Everything you want to know about doing business in China
China, with a population of more than one billion people, is a country full of marketing potential. With so many possible consumers, it would seem like any product could reach its target audience. However, with a country so rich in history and culture, there are many factors to be considered by marketers. Some of the most important and influential elements (the monetary policy, currency system, market agreements, and environmental factors of the country) must be further examined.
Monetary Policy: A brief history of China’s financial system is necessary at this point. In 1949, the Chinese Communist Party (which had been established about thirty years beforehand) overthrew the Kuomintang government and subsequently seized control of the economic and financial markets in China. The first major change made by the CCE, and was a unification of financial and economics affairs. Until 1950, these two sectors were handled individually. For financial purposes, the Chinese central government created two plans.
The first of these was a state physical plan, which consisted of the expenditures and budgets of all government departments, state-owned enterprises, cooperatives, and communes. The second was a credit plan, which contained specific blueprints as to how the implementation of certain projects in the physical plan would take place. The People’s Bank of China effectively served as a liaison in matters of the credit plan. The Bank distributed funds to economic sectors based on information revealed by the credit plan, and acted as a symbolic auditor to ensure that the budgets matched the amount of funds spent during that time period. The People’s Bank also had the responsibility of ensuring that unspent cash was deposited in a state bank, and maintained supervisory status over most financial matters. Although the specific procedures regarding the physical and credit plans changed, most of the principles described above went unchanged until the 1980s.
The Essay on How Inflation Rate Might Affect Non financial Corporations The Banks Etc
How Inflation Rate Might Affect Non-Financial Corporations, the Banks, etc High level of inflation is the most important risk factor for our economy. Management of Federal Reserve Banks of America claims that threat of strengthening of price pressure remains the most considerable danger for American economy. The risk that basic level of inflation will increase became the main threat from the side ...
In 1983, the State Council of China issued a resolution, decreeing that the People’s Bank of China was to be “a national institution through which the State Council directs and administers financial operations of the whole country, and it is the central bank of China” . The State Council indicated that there were four main functions to be performed by the PBOC. First, the PBOC was to provide money, credit, and other finances for the purposes of macroeconomics. Second, the PBOC was required to enforce any and all laws regarding the financial stability of the country. The third stipulation was that the PBOC was to be the control for any indirect measures relating to financial stability, including deposit reserve requirements, interest rates, and the like.
The last primary function of the PBOC as decreed by the State Council (and, essentially, the most important and tell-all task that the PBOC was to enforce) was to “promote, supervise, and control all aspects of the operations of China’s financial market” . The words “all aspects” include banks or any non-bank organization. Essentially, this means that the PBOC controlled nearly every facet of the financial system in the country.
However, the PBOC cannot function independently, and it receives most of its authority from the State Council. After the State Council, control falls to the Board of Governors, which consists of the following authorities: the president and vice-president of the PBOC, a group of financial experts and consultants, a deputy minister of the Ministry of Finance, a deputy director of the State Planning Commission, a deputy director of the State Economy Commission, presidents of all specialized banks, and the general manager of the People’s Insurance Company of China. The People’s Bank’s president serves as chairperson of this board. Functions of the Board of Governors include the discussion and solution of problems relating to either generalized or specific financial policies, the evaluation of miscellaneous matters relating to the overall financial system in China, and the formulation of policies regarding mergers, closures, or other matters relating to banks and other financial institutions.
The Essay on Riordan Manufacturing Financial State
Riordan Manufacturing (RM) is a global organization that specializes in the manufacture of molded plastic products. With revenues in excess of $1 billion, RM employs 550 people and has projected annual earnings of $46 million. The organization operates three separate manufacturing facilities located in Albany, Georgia, Pontiac, Michigan, and a joint venture in Hangzhou, China. With such a broad ...
Directly under the Board of Governors lies the Head Office of the PBOC, which is where the multitude of functions performed by the Bank take place. The Head Office is located in Beijing, and is broken down into twenty-seven different departments, each with a specified function. Examples of these departments include the Foreign Affairs Department, Administrative Department, General Office, Inspection Bureau, and several others. There are also several branches of the bank; each located in individual provinces, municipalities, and regions. These branches are responsible for performing PBOC functions within their legal and physical boundaries. From there on, branches are divided into sub-branches or business offices.
Although the PBOC oversees most financial operations in China, there are certainly other banks in the country. Specialized banks are an example of this. These banks operate with permission from the State Council in certain business sectors for certain purposes. At present there are six; the Industrial and Commercial Bank of China, and Agricultural Bank of China, the Bank of China, the People’s Construction Bank of China, the China Investment Bank, and the Housing Savings Bank. Although these banks play an important role in the financial stability of China, they often do not secure a profit, mainly because of the SOE’s reliance upon them for loans.
