1. Business With China

2. Why China?

3. 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

4. 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

5. 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

6. 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

7. 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.

8. 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.

9. 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

10. Business Environment of China

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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 !!

17. Political Structure - Graph

18. 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)

19. 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

20. 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

21. 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

22. Macroeconomic Policies of
China

23. 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…

24. Macroeconomic Policy in China
• 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…

25. Macroeconomic Policy in China
• 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…

26. Macroeconomic Policy in China
– 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…

27. 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…

28. Macroeconomic Policy in China
• 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.

30. Macroeconomic Policy in China
• 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.

31. Macroeconomic Policy in China
• 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.

32. Macroeconomic Policy in China
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.

33. 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.

34. Economic Development of
Post Liberal Era

35. 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.

36. • 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.
Economic Development of Post Liberal Era

37. A Chronology of Events Affecting China’s
Development Policies in the Last Three Decades
Time Event
Sept 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…

38. A Chronology of Events Affecting China’s
Development Policies in the Last Three Decades
Time Event
1980 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…

39. A Chronology of Events Affecting China’s
Development Policies in the Last Three Decades
Time Event
1989 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…

40. A Chronology of Events Affecting China’s
Development Policies in the Last Three Decades
Time Event
2007 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.

41. 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.

42. 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)

43. 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

44. 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.

45. 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.

46. 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.

47. • 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
INDICATORS OF CHINA’S
ECONOMIC PROGRESS SINCE 1978

48. • 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.
INDICATORS OF CHINA’S
ECONOMIC PROGRESS SINCE 1978

49. 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.

51. 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).

53. • 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

54. 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