Business Environment In China


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Business Environment In China

  1. 1. Business Environment in China Arun Kottolli
  2. 2. Introduction <ul><li>China is the largest market on the planet </li></ul><ul><li>China’s immense diversity, variety, complexity, and is has enormous competitive intensity is unrivalled in the world </li></ul><ul><li>China’s historical development,political structure and climate, & international relations influences its economy and foreign trade. </li></ul><ul><li>China’s infrastructure and energy structure, legal framework pose a challenge to business </li></ul><ul><li>China possibly has the toughest business environment in the world </li></ul>
  3. 4. Area & Population <ul><li>Land area of 9.56 million square kilometers </li></ul><ul><li>3 th Largest country in the world </li></ul><ul><li>Largest Population – 1.3 Billion in 1997 </li></ul><ul><li>Population growing at 0.9% per year </li></ul><ul><li>Two thirds of people live in eastern lowlands of yellow river, pearl river and Yangtze river valleys – population density of > 200 per sq km! </li></ul><ul><li>10% of china’s land is arable </li></ul><ul><li>Vast sections of Northern, western & Tibet is sparsely inhabited </li></ul>
  4. 5. Ethnic and Linguistic Group <ul><li>Han is the dominant race – 91.9% of population sharing common language. </li></ul><ul><li>55 ethnic minorities </li></ul><ul><li>Major Religious groups are Daoist & Buddhist </li></ul><ul><li>Muslim (1-2%) & Christian (1%) </li></ul><ul><li>Mandarin is the official standard language </li></ul><ul><li>There are also 50 minority languages </li></ul>
  5. 6. China Ethnic Distribution
  6. 7. Political Structure <ul><li>Centralized unitary government – not federal </li></ul><ul><li>Single Party with one legislative house </li></ul><ul><li>CCP and the Parliament has separate constitutions </li></ul><ul><li>All national legislative power is vested with the parliament (CCP controls the parliament) </li></ul><ul><li>CCP – Communist Party controls all the law making and other important decisions </li></ul><ul><li>President is the head of CCP, national Legislature, and the Army – CCP thus has overall control </li></ul>
  7. 8. Images of CCP
  8. 11. CCP <ul><li>CCP has legislature and Executive branches </li></ul><ul><li>Legislature is the National People’s congress represents 58 million party members and meets every 5 years </li></ul><ul><li>CCP Executive branch called Central Committee (CC) has 151 full time members and 191 alternate members </li></ul><ul><li>Executive meets twice a year </li></ul><ul><li>Politburo (PB) represents the Central Committee and consists of 20 members </li></ul><ul><li>Politburo standing committee(PBSC) is the most authority to deal with any issue with which it wants to deal </li></ul><ul><li>The seven members of PBSC are the seven most important men in the country </li></ul>
  9. 12. Role of CCP <ul><li>CCP is the all powerful entity in China – 58 million members </li></ul><ul><li>CCP controls the government at all levels of hierarchy – central, provincial & municipal </li></ul><ul><li>CCP sets the strategic direction and monitors the implementation of policies </li></ul><ul><li>Government bureaucracy executes the policies </li></ul><ul><li>CCP controls all the key government job appointments </li></ul>
  10. 13. CCP and Government <ul><li>It is difficult to isolate CCP from the government </li></ul><ul><li>Functions, responsibilities and authority often overlap between CCP and bureaucracy </li></ul><ul><li>Many government official are also CCP members </li></ul><ul><li>Independent Government institutions do not really exist in China – Judiciary, Army and Executive are all under CCP control </li></ul><ul><li>CCP controls all the key appointments in all branches of Government </li></ul><ul><li>!! In short CCP is the Government !! </li></ul>
  11. 14. Political Structure - Graphic
  12. 15. Bureaucracy <ul><li>Bureaucracy is organized along territorial and functional lines </li></ul><ul><li>Three territorial lines are – Central, Provincial and Municipal </li></ul><ul><li>Functional lines is based on various ministries and departments </li></ul><ul><li>Note that the prestige of the person determines the power of the office and not the vice-versa </li></ul><ul><li>To understand Chinese politics, one need to understand the power struggle of the individuals </li></ul>