The roles of these specialized banks can be generally described as follows; to borrow and lend funds, to supervise the transfer of finances in the economy, to aid in credit and settlement transactions, to supervise the wage funds of enterprises that have accounts at that particular bank, and to handle international business. These banks are under the control of the central bank, which generally divides actions up into four categories; namely, credit planning management, management of deposits, management of loans, and management of interest rates on loans and deposits. Each of the six specialized banks in China serves a different function, to be documented below.
The Essay on Repay The Loan Bank Borrower Loans
Assignment # 41) One of the most important ways a bank can make sure its loans meet regulatory standards and are profitable is by establishing a written loan policy. A loan policy gives loan officers and the bank's management specific guidelines in making some loan decisions and in shaping the over all portfolios of the bank. The following are the most important elements of a Written Loan Policy; ...
The Industrial and Commercial Bank of China handles deposits of both enterprises and the general population, loans to enterprises and the general population, cash settlements, investing, the issuing of saving bonds and the like, and everything in between. Since 1989, the ICBC began to handle international forms of financial business, such as foreign exchange guarantees, borrowing in foreign currencies, etc.
However, the Bank of China (which establishes branches not only in China, but in other countries) is usually associated with foreign affairs. The BOC is authorized to handle international gold transactions, foreign exchange transactions, overseas remittances, and more .
The People’s Construction Bank of China was formed in order to serve a role as fiscal agent. Specifically, this means that the PCBC’s role is to allocate funds regarding certain capital construction projects. This specialized bank was actually closed in 1958, which resulted in problems with capital construction products. In 1972, the PCBS was officially reopened, and capital construction continued. The duties of the PCBC can be divided into four main roles. First, to manage the capital construction fund. Two, to manage financial accounts and budgets for capital construction. Three, to examine annual financial plans of enterprises involved with capital construction. And finally, to manage the budgets of the capital construction itself .
The Agricultural Bank of China had a shaky start. Formulated in 1955, it was quickly closed after almost two years and merged with the PBOC. In 1963, however, the ABC was revived, then again was closed and merged the next year, in 1964. In 1978, the Central Party Committee decreed that there was a need to quicken agricultural production in the country, necessitating an agricultural bank; and thus, the ABC was again reopened, and subsequently became an independent economic unit. The roles of the ABC were to handle loans, deposits, cash transfers, and loans relating to rural government institutions and groups (as well as handling any other financial duties entrusted to it by the PBOC or other banks).
The Term Paper on Tony Wang China Chinese Kfc
The Chinese Economy, Culture & Society The social values and history have shaped and formed the economical developments and the current environment of business in the People's Republic of China. They have determined the patterns for negotiation and the Chinese perceptions of business, and their feelings towards westerners. The implicit and explicit rules that the Chinese society has on the ...
It is notable to state that the ABC was the first specialized bank to establish the contract responsibility system, which dictates that the bank must deliver a certain profit to the state annually. The ABC has met these terms since 1988.
The China Investment Bank was established in 1981 as an official financial liaison, which had the responsibility of raising large loans in forms of international exchange, granting small loans to enterprises in China with the intention of capital construction, and performing other tasks relegated to it by the central bank.
In addition to specialized banks, there also exist commercial banks. These are modeled after Western banks and are not government-operated; thus, they are not obliged to loan money to enterprises for capital construction. This indicates that they tend to be more profitable than specialized banks. Also, there are a number of foreign/joint-venture banks around the country. However, according to recent sources, the Chinese government may be taking interest in these banks and, subsequently, will try to take control of them. Also, interestingly enough, there are a number of “illegal” banks set up around the country, known as private unlicensed banks. These banks trick investors by dictating high interest rates, then rock lenders with exorbitantly high lending rates. Nevertheless, commercial or specialized, banks in China are usually required to put 13% of their deposits in the central bank. However, the central bank does not specifically use this reserve for any purpose other than that; as a reserve.
As one may have guessed from reading above, Chinese banks are certainly the largest banks in the world regarding actual assets. In fact, a future estimate of market capitalization for Chinese banks could number upwards to 190 billion dollars. However, the manner in which China runs its banks could be seen as a step down rather than a step up. Most financial matters are strictly run by the government, most banks are government-owned, and interest rates are stringently regulated. Instead of having banks fulfill market criteria, the Chinese government instead uses the banking system as its own tool, as leverage in order to more effectively implement government policies, particularly with state-owned enterprises. Chinese banks do not often secure a high profit, and the stipulations for specialized banks often include having to loan money to enterprises in China for the purposes of capital construction. Statistics and studies indicate that nearly ninety percent of investment funds are granted to state-owned enterprises, where roughly seventy percent of China’s population is employed. This, the necessity of loaning money to the SOEs, undermines the banking system’s ability to secure a profit. In addition, most of these state-owned enterprises are often unprofitable. In short, it is likely that without reforms and a loosening of government control, Chinese banks will fall short in the profit sector.
