Business Environment in China

Arun Kottolli
 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 – 1.3 Billion in 1997
• Population growing at 0.9% per year
• Two thirds of people live in eastern lowlands of
yellow river, pearl river and Yangtze river valleys
– population density of > 200 per sq km!
• 10% of china’s land is arable
• Vast sections of Northern, western & Tibet is
sparsely inhabited
 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
China Ethnic Distribution
 Political Structure
• Centralized unitary government – not federal
• Single Party with one legislative house
• CCP 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
Images of CCP
 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 - Graphic
 Bureaucracy
• Bureaucracy is organized along territorial and
functional lines
• Three territorial lines are – Central, Provincial and
Municipal
• Functional lines is based on various ministries and
departments
• Note that the prestige of the person determines the
power of the office and not the vice-versa
• To understand Chinese politics, one need to
understand the power struggle of the individuals
 Government
• Legislature:
– National people’s congress (NPC) of 3000 members
meets once a year
– Elected for five years.
– Between sessions NPC is represented by a standing
committee of 200 members
– Legislature appoints members to the Executive
 Government - Executive
• Executive: legislature appoints the executive
board of 15 members consisting of premier, Vice
premiers, State councilors and Secretary General
– Subordinate to Sate Council are the various ministries,
commissions and important SOE (State Owned
Enterprises)
– Premier and Vice-Premier are nominated by the
president for a term of 5 years (max of 2 terms)
– Decisions by the executive board becomes the law
– Each member of executive board is in charge of one
sector
 PLA – China’s Army
• People’s Liberation Army is the world’s largest
standing army – with more than 3 million men
• In addition, army can summon 197 million men
who are in reserve
• PLA also runs a sprawling business empire – arms
exports, and other businesses, Employs more than
600,000 people in its factories
• Army therefore plays a major role but is under the
control of CCP
 Judiciary
• Supreme People’s Court is the highest judicial
authority
• NPC appoints all the judges in the supreme court
and other Lower People’s Court
• A parallel hierarchy of Procurate courts headed by
supreme people’s procurate oversees regional and
local procurates
• People’s procurate is responsible for ensuring
observance of the law and prosecution of criminals
 Democratic Organizations
• Chinese People’s Political Consultative Conference
(CPPCC) oversees democratic parties, trade unions and
other organizations
• China has 8 registered democratic parties – all controlled
by CCP
• There are also several other mass organizations such as
writers guild etc,
• These organizations ensure social control and political
discipline
• Neighborhood committees in cities and municipalities
ensure control over family planning and crime at grass-
root level
 Provincial Administration
• China is unitary in administration, but provinces
with its huge population needs provincial
administration
• 22 provinces + Taiwan and four special
municipalities which have the status of a province
– Beijing, Shanghai, Tianjin, Chongqing
• 5 autonomous zones which have high minority
population and have limited self government
(Tibet, Xinjiang, Qinghai, Inner Mongolia etc)
Provinces of China
Shanghai’s Skyline
Map of Shanghai Province
Map of Tianjin Province
 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
 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
 Development Challenges
• Recent boom in urban and industrial sector has
created an imbalance vis-à-vis with rural
agricultural sector
• Rising Power shortages, food imports and income
imbalances is a major cause of concern
• Defunct Banking sector and highly inefficient
SOE places enormous burden on future economic
growth and development
• SOE uses up 95% of bank loans (many default)
• Reforms have not touched Banks and SOE
 Growth Engines
• China’s fast growth is fuelled by supply side – by
massive increase in industrial production to feed
exports – Funded by FDI (total for > $300 billion)
• Domestic consumption remains low and has
marginal impact on growth – Recent trend towards
higher local consumption is driving growth in
2004
• Local Banks and Domestic savings are used to
fund SOE (94% of domestic savings are loaned to
SOE)
 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)
• 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 spur local business
growth – channel loans to local businesses
 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
 TVE – Cooperative firms
• In 1984 China allowed the formation of “Town-
Village Enterprises(TVE)” – a people’s
cooperative in small scale or medium scale
industries engaged in light manufacturing or
services
• TVE enabled to absorb surplus rural labor
• TVE’s resulted in a tremendous development of
the country side – A real growth engine
• Private initiative with a collective thought - TVE
 Investment Reforms - FDI
• MNC’s were encouraged to establish joint ventures
in China
• Prior to 2004, all MNC’s were required to have a
joint venture with a Chinese firm – either SOE or
TVE
• Wholly owned MNC subsidiaries were allowed
only in 2004
• Special Economic Zones (SEZ) were created to
encourage FDI - Shenzhen, Zhuhai, Shantou, &
Xiamen
 SEZ Benefits
• Firms located in SEZ can benefit from low cost of
labor, tax exemptions, duty free imports of raw
materials and technology
– Income tax level in SEZ is 15%
• In 1984, another 14 costal cities were opened up
to FDI with similar incentives like SEZ with free
ports etc
– Tax rate at costal cities is 25% Vs national rate of 35%
• Later other cities and towns have been converted
into development zones
 Living Standards
• High growth rate is raising local living standards –
slowly but limited
• Not all are enjoying a higher living standard as
most of manufactured goods are exported
• Demographic – Psychographics segmentation