53.95 11.37 5.03

4 S. Korea 34.50 7.27 3.21

5 Taiwan 30.53 6.44 2.84

6 Germany 19.69 4.15 1.83

7 Singapore 10.82 2.28 1.01

8 UK 9.90 2.09 0.92

9 Australia 8.45 1.78 0.79

10 Russia 8.03 1.69 0.75Source: General Administration of Customs, China Customs Statistics (2001)

China and Yangtze Delta

• Since 1978’s open-door policy (adopted by Deng Xiaoping) to foreign countries, China’s growth has been around 9% until the Asian currency crisis

• FDI- come from Taiwan, Hong Kong, Singapore, South Korea and U.S.

• Reforms --economic and political, downsizing the state-owned enterprises and government bureaucracy

• Development of private and non-state owned enterprises

Continued

• Historical High inflation1988 (23%) and 1994 (21.7%)

• Policies to keep inflation down to 10%– reforms led to overheated economy and wage

hike in 1980s– government implemented a wage and bonus tax– control inflation in 1994, using contractual

monetary aggregate and fiscal deficits.

continued

• Success factors:– High Saving rates: 30-50% of GDP– Growth in FDI– accumulation of reserves (confidence) as a

result of trade surplus– relative stable working environment (no major

revolution)– hardworking of the Chinese people

4 Growing Regions in China

Regions GDP (%) • Yangtze River Valley 38.5%

Shanghai, Jiangsu, Zhejiang

• Yellow River Valley 30.2% Beijing, Tianjin, Shandong

• North-east Areas 11.3% Heilongjiang, Jilin, Liaoning

• Zhujian (Pearl) River Valley 16.8%Guangdong and Fujian

Regions of Development

• Economic and Development Zones – along the cost– successful for the past 20 years

• Development of the West and Central China– Railways and roads– oil lines

Economy Structure

Composition Percentage

Industry 45 %

Service 27 %(commerce, construction, others)

Agriculture 28%

Banking Sector

• Central bank - People’s Bank of China

• 4 big banks - control 80 % business– Bank of China,

– Industrial and Commercial Bank of China,

– Agricultural bank,

– China’s Construction bank

• Under financial reforms– bad debts

Financial Markets

• Two Stock Markets– Shanghai Stock exchange– Shenzhen Stock exchange– enables state firms to raise money– A-share vs. B-share

• Underdeveloped bond markets

Investments in China

• Two types

• Foreign Direct Investment (FDI)– in forms of setting up plants and factory

• Portfolio investment– in stock markets (B-share investments)

Total (Realized) FDI in ChinaYear FDI ($ billion)1984 1.419

1986 1.875

1988 3.194

1990 3.487

1992 11.008

1994 33.767

1996 41.726

1997 45.257

1998 45.463

1999 40.319

Choices of investment

• Representative office, • Joint venture,• Wholly-owned foreign enterprise• Foreign investor shareholding corporation

China and World Trade Organization (WTO)

• Sept 17, 2001– Accord on China’s entry into WTO is signed,

clearing China’s way to WTO– The last big dispute between the US and EU over

the status in the Chinese market of AIG, the US insurer is resolved

– signs bilateral deal with Mexico, the last WTO member to sign for approval to admit China

• Nov, 2001, formal agreement was signed

WTO Effects on China• Agriculture

– import tariff reduces from 21.2% to 17% over time– quota and permit for trade will be phased out– farmers may suffer most

• State-owned enterprises (SOEs) - employ over 50 % population; face tense competition

• Automobile industries - worst hit– tariffs cut from 25 % from current 80-100%

• Textiles - shoes, toy industries may gain (export)• Financial services - may suffer