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In the world market, countries trade products they wouldn’t be able to produce on their own. Countries like Cuba specializes in cigar production, Japan in electronics, and Russia in rocket technology. However, even if a country has an absolute advantage in producing all goods, they still will benefit from trade. Many economic factors are involved with trade. Among the major factors are ...
In order to integrate Chinese banks into a national standard banking system, the Chinese government should carefully consider a number of steps. Firstly, independence of the central bank is required. This is already taking place, as the Chinese government has divided the PBOC into nine regional branches, each with the power to carry out financial policy. As stated above, the continuous loaning of money to state-owned enterprises is also a problem. However, the Chinese government is taking steps, such as donating 270 billion yen into banks to help bring them to an international standard. A number of banks, specifically ones that are not securing a profit, should be closed or declared bankrupt, as there is no other reason for them to be open in the first place.
Currency System: Turning our attention to the currency of China, copper and iron were used but found to be too heavy to carry and transport, and copper was becoming scarce. In the ninth century, China came up with the invention of paper money. It was originally known as “Flying Money” because it was so light compared to the heavy coins previously used. It also was said that it could “fly” out of your hands. In 1024 the Song government took over the printing of paper money and made official certificates used for currency.
In Chinese “Renminbi” means “People’s Currency.” The Renminbi is the sole legal currency of the People’s Republic of China. Chinese currency is based on the decimal system, and consists of paper and coinage. The smallest coin is one fen, ten fen make up a jiao (also called mao) and ten jiao (or mao) make up a yuan. The paper form of Chinese currency comes in ten denominations: 1 jiao, 2 jiao, 5 jiao, 1 yuan, 2 yuan, 5 yuan, 10 yuan, 20 yuan, 50 yuan, and 100 yuan. These denominations can all be seen on the following pages.
The Essay on Benefits Of Chinas Wto Entry
Benefits of Chinas WTO Entry Chinas joining World Trade Organization obviously benefits, first of all, to Chinese economy. Since the times, when China started developing its economy ... that for some recent years China considerably improved its reputation among the other developing countries, and now Chinese market is considered to be one ...
A different set of Chinese characters is used for numbers on banknotes and other financial dealings. The Chinese use this system because ordinary Chinese numbers are easy to write, and therefore easy to forge.
As in most countries, the pictures on Chinese currency have a political message. Portraits appear on the front of the currency. Pictures of famous Chinese scenery, such as the Great Wall appear on the reverse side. The 100-yuan note has pictures of four of the founders of the People’s Republic of China. From right to left these are Mao Zedong, Zhou Enlai, Liu Shaoqi, and Zhu De.
Money exchange is sponsored by The Bank of China and is set up in airports, hotels and tourist stores. No foreign currency is allowed to circulate in China. Illegal selling of foreign exchange is not allowed. Travelers may exchange foreign currency cash or checks at Bank of China offices or exchange counters at the published exchange rates. These bureaus would issue a foreign exchange statement, which shall be valid for 6 months. The State Administration of Exchange Control formulates the exchange rate. As a result, the exchange rate is the same wherever you change the money. As of March 22nd, 2002 the exchange rate is as follows: •U.S. Dollar / Chinese Renminbi0.1208 •Chinese Renminbi / U.S. Dollar8.2768 It is necessary to show the form that you received when you change RMB back to foreign currencies.
Market Agreements: With the vast landmass and tremendous population, China is an enormous player in world trade. In 1999 alone, China’s exports reached $194.7 billion, while their imports totaled $158.5 billion. With these kinds of numbers representing China’s trade volume, their trade agreements require very special attention. And lately, it seems as though China has been doing a lot of this.
In September of 2001, China took a large step in developing economic relations and trade cooperation with other countries when they joined the World Trade Organization (WTO).
As of January 1, 2002, the WTO had a membership of 144 countries. With headquarters in Geneva, Switzerland, the WTO is a global organization dealing with the agreements and disputes of trade between nations. Because their economy has been steadily improving over the past two decades, China wanted the stability and assurance to keep this growth long-term. By joining the WTO, China will no doubt be a paramount power early in this century in relation to trade.
Before China joined the WTO, high tariffs and other import restrictions kept many countries’ products out of China’s market. Joining the WTO will mean much easier market access into China from firms around the world. And because of China’s continual economic growth, major multinational companies from around the world will have great interest in investing in China. China’s entrance into the WTO should create nondiscriminatory trading rights between local and foreign commercial operations and the reduction of monopolistic state trading practices.
China had been campaigning for fifteen years for entry into the WTO. Their large involvement in the world’s trading patterns led to many major trading entities being interested in their acceptance into the WTO. China’s top three trading partners from January to September of 2001 were Japan, the United States, and the European Union (EU) respectively. These markets, and China, are the largest and most appealing markets in the world.
