BMG2058 GLOBAL MANAGEMENT ASSIGNMENT 1 Country analysis China

TONG KOK KWONG - 1021300383

Introduction There are more than 180 nations in the world, but they do not hold the same profit potential for a firm to investment. The choice will be based on a nations long run profit potential. The factors that influence that decision are economic, political, social, technological and legal. The attractiveness will depends on balancing the benefits, costs, and risk associated with doing business in China. China is a very large market but when measured by the number of consumers due to low living standards it may imply limited purchasing power. It is often said there are 1.3 billion reasons for western brands to sell to China. The value systems and norms of China will influence the costs of doing business. The costs of doing business in a country influence the ability of firms to establish a competitive advantage in the global marketplace. China continues to attract foreign investment. At the same time China remains a major political risk for investors. Chinas one country, two system (communism and capitalism) is a delicate balance to maintain and foreign businesses are often caught in the middle. Simply put, China remains a complicated and high-risk venture. Even so, MMCs know that China with its 1.3 billion people will be a major world market and that they must have a presence there. Chinese private companies have long been accused of illegally coping. General information: Capital: Surface area: Population: Exchange rate: Beijing 9,561 thousand sq km 1,295.2 million (2003) A$1 = 5.7459 Yuan (Jun 2004)

Official language: Mandarin

Recent economic indicators:

1999 GDP (US$bn): GDP per capita (US$): Real GDP growth (% change YOY): Current account balance (US Current account balance (% ): Goods & services exports (%P): Inflation (% change YOY): Unemployment rate (%): 991.4 793 7.1 21,115 2.1 22.0 1.5 7.4 2000 1,080.7 856 8.0 20,518 1.9 25.9 0.3 8.2 2001 1,175.7 923 7.5 17,401 1.5 25.5 0.7 9.3 2002 1,266.1 986 8.0 35,422 2.8 28.9 0.8 9.7 2003(a) 1,446.9 1,117 9.1 45,875 3.2 3.5 1.2 10.1 2004(b) 1,657.6 1,270 9.4 34,596 2.1 34.5 3.8 9.8

China's global trade relationships: China's principal export destinations, 2003: 1. United States - 21.1% 2. Hong Kong - 17.4% 3. Japan 5. Germany 12. Australia 13.6% 4.0% 1.4% 4. South Korea - 4.6%

China's principal import sources, 2003: 1. Japan 2. Taiwan 18.0% 11.9%

3. South Korea - 10.4% 4. United States - 8.2% 5. Germany 12. Australia 5.9% 1.8%

Economic growth in China Gross Domestic Product growth %

199 6 9.6

199 7 8.8

199 8 7.8

199 9 7.1

200 0 8.0

200 1 7.5

200 3 9.3

2004 9.5

Source : Govt. AFP (The Star 26 Jan 2005)

Social Situation Chinas long-standing cultural traditions rooted in a 2000 year old ideology continues to have an important influence on the way business is transacted in China. Chinas Confucian ideology, group-oriented social structures, and advanced education systems can lower the cost of doing business in china. The three values central to the Confucian system of ethics, which are important, are 1) loyalty 2) reciprocal obligations 3) honesty in dealings with others. Cooperation between management and labour can lower the cost of doing business. The combination of trust and reciprocal obligations is central to the workings and persistence of guanxi (literally means relationships) networks in China. It is claimed that these relationships-based networks can be more important in helping to enforce agreements between businesses than the Chinese legal system. Some claim that guanxi networks are a substitute for the legal system. Many find themselves at a disadvantage when dong business in China if the firms lack sufficient guanxi. Prevailing cultural mores in China may put a foreign business in a difficult ethical position. While it is important to build guanxi in china, there is a thin line between giving

gifts to support the establishment of relationships, which is culturally normal behavior in China. But bribery or corruption is viewed dimly in the West and against the law in some nations such as USA. In the Transparency International Corruption Perceptions Index 2004, China score 3.4 against a clean score of 10. In Country Rank it is 71out of 145. (Transparency International ,2004) Some controls still exist on the mobility of labour and the flexibility on the deployment, particularly in state-owned enterprises. There is now mobility, considerably less intervention in wages and other conditions in the state labour enterprise sector but there are still definite limits to the ability to dismiss workers without official approval. This results in considerable inefficiency in state-owned enterprises. Although China's household registration (hukou) system has been significantly relaxed, allowing massive migration to urban areas, some elements of it still persist, preventing permanent migration for most rural workers. Due to the influence of Chinese national culture in labour relations the nature of Chinese trade unions in China can be described as follows. Non-confrontational An emphasis on the maintenance of harmony A reluctance to take on management or the government. A tendency towards the avoidance of direct conflict.

But due to changes in the political, institutional and economic forces, there is perceived increase in the level of self-interest. Due to this, there is substantial increase in labour turnover and subsequent recruiting problems for a large number of enterprises. Capital Markets The financial sector is developing rapidly, from a low base, Stock exchanges have been established in Shanghai and Shenzhen, and a bond market in Wuhan. A growing cooperative credit system has developed in rural and urban areas and many new banks have been established including recently a domestically owned private bank.

