business-environment-in-china1756

8/7/2019 business-environment-in-china1756

1/39

Business Environment in China

Arun Kottolli


2/39

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


3/39


4/39

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


5/39

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


6/39

China Ethnic Distribution


7/39

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


8/39

Images of CCP


9/39


10/39


11/39

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


12/39

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


13/39

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 !!


14/39

Political Structure - Graphic


15/39

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


16/39

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


17/39

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


18/39

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


19/39


20/39

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


21/39

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


22/39

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)


23/39


24/39

Shanghais Skyline


25/39

Map of Shanghai Province


26/39

Map of Tianjin Province


27/39

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)


28/39

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


29/39

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


30/39

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


31/39


32/39

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


33/39

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)


34/39

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


35/39


36/39

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


37/39

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


38/39

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


39/39

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

business-environment-in-china1756

Documents

Transcript of business-environment-in-china1756