In order to become a member of the WTO, countries are required to conform to certain fundamental trading exercises and are required to offer equal and expanded market access to other members of the organization. The EU and the United States both played an integral part in China’s succession into the WTO.
Before China could join the WTO, an agreement with the EU needed to be reached. After 14 years of on and off negotiations, they finally reached an agreement. China had jumped over their largest hurdle to gain access to the WTO when reaching an agreement with the fifteen member EU. The agreement with the EU said that tariffs on 150 items that Europe produced would fall an average of 40 percent.
China’s market is also very important in relation to the United States commercial interests. The reason the United States would like China to join the WTO is that it would make them a more global, market-based trading system. This would then give the United States exporters and investors easier access to the Chinese market. As China’s economy continues to grow and develop, their need for imported goods and services will continue to grow as well. The United States economy will then grow by supplying for some of these needs.
The United States and the EU countries will not be the only countries benefiting from China’s accession into the WTO. China’s recent inauguration into the WTO will cause economic growth in other WTO members as well.
Since it is so early in China’s career with the WTO, it is hard to say how China will do in relation to trade, especially with the recovery of the world’s economy since September 11th. Most economists predict that China’s implementation of the WTO agreements will not be easy. Some predict that China’s economy will continue to grow at the rate that it has been, while some think the economy may slow for a little while and then pick back up.
One thing that China needs to work on is the improvement of their many free trade zones throughout the country. The free trade zones that existed before the WTO will lose some of their appeal. Officials say, “…China’s entry into the WTO will not mean the end of its free trade zones but a chance for their improvement and perfection.” China and Hong Kong’s “one country, two system” policy could be translated into “one country, two markets”. Hong Kong is one of the world’s most open marketplaces. They are the world’s fifth largest trading entity. Hong Kong also acts as a large re-export center into China and other countries of the region. It is estimated that a third of the United States exports to Hong Kong are re-exported to China. Before China’s accession into the WTO, products moving from Hong Kong to China were subject to the tariffs and import requirements of mainland China. These tariffs should be much lower now that China is a Member of the WTO. Hong Kong became a member of the WTO before China.
Now that China and Hong Kong are both members of the WTO, Hong Kong should be able to export more easily to the mainland. This means that Hong Kong’s domestic exports should increase distinctly. More foreign companies may also locate their regional headquarters in Hong Kong to facilitate their entry into the Chinese market. Hong Kong’s support of China’s entry into the WTO shows that Hong Kong is a supporter of global trade.
APEC is a primary agreement in the Asia region to promote open trade and economic cooperation. APEC now has 21 member countries, which include the major countries of the region, and some of the fastest growing countries in the world. The United States, Japan, and Hong Kong are members of APEC. APEC is not a formal trade agreement like the WTO and NAFTA, or a market like the EU. APEC operates under the intent of three main themes. These themes are trade and investment liberalization, trade facilitation, and economic and technical compensation. In relation to trade, member countries of APEC are forced to focus on tariffs and non-tariff measures. APEC regulates its members to make trade easier and less costly.
Because of China’s economic expansion in recent years, it is essential that China maintain its international trade relations. Access to their market has become a critical element in the growth of many countries. China’s participation in the global economy should not only help with economic reform in many countries around the world, but it should increase China’s stake in the stability and prosperity of East Asia as well.
Economic Environment: Looking at the environmental factors of China, the economic development it has undergone in the past 15 years is of increasing interest to marketers. It has developed and continues to grow into a great trading partner. If this growth pattern continues, China will someday have significant economic influence on the world. One reason China could have a particularly large effect is due to the number of Chinese citizens. China supports over 1.29 billion people and this number is increasing by .93%. If the standard of living persists and income levels rise, it would be possible to accept the Chinese as potential consumers that would unlock a huge market of individuals.
The massive population has been a burden on China because the economy, as it stands now, cannot bear to support such a number of citizens. The government is trying to gain control of this problem by limiting the number of children to one per household, with exceptions to ethnic minorities and those living in rural areas. Other countries are offering their services to attempt to control the birthrate by showing the government that population control can be managed without a coercive and involuntary approach. The government has been losing its authority due to political changes and popular resistance that make population standards difficult to maintain. Therefore, some projections still approximate that 1.6 billion will make up China’s population by the year 2025.
Countries wishing to take advantage of China’s emerging opportunities are investing a large amount of time, effort and money in order to access such a vast market. These possibilities were made possible when China started its reform in 1978, opening its doors to foreign investments and trade. This changed a self-reliant central economy into a mixed economy that combined state owned enterprises and private businesses. China could now allow individual citizens to have different amounts of incomes. The results have changed China dramatically making it the fastest growing economy for 15 years. When the reforms began in 1978, 60 percent of the population earned less than $1 a day. Since the reform, GDP has grown steadily by an average of 9 percent. In the year 2000 GDP grew by 8 percent. Currently, per capita is equivalent to $3600 and as the economy continues to expand the purchasing power of individuals will increase as well.