  13. 16. Government <ul><li>Legislature: </li></ul><ul><ul><li>National people’s congress (NPC) of 3000 members meets once a year </li></ul></ul><ul><ul><li>Elected for five years. </li></ul></ul><ul><ul><li>Between sessions NPC is represented by a standing committee of 200 members </li></ul></ul><ul><ul><li>Legislature appoints members to the Executive </li></ul></ul>
  14. 17. Government - Executive <ul><li>Executive: legislature appoints the executive board of 15 members consisting of premier, Vice premiers, State councilors and Secretary General </li></ul><ul><ul><li>Subordinate to Sate Council are the various ministries, commissions and important SOE (State Owned Enterprises) </li></ul></ul><ul><ul><li>Premier and Vice-Premier are nominated by the president for a term of 5 years (max of 2 terms) </li></ul></ul><ul><ul><li>Decisions by the executive board becomes the law </li></ul></ul><ul><ul><li>Each member of executive board is in charge of one sector </li></ul></ul>
  15. 18. PLA – China’s Army <ul><li>People’s Liberation Army is the world’s largest standing army – with more than 3 million men </li></ul><ul><li>In addition, army can summon 197 million men who are in reserve </li></ul><ul><li>PLA also runs a sprawling business empire – arms exports, and other businesses, Employs more than 600,000 people in its factories </li></ul><ul><li>Army therefore plays a major role but is under the control of CCP </li></ul>
  16. 20. Judiciary <ul><li>Supreme People’s Court is the highest judicial authority </li></ul><ul><li>NPC appoints all the judges in the supreme court and other Lower People’s Court </li></ul><ul><li>A parallel hierarchy of Procurate courts headed by supreme people’s procurate oversees regional and local procurates </li></ul><ul><li>People’s procurate is responsible for ensuring observance of the law and prosecution of criminals </li></ul>
  17. 21. Democratic Organizations <ul><li>Chinese People’s Political Consultative Conference (CPPCC) oversees democratic parties, trade unions and other organizations </li></ul><ul><li>China has 8 registered democratic parties – all controlled by CCP </li></ul><ul><li>There are also several other mass organizations such as writers guild etc, </li></ul><ul><li>These organizations ensure social control and political discipline </li></ul><ul><li>Neighborhood committees in cities and municipalities ensure control over family planning and crime at grass-root level </li></ul>
  18. 22. Provincial Administration <ul><li>China is unitary in administration, but provinces with its huge population needs provincial administration </li></ul><ul><li>22 provinces + Taiwan and four special municipalities which have the status of a province – Beijing, Shanghai, Tianjin, Chongqing </li></ul><ul><li>5 autonomous zones which have high minority population and have limited self government (Tibet, Xinjiang, Qinghai, Inner Mongolia etc) </li></ul>
  19. 23. Provinces of China
  20. 24. Shanghai’s Skyline
  21. 25. Map of Shanghai Province
  22. 26. Map of Tianjin Province
  23. 27. Political Climate <ul><li>China follows incremental reforms based on clear consensus of the leadership </li></ul><ul><li>Reforms have introduced open, transparent and responsive style of government </li></ul><ul><li>Maintaining order and stability is of highest importance to Chinese leadership – which is managed by monopoly power of CCP </li></ul><ul><li>Leadership believes that democracy at national level will throw China into chaos and endanger political stability – like in USSR(Russia) </li></ul>
  24. 28. Corruption & Lawlessness <ul><li>China is fighting against Corruption and lawlessness </li></ul><ul><li>Public protest against corruption is tolerated </li></ul><ul><li>Government is becoming increasingly responsive to people’s concerns </li></ul><ul><li>Protests against the political system and constitution is not tolerated – dissidents are prosecuted </li></ul><ul><li>Legal procedures are evolving and courts have a wide leverage in interpretation of the law </li></ul><ul><li>Corruption is still widely prevalent and a major problem for businesses </li></ul><ul><li>CCP members and their family yield enormous influence leading to corruption </li></ul>
  25. 29. International Relations <ul><li>China believes in multi-polar world – sees itself as a superpower </li></ul><ul><li>Foreign policy is dominated by territorial and political integrity – Often the cause of friction with the US on issue of Taiwan and democracy </li></ul><ul><li>China will maintain a strong military force to maintain its freedom and avoid any domination by the US </li></ul><ul><li>China can project its military power far beyond its borders – invasion of Taiwan if Taiwan becomes independent </li></ul>
