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    Business Environment in China

    Arun Kottolli

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    Introduction

    China is the largest market on the planet

    Chinas immense diversity, variety, complexity, and

    is has enormous competitive intensity is unrivalled in

    the world Chinas historical development,political structure and

    climate, & international relations influences its

    economy and foreign trade.

    Chinas infrastructure and energy structure, legal

    framework pose a challenge to business

    China possibly has the toughest business

    environment in the world

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    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 ofyellow river, pearl river and Yangtze river valleys

    population density of > 200 per sq km! 10% of chinas land is arable

    Vast sections of Northern, western & Tibet is

    sparsely inhabited

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    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

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    China Ethnic Distribution

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    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 lawmaking and other important decisions

    President is the head of CCP, national Legislature,

    and the Army CCP thus has overall control

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    Images of CCP

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    CCP

    CCP has legislature and Executive branches

    Legislature is the National Peoples congress represents58 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

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    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

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    CCP and Government

    It is difficult to isolate CCP from the government

    Functions, responsibilities and authority oftenoverlap between CCP and bureaucracy

    Many government official are also CCP members

    Independent Government institutions do not reallyexist 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 !!

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    Political Structure - Graphic

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    Bureaucracy

    Bureaucracy is organized along territorial andfunctional 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 thepower of the office and not the vice-versa

    To understand Chinese politics, one need tounderstand the power struggle of the individuals

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    Government

    Legislature:

    National peoples 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

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    Government - Executive

    Executive: legislature appoints the executiveboard of 15 members consisting of premier, Vicepremiers, State councilors and Secretary General

    Subordinate to Sate Council are the various ministries,commissions and important SOE (State OwnedEnterprises)

    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 onesector

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    PLA Chinas Army

    Peoples Liberation Army is the worlds 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

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    Judiciary

    Supreme Peoples Court is the highest judicial

    authority

    NPC appoints all the judges in the supreme court

    and other Lower Peoples Court

    A parallel hierarchy of Procurate courts headed by

    supreme peoples procurate oversees regional and

    local procurates

    Peoples procurate is responsible for ensuring

    observance of the law and prosecution of criminals

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    Democratic Organizations

    Chinese Peoples Political Consultative Conference(CPPCC) oversees democratic parties, trade unions andother organizations

    China has 8 registered democratic parties all controlledby CCP

    There are also several other mass organizations such aswriters guild etc,

    These organizations ensure social control and politicaldiscipline

    Neighborhood committees in cities and municipalitiesensure control over family planning and crime at grass-root level

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    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 minoritypopulation and have limited self government

    (Tibet, Xinjiang, Qinghai, Inner Mongolia etc)

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    Shanghais Skyline

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    Map of Shanghai Province

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    Map of Tianjin Province

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    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)

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    Corruption & Lawlessness

    China is fighting against Corruption and lawlessness

    Public protest against corruption is tolerated

    Government is becoming increasingly responsive to

    peoples 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

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    International Relations

    China believes in multi-polar world sees itself asa superpower

    Foreign policy is dominated by territorial and

    political integrity Often the cause of friction withthe US on issue of Taiwan and democracy

    China will maintain a strong military force tomaintain its freedom and avoid any domination bythe US

    China can project its military power far beyond itsborders invasion of Taiwan if Taiwan becomes

    independent

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    International Relations - Asia

    China sees itself as the power center ofAsia

    Seeks to maintain friendly relations with other

    countries as long as they acknowledge Chinas

    superiority

    Chinas need for Oil is driving relations with

    Vietnam, Africa and the middle-east

    Relations with India, Japan and Australia isstrained or cold at very best because these

    countries represent alternate power centers in Asia

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    Development Challenges

    Recent boom in urban and industrial sector hascreated an imbalance vis--vis with ruralagricultural sector

    Rising Power shortages, food imports and incomeimbalances is a major cause of concern

    Defunct Banking sector and highly inefficientSOE places enormous burden on future economicgrowth and development

    SOE uses up 95% of bank loans (many default)

    Reforms have not touched Banks and SOE

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    Growth Engines

    Chinas 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)

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    Domestic Savings

    China has the highest level of family savings Awhopping 40% saving rate

    High domestic saving is channeled to fund

    inefficient SOE via state owned banks (94% of allbank loans goes to SOE)

    In 2003-2004, Banks are changing priority ofloans to housing, cars and other publicconsumption goods Driving recent surge indemand for cars and consumer goods

    Privatization of Banks will spur local business

    growth channel loans to local businesses

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    TVE Cooperative firms

    In 1984 China allowed the formation of Town-

    Village Enterprises(TVE) a peoples

    cooperative in small scale or medium scale

    industries engaged in light manufacturing orservices

    TVE enabled to absorb surplus rural labor

    TVEs resulted in a tremendous development ofthe country side A real growth engine

    Private initiative with a collective thought - TVE

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    Investment Reforms - FDI

    MNCs were encouraged to establish joint

    ventures in China

    Prior to 2004, all MNCs 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

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    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

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    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