The new economic reform policy intends to reduce central planning and increase business autonomy and spread income. Many problems still exist, despite the success of the policy and rapid economic growth. There is a movement for more privatization of some State Owned Enterprises because many remain unprofitable. In the year 2000, 46.5% of the SOEs were running at a loss. These problems stem from the socialist system that is still in place under their Constitution. Under the Chinese Constitution, it is the responsibility of the government to manage the economy by means of production quotas and price setting. This apparent contradiction between the reform policy and the Constitution (1982) seem to work against each other. China will never succeed at full potential unless it retires the Marxist views and embraces a market directed system.
There is no denying the growth that China is undergoing places China in the Take-Off stage of economic development. For the past two decades China has experienced a steady growth that appears to be continuing for a time. If this growth, at 6-7 percent, continues over the next 20 years, China will have the second largest economy next to the U.S. The thought of China having so much economic strength is undoubtedly an interesting concept to grasp. Nevertheless, there are obstacles that China will have to elude if the economic success is to endure. One of these obstacles includes the unemployment problem. The current urban unemployment rate is 10% but as the economic growth shrinks from 8% to 6-7, less jobs are going to be available as more and more people flood urban areas to pursue job openings. There will be fewer openings than people coming into the urban areas, and will result in millions of people needing work. In order for the success of the country to endure the problem must be solved.
China is taking the necessary steps to move forward towards an economic drive to maturity. It is moving rapidly through the less-developed stages and it is feasible that China may work its way up in the next 20 years or sooner. China has expanded rapidly in agriculture and industry, which are qualities of a country in Take-Off. In the 1980’s agriculture output doubled in a country where only 10 percent of the land is appropriate for farming. Making up 50% of the workforce, agriculture only accounts for 15% of the GDP. Although, Chinese exports can only expect to increase with the advancement of technology, and with more efficient production methods. Industry has also significantly improved with main exports consisting of machinery and electronics. In spite of the major developments in agriculture and industry, China is looking to focus on being service-oriented in the future. In 20 years it is expected that agriculture will only make up 20 percent of the workforce, as China becomes more service oriented.
There is an increasing importance being placed on science and technology that persists because foreign direct investment was initiated in 1978. As the developed countries move into China looking for opportunity they take with them jobs and knowledge. This expansion of knowledge can educate the Chinese and raise their standard of living as more money flows into their country. The world can benefit from such action because the people of China are converted into potential consumers, which could raise the standard of living for many economies because of China’s size. Foreign involvement in China was certainly evident in 2000 when it more than doubled. A year later, the total market value of technology research and development deals in Beijing City grew 36 percent. The foreign businesses understand China’s potential and recognize that while obtaining a part of the market now may be costly, it is most likely crucial to remain advantageous in the long wrong. As China becomes technologically advanced the communication lines are broadened and trade becomes cheaper due to the depletion of barriers. China must also lower the tariffs placed on imports in order to take full advantage of a market system and spur on development. China has a tariff rate of greater than 19 percent, however this is expected to decrease with China’s accession into the World Trade Organization. As China’s infrastructure develops, concerning transportation and communications, the demand for technology increases. Thus, foreign technical businesses have the opportunity to expand their market of consumers.
The development of science and technology is apparent in the programs that have been established. For example, China’s National Space Administration is evidence that an importance is placed on emerging technology and while they have yet to send a man to space, they have successfully launched a satellite in 1970. The Ministry of Science and Technology is another example of the magnitude that exists in the effort to expand the knowledge of technology and science in an effort to speed up the economy. The MOST was set up to research, analyze and widen China’s science and technological advancements. China may still be considered an underdeveloped country, however, it’s acknowledgement of the sciences and consideration being placed on the economy will prove beneficial in rising up out of the Take-Off stage.
Since the economic reform, private firms have emerged and now hold 27 percent of the GDP. Nonetheless, investment is low among these firms accounting for only 1 percent of bank lending. The concern lies in light of the fact that these companies may not be able to withstand pressure that the future may hold with the current growth rate. One thing we have learned from the recent past is that in order to stimulate the economy and keep the system growing, people must be investing and spending money. The Chinese economy works with the same principles as the U.S. economy despite the differences. However, the State Owned Enterprises find it easier to obtain loans because the Chinese government offers guarantees to the banks that private firms cannot uphold. In this case, many private firms are faced with higher return rates in order to obtain the loan. This can choke economic growth and lead to greater challenges in the future.