  26. 30. International Relations - Asia <ul><li>China sees itself as the power center of Asia </li></ul><ul><li>Seeks to maintain friendly relations with other countries as long as they acknowledge China’s superiority </li></ul><ul><li>China’s need for Oil is driving relations with Vietnam, Africa and the middle-east </li></ul><ul><li>Relations with India, Japan and Australia is strained or cold at very best – because these countries represent alternate power centers in Asia </li></ul>
  27. 31. Economic Policy <ul><li>China initiated economic reforms in 1978 </li></ul><ul><li>Flexibility and pragmatism is the hallmark of economic reforms </li></ul><ul><li>CCP and leadership acknowledge that reforms are irreversible – and need faster/more reforms to sustain the current growth </li></ul><ul><li>CCP and Government are concerned about the future economic challenges </li></ul><ul><li>Policies are aimed at minimizing boom-burst cycles, controlling inflation and maintaining growth </li></ul>
  28. 32. Development Challenges <ul><li>Recent boom in urban and industrial sector has created an imbalance vis-à-vis with rural agricultural sector </li></ul><ul><li>Rising Power shortages, food imports and income imbalances is a major cause of concern </li></ul><ul><li>Defunct Banking sector and highly inefficient SOE places enormous burden on future economic growth and development </li></ul><ul><li>SOE uses up 95% of bank loans (many default) </li></ul><ul><li>Reforms have not touched Banks and SOE </li></ul>
  29. 33. Growth Engines <ul><li>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) </li></ul><ul><li>Domestic consumption remains low and has marginal impact on growth – Recent trend towards higher local consumption is driving growth in 2004 </li></ul><ul><li>Local Banks and Domestic savings are used to fund SOE (94% of domestic savings are loaned to SOE) </li></ul>
  30. 34. Domestic Savings <ul><li>China has the highest level of family savings – A whopping 40% saving rate </li></ul><ul><li>High domestic saving is channeled to fund inefficient SOE via state owned banks (94% of all bank loans goes to SOE) </li></ul><ul><li>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 </li></ul><ul><li>Privatization of Banks will spur local business growth – channel loans to local businesses </li></ul>
  31. 35. Economic Reforms <ul><li>China embarked on free market reforms in 1978 with agricultural reforms </li></ul><ul><li>Farmers were allowed to own land, grow any crop and the selling price for agricultural produce was increased dramatically </li></ul><ul><li>In 1981 prices of industrial products was liberalized and private enterprises were allowed to setup factories in rural areas </li></ul><ul><li>By mid 1980’s a substantial portion of rural countryside had private farms and had developed basic industries </li></ul>
  32. 36. TVE – Cooperative firms <ul><li>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 </li></ul><ul><li>TVE enabled to absorb surplus rural labor </li></ul><ul><li>TVE’s resulted in a tremendous development of the country side – A real growth engine </li></ul><ul><li>Private initiative with a collective thought - TVE </li></ul>
  33. 37. Investment Reforms - FDI <ul><li>MNC’s were encouraged to establish joint ventures in China </li></ul><ul><li>Prior to 2004, all MNC’s were required to have a joint venture with a Chinese firm – either SOE or TVE </li></ul><ul><li>Wholly owned MNC subsidiaries were allowed only in 2004 </li></ul><ul><li>Special Economic Zones (SEZ) were created to encourage FDI - Shenzhen, Zhuhai, Shantou, & Xiamen </li></ul>
  34. 38. SEZ Benefits <ul><li>Firms located in SEZ can benefit from low cost of labor, tax exemptions, duty free imports of raw materials and technology </li></ul><ul><ul><li>Income tax level in SEZ is 15% </li></ul></ul><ul><li>In 1984, another 14 costal cities were opened up to FDI with similar incentives like SEZ with free ports etc </li></ul><ul><ul><li>Tax rate at costal cities is 25% Vs national rate of 35% </li></ul></ul><ul><li>Later other cities and towns have been converted into development zones </li></ul>
  35. 39. Living Standards <ul><li>High growth rate is raising local living standards – slowly but limited </li></ul><ul><li>Not all are enjoying a higher living standard as most of manufactured goods are exported </li></ul><ul><li>Demographic – Psychographics segmentation </li></ul>