Legal Situation There is a basic difference between doing business in the west and doing business in China. In the advanced economics of the west, business transactions are conducted and regulated by the centuries-old framework of contract law, which specifies the rights and obligations of the parties to a business contract and provides mechanisms for seeking to redress grievances should one party in the exchange fail to live up to the legal agreement. A number of companies doing business in China have encountered difficulties due to the under-developed legal infrastructure. Some have encountered difficulties obtaining payment; others have found their technology and intellectual property has been copied. The Chinese Government is still working to improve the transparency and effectiveness of the legal and regulatory framework for foreign investment and business activity, but there is inconsistency in the system and concern by foreigners that the system sometimes discriminates against them. As an example, when McDonald was informed that it would have to vacate its restaurant to make way for a commercial complex, which McDonalds still had 18 years to run on its 20-year lease. A stunned McDonalds did what any good Western company would do, it took the Beijing city government to court to try to enforce the lease. The court refused to enforce the lease, and McDonalds had to move. China does not have the same legal infrastructure. Personal power and relationships or connections, rather than the rule of law, have always been the key to getting things done in china. Another example, A unit of GM last month fled a lawsuit in Shanghai accusing Chery Automobile Co., of filching production line blueprints for a compact car, the Chevrolet Spark. The local rail and road infrastructure is inadequate for the delivery of finished products.

A large volume of commercial and civil laws have been passed by the National and Provincial Peoples Congresses since 1978, covering many aspects of commercial operations. The legal profession is growing rapidly and foreign legal firms have been established. The central Governments arbitration system5 is well regarded by foreign investors (Graham and James 1996), although obtaining redress through the local courts or tribunal systems can be very difficult. The rule of law is the weakest element of Chinas institutional China International Economic and Trade Arbitration Commission (CIETAC). China is working to improve legal framework, but still weak Performance of bureaucracy had make it uneven.

Administrative System While there is marked improvement in the administrative capacity of the core central ministries, some local government administrative bodies are considerably less efficient and transparent. Many officials of such bodies retain considerable discretionary authority over economic decisions. Accounting System Chinas accounting standards also are in transition between systems used in planned and market economies. Important differences remain between Chinese and Western accounting standards and also in the treatment of Chinese enterprises and foreigninvested enterprises. The Chairman of the National People's Congress, Qiao Shi, has recently observed that "the neglect of law and even overriding laws with administrative power, are relatively serious in some localities and departments" (FEER 96: 7).

These differences cover a wide variety of issues including the treatment of bad debts, inventories, long-term equity investments, plant and equipment, land, non-profit facilities, intangible assets and pensions.

Technological situation Online advertising and marketing agencies are discovering that china s posed to become the largest web market in the world. Confirmed official statistics had put the size of the market at the start of 2004 at around 90 million. This means Chinas online population is larger than Europe s. Political situation As a result of a range of China government initiatives, including Deng Xiaopings Open Door and Four Modernizations policies, the Chinese economy and political has undergone fundamental changes over the last two decades. Economic reform in china has been supported and highlighted by Chinas recent entry into the WTO. This transformation in the Chinese economy has been associated with significant levels of reform in employment relations. A strong belief that economic progress leads to adoption of a democratic regime underlies the fairly permissive attitude that Western governments have adopted towards human rights violations in china. Although china has a totalitarian government in which human rights are abused, many Western countries have been hesitant to criticize the country too much for fear that this might hamper the countrys march towards a free market system. The belief is that once china has a free market system, democracy will follow. While China needs vessels to transport its vast amounts of imported commodities which its booming economy demands, China was also reportedly developing military bases and

diplomatic ties from the Middle East to the South China Sea in order to protect its oil shipments and strategic interests. Chinas string of pearls strategy is according to an internal report prepared for US Defense Secretary Donald Rumsfeld and recently reported by The Washington Times. China is a net importer of energy resources and therefore has a long term and immediate interest in enhancing energy security. Western countries have protested that Chinas yuan pegged near 8.28 to the dollar (US) since the 1997-98 Asian financial crisis is artificially undervalued, taking away millions of manufacturing jobs and swelling trade deficits. China can no longer be regarded as a centrally planned economy in which the government substantially influences the domestic prices of goods or substantially monopolises international trade. However, neither is it a fully market-oriented economyas noted by Pieter Botellier, the head of the World Bank Mission in Beijing, China is perhaps about half way in its historic transition from a centrally planned to a market economic model (Botellier 1996). The following are also observed. A gradual process of market-oriented reform is continuing in a range of policy domains. In relation to competition and the role of government intervention in the economy, in most sectors central planning has been dismantled, although there is still some way to go before other sectors can be considered fully market-oriented. While the legal and institutional framework necessary to underpin the operation of markets needs to be developed and that process is likely to take many years, it is nonetheless the case that the exchange of many goods and services are effected in accordance with market prices. Market-orientation varies widely across the economy. It is more market oriented in the light industry, agriculture and services. Less in mining, distribution, parts of heavy industry, and infrastructure services such as rail and telecommunications. It is also more market oriented in coastal areas less in central and inland regions.