The People’s Bank of China functions as a central bank for the country. It is responsible in formulating and implementing monetary policies to ensure the currency remains stable and the economy continues to mature. In doing so, the PBC would have control over interest rates and regulation over financial markets. The bank must also have authority over other financial institutions to be capable of implementing any regulation deemed necessary for the development of the economy. However in China there is a high level of government involvement, perhaps even corruption, within the entire banking system that could have negative effects on growth.
China will remain a critical area of influence and interest for developed countries in the years to come. The growth that China has sustained over the past two decades is unprecedented and undoubtedly will be observed as more and more businesses take advantage of the emerging opportunities. The economic changes stemming from reform has given power to China that has never existed in the purely socialist world under Mao’s People’s Republic of China. Even with the economy being influenced by both market and state-owned powers, China has flourished and will most likely continue to flourish for years to come.
Political Environment: Relevant political history begins in 1949 when Mao Zedong established the People’s Republic of China and labeled their country with the term “New China”. The new government established Communism and made economic progress a necessity in order to revive China from the state of repression from years of war. Under the leadership of Zedong, the country closed its borders and proceeded to attempt a form of utopia within Chinese walls. The strong military and police presence enforced the power of the Communist party that gained more control during this time. Economic hardship hit China once again and the country underwent major economic changes. After Mao Zedong’s death, a new thought was introduced that combined Capitalism and Communism. The country opened their doors to trade and started entertaining a new form of government. Regardless, their country continues to be based on a form of socialism that is comprised of thoughts of Marxism, Leninism, and Mao Zedong and remains heavily influenced by central government. The success of this system remains unknown even with the development of the economy throughout the past two decades.
Their Constitution was written in 1982 and outlines the combination of socialism and democracy into what is named democratic centralism. There are strong socialist undertones that link every aspect of the Constitution under the Communist Party. While the form of government allows for elections of officials, the Chinese Communist Party remains dominate in government with more than 63 million members. This is due to the fact that any insubordination or disloyalty towards the Communist Party can be punishable by law. Thus there are few opposition groups standing against the Communist Party. Even so, an apparent movement for democracy is threatening Communism because central authoritarian rule is difficult in a country of China’s size. The future style of government remains unsettled and unstable because of rising controversies and adversary groups opposing communism.
The administration of the government was arranged in a democratic style under the direction and influence of the Communist party. The goals have been to implement party policies ensuring the progression of the economy and development of the country. The government is divided into three branches; the executive, legislative, and judicial. The executive branch consists of the president and other head of government that are elected by the National People’s Congress every five years. The Legislative Branch is a unicameral branch that makes up the National People’s Congress. Unlike the U.S. government that is made up of the House of Representatives and the Senate, there is only one governing body in China. The members of this Congress also serve for five years. The Judicial Branch consists of a three level court hierarchy system in China. The Supreme People’s Court is the highest court in China, followed by Local Peoples Courts, and Special People’s Courts.
The party members that can be elected into these positions can stem from the CCP or the other eight registered parties that are controlled by the CCP. Any parties in opposition to the Communist Party are unable to exist based on the law of the Constitution. The system is dominated by the authoritarian style of government run by the Communist Party. In spite of this, as public opinion continues to be fashioned more leaders are finding it necessary to build consensus among the public before being able to implement new policies. In light of the success that China is enjoying in the urban areas, the party works to maintain control over any organization that has the potential to challenge the authority of the CCP. The conflict between the government and the changing opinion of many people could create an unstable government in which the outcome is unknown.
As of now, the government has allowed foreign companies a great deal of autonomy in order to rouse economic growth. These foreign companies are being treated better than many of the privately owned firms, which are finding it difficult to invest in spite of their successes. The government encourages the Chinese people to work for foreign companies, which places many of the Chinese firms both state-owned and privately owned at a severe disadvantage. The reasons behind this concept is most likely due to the fact that it is necessary to educate the Chinese in big business if it wishes to sustain growth in the economy. Nevertheless, it is clear that foreign presence is both welcomed and feared. This assumption is based on the fact that the Communist government does not accept being challenged, and yet the influence of foreign democratic businesses has swayed certain public opinion to entertain ideas of democracy. This must be a thorn in the side of the government officials that are enjoying the economic success that foreign involvement has issued and yet the conflicting ideals that come with the businesses. Therefore, while these changes are occurring within China’s walls, it is necessary to view the risks associated with doing business there.
The amount of power the government has over businesses can be a threat to any private or foreign owned firm. The Constitution confirms the idea that socialism cannot be compromised by any standard and yet the pursuit of increased democracy is necessary as well. A quote from the document reads: “the Chinese people of all nationalities will continue to adhere to the people’s democratic dictatorship and follow the socialist road, steadily improve socialist institutions, develop socialist democracy, improve the socialist legal system and work hard and self-reliantly to modernize industry, agriculture, national defense and science and technology step by step to turn China into a socialist country with a high level of culture and democracy”.