Generalising About Chinas Status Given the enormous scale of Chinas economyan economy of 1.3 billion people, it is not surprising that considerable variations in market across industries, orientation occur across industrial sectors, geographic regions and regions and ownership forms. Much of the reason for the high degree of variability in ownership forms the extent of marketorientation is due to the considerable decentralisation of authority to provincial and local government. This needs to be borne in mind in any attempt to generalise about the status of the Chinese Even Hong Kong, one of the most open economies in the world, maintains some regulatory barriers to entry Resources are allocated primarily by the market Government no longer substantially monopolises economy. Sectoral Variation The majority of prices are market-determined and most foreign trade is undertaken by independent trading corporations and enterprises attempting to maximise returns. While the great majority of industrial sectors are now unplanned, some heavy industry sectors still have significant government involvement. While there has been rapid development of the non-state financial sector, planned reforms of the state banking system have been delayed by their obligation to finance loss making state-owned enterprises. Geographic Variation Market-orientation is most advanced in the coastal regions and in the south, whereas north-east, central and western Chinawhile also developing rapidlylag, having for example a higher proportion of output produced by state-owned enterprises and prices subject to controls. Ownership-Related Variations Most of the non-state sector, which represents two thirds of industrial output is highly market-oriented, and exposed to market disciplines, including bankruptcy. Non-state

enterprises have been responsible for three quarters of the growth in exports in recent years. Despite considerable efforts to change the operation of state-owned enterprises, many still continue to operate although they make losses and have been much less successful in domestic and international markets. Decline of Central Planning China has come a long way from central planning and resources are now allocated primarily by the market. However, as mentioned above, residual element of planning does operate in some sectors of the economy. Rather than intervening pervasively to allocate resources economy-wide, the Government now intervenes only selectively to achieve specific policy goals, such as macroeconomic management, energy and food security and assistance to ailing state-owned enterprises. As such, China more closely resembles many mixed economies whose governments also pursue a similar range of social and economic objectives. China therefore can no longer be treated as a centrally-planned economy. In particular, it can no longer be described as an economy in which the Government substantially influences domestic prices of goods or substantially monopolises trade. In each of these areas and others into certain sectors (such as banking). trade or prices considered by this paper government planning and control have been largely dismantled. Transition to Market China is an economy in transition between plan and market. While the market mechanism now has been introduced throughout most of the economy, the complex task of establishing the necessary institutional framework to underpin and facilitate the operations of a market-based system is still in progress. However, it is clear that Chinas transition to a market is advancing strongly, and that this process is irreversible.

Conclusion There are no right or wrong decisions, just decisions that are associated with different levels of risk and reward. Entering a large developing nation as china and entering on a large scale will be associated with high levels of risk. At the same time, the potential long-term rewards associated with such a strategy are great. While it is difficult to generalise about the nature of the Chinese economy due to its considerable regional and sectoral variation, China has obviously progressed a considerable distance from central planning towards a market economy. But there is a tendency in the media to exaggerate the achievements, which China has had to date when it comes to efforts to change from central planned towards a market economy. A Market with Chinese Characteristics China has indicated that its goal is to create a socialist market economy with Chinese characteristics. While it is unclear how this Chinese economy with characteristics will be expressed in practice, there are indications that this Chinese model envisages a strong role for the state and continued close characteristics cooperation between the state and the business sector. Singapore and the Republic of Korea are often cited by Chinese officials as appropriate models of state intervention for China. The leaderships commitment to preserving the socialist character of the economy is likely to preclude privatisation of the sort experienced in some transitional economies of Eastern Europe and the Former Soviet Union, especially in key pillar industries (IMF 1993: 4).

References The Star, 3 Febuary 2005. The Star, 7 Febuary 2005. The Star, 26 January 2005. Far Eastern Economic Review (FEER) 1996 "China Rules: Liberalism with Chinese Characteristics", November 7. George Mina and Frances Perkins, 1997,Chinas Transitional Economy: Between Plan and Market, East Asia Analytical Unit, Department of Foreign Affairs and Trade, Australia. Botellier, Pieter 1996, Chinas Economic Reforms Since 1978 and the Role of the World Bank, Background Paper for Seminars Sponsored by Austrade Graham and James Beijing 1996, Reform to the Legal System, consultancy to the East Asia Analytical Unit, unpublished. International Monetary Fund (IMF) 1993, China at the Threshold of a Market Economy, IMF Washington D.C., September. Charles W. L. Hill, 2003, International business: competing n the global marketplace, McGraw Hill/Irwin. Hodgetts, Richard M. 2003, International Management: culture, strategy, and behaviour, McGraw Hill/Irwin. Transparency International Corruption Perceptions Index 2004,