This quote is confusing in the apparent contradiction in the last statement. China will never be able to fully obtain its full potential if this amount of confusion exists. Also businesses should be aware that, despite the increased movement for democracy the Chinese Constitution is strictly against this movement and officials in the future might wish to defend their authority with methods consistent with socialism. The potential threat of the government obtaining control over all businesses should be measured before undergoing any business investments in China.
The corruption of Chinese officials has been a well-known fact among the public. President Jiang administered a speech where he actually condemned many officials for being overtaken with greed and taking state property as their own. In addition, China’s auditor general discovered that billions of dollars were misspent and embezzled in 1998. China may be a prime example of the proverb that power corrupts. In a socialist society, the totalitarian leader has all authority and will protect this authority with great lengths. In light of the knowledge of government corruption, many continue their support of the regime because the lack of any other better alternative. It is important to understand the authorities that businesses are dealing with when getting involved in an unknown country. The authorities are known for their corruption and therefore careful consideration must be taken before working with them.
China’s intervention on foreign business has been less than mild. The economic success in China, largely due to foreign investment and businesses, has been welcomed and therefore the economy is becoming increasingly market-oriented. Some political intervention in foreign businesses may come in the form of domestication of foreign owned businesses. This would be logical, based on the large unemployed population and the need for education in business among the Chinese people. The government has large number of state-owned enterprises that they control and often gain favor as far as investment opportunity in comparison to private owned firms, however the foreign firms are not affected as much by the State-Owned businesses. Businesses continue to weigh the risks and opportunities that make up China and will result in increased investment as long as the freedom from government exists as it does.
Import restrictions and compliance with trade agreements have often been a persistent problem with China. China’s lack of resources and corruption of officials can often make it difficult to gain control and enforce trade regulations (http://cnie.org/NLE/CRSreports/international/inter-60.cfm#_1_18).
The hope that China will adhere to the WTO agreements is a concern on the minds of many. Due to their lack of compliance in the past, many people are worried that China may not comply with WTO agreements and “undermine the WTO as a multilateral institution and international support for free trade” that would result in the WTO’s inability to act efficiently and adequately to the complaints that countries have on trade issues with China. However, many view the accession as a positive event that will result in long-term economic advancement and growth (http://cnie.org/NLE/CRSreports/international/inter-60.cfm#_1_18).
The instability of China increases the need for risk assessment. In order to assess the risk, research must be completed to develop a credible forecast. China has a tremendous amount of potential based on the performance of the economy, however, where opportunity exists, risks are most certainly inevitable. Foreign businesses may choose any method that would best identify the risks concerning their firm. The Coplin-O’Leary Rating System seeks to quantify information to establish a rating system to forecast potential problems that may exist. The system takes into account future events that could impact the economy and projects both short-run (18 months) and long-term (5 years) possibilities that could affect international businesses. The changes that persist in China make forecasting difficult. In light of this, the Rating System has acknowledged several key events and projected estimations on the type of government that will exist, risk of business, and economic forecasts.
China is undergoing many changes that pose a threat to the government itself. Democracy is increasing in popularity as socialist leaders seek to maintain control of opposition groups. The Coplin-O’Leary System projected that there is a 55 percent probability that the government will remain the same in the next 5 years. This prediction exemplifies the instability of China’s governmental body. This could be good news for those wishing for a democratic movement in China. There are several challenges that the socialist government will encounter concerning their control in the future. For example, the president is expected to retire in 2002, which could result in major changes that often occur when a major leader leaves an unstable government. Furthermore, China’s WTO membership transfers more control to the market system and less to the Communist governing officials. Identifying these policy changes and problems that could be confronted because of the changes are critical in appropriately assessing risk of a changing government.
In a matter of five years changes in foreign businesses are quite possible. The Coplin-O’Leary System projected that there is a considerably high risk of violence. This violence may include issues of riots, terrorism, guerrilla warfare, civil war, and like events. It may stem in part because of the changes in government but also the amount of unemployment that must be managed as businesses try to run more efficiently. Terrorism becomes a real threat to foreign businesses involved in China, especially if these businesses are thought to have brought about the turmoil. It has also been assessed that increased barriers may result in blockage or slowing of direct investment. Funds transfers are projected to improve but still result in delays, which affect investment and growth. In spite of these adjustments, from 2003-2007 the economy is still expected to grow on an average of 7.7 percent. This influences business involvement because where there is economic growth there is opportunity for capital gains. A foreign firm must make an assumption of risks before it begins to operate in China. The business must be aware of the constraints that may be placed on the firm upon its arrival or potential outcomes that may result from changes that the country is undergoing. More and more businesses are choosing to invest in China’s markets as opportunities for their business exceed the risks.
Cultural Environment: Another key environmental factor is the culture of China. In examining this aspect, we must turn our attention to the various elements of culture. The Chinese material culture relates closely to the economic environment of the country. With the country in the take-off stage of economic development, and continuously improving the technologies available, it is clear that China will continue to develop as a materialistic culture. What this will mean to consumers is the constant improvement of products, their designs, functions, and production techniques.
One of the most well known aspects of the Chinese social organization is the one child policy, as mentioned before. Because of the huge population of China, and the limited livable land area, this policy was created as a serious effort and major factor in the goal of lowering the population growth rates. Implemented in 1979, the policy required that 95% of urban married couples, and 90% of rural couples sign certificates stating that they will only have one child. While this may seem like an alien idea to agree to, both material and non-material incentives and disincentives are tied into this agreement. Some incentives include receiving income, housing, healthcare, employment, pension, and educational benefits for both the couples and their child. This one child policy is important for marketers to note because it affects the way that the family structure is viewed. For example, showing a food product being consumed by a large family with multiple children will be viewed as a foreign product to the Chinese consumers.
The Chinese Constitution provides for the protection of the freedom to believe or not believe in any religion. This has allowed three main religions, or philosophies, to blossom; Buddhism, Confucianism, and Taoism. All three have the common goal of inner peace and happiness. Along with these native religions, the Muslim religion and Western religions have made a small resurgence. With the introduction of the open-door policy, religions such as Catholicism and Protestantism have gained recognition.
Buddhism is a religion of wisdom and disciplinary meditational practices, encouraging its followers to question the world and its teachings. Along with questioning the world, followers are taught to view both life and the world realistically. This 2,500 year-old religion, based on the teachings of Buddha, demands discipline, determination, and self-effort of its followers. Through the practice of Buddhism, followers believe they will attain happiness, wisdom, and purification of the mind.
The teachings of Confucius have developed into Confucianism, the most influential school of thought in China. Not only has this religion shaped the Chinese attitude toward life, but Confucianism has also provided background for political theories, and set standards of living and social value. Human beings’ individual achievements and interests are the main concern here, not the abstract being or questions of theology as in Buddhism. However, in accordance with the teachings of Buddha, the ultimate goal in Confucianism is individual happiness.
Taoism, the second most influential religion in China, dates back to the fourth century, BC. The philosophy behind Taoism is that the individual should not seek to conform with society, but to the Tao (“way”) of the universe. One should do nothing strained or unnatural, but instead comply with the impulses of one’s own nature. By uniting with the Tao of the universe, followers will find happiness and inner peace.
It is imperative that marketers have some basic understanding of these three philosophical religions. Because these schools of thought have been in existence in China for thousands of years, they are ingrained in the Chinese culture. The religions affect the viewpoints of followers on kinds of topics, including opinions formed about products.
Three colors are central to the Chinese culture: red, black, and white. Red symbolizes the positive aspects of life such as happiness, wealth, and fame. For these reasons, the color red is always associated with good luck and fortune. Today, the color gold can also be used to signify much the same as red, especially prosperity. Black is the color of sin, evil, sadness, suffering, and disasters. Signifying bad fortune, black is not used in home decoration, nor worn during festivals and celebrations. While the stigma that is associated with black is known and followed, its significance appears to be fading. This can be seen in the younger Chinese generations’ tendency to wear black as a usual element of their ensemble. Purity, honesty, and life can be found in the color white. However, it should also be known that white is used at funerals because it is believed to harmonize all elements. Clearly, it is necessary to be aware of and utilize these color meanings in marketing strategies. For example, an airline would never purposely use black as a central color in an advertising campaign, for this would lead people to associate disaster and bad fortune with that airline.
One important ancient art form that must be discussed is the art of Feng Shui. First developed over 6,000 years ago, this art is related to the law and order of the universe, and the power of nature. This art is based on various elements concerning astronomy, astrology, intuition, geology, mathematics, philosophy, physics, and psychology. The major concept behind Feng Shui is balance. This balance must be achieved between the elements of a person’s environment, and work with the interaction between potential factors. This art form is important to be aware of because many Chinese believe that following Feng Shui will help promote prosperity, good health, and good relationships. The theory behind Feng Shui cannot only be followed in people’s personal lives, but in their business lives as well.
When looking at entertainment and the arts in China, there are a few to note. To date, there are many song and dance troupes, opera companies, symphony orchestras, choirs, and traditional instrument orchestras. These traditional forms of entertainment are still quite popular in Chinese culture. However, looking at the younger forms of entertainment, such as movies and “pop” music, there are some figures to be aware of. Currently, the most popular singer is Teresa Teng, whose Chinese name is Deng LiJun. Chow Yun Fat (Zhou Run Fa) is a popular actor, and Gong Li and Joan Chen (Chen Chong) are the more popular actresses. Jackie Chan (Cheng Long) and Bruce Lee (Li XiaoLong) are popular action movie stars. These are all important to note because using these celebrities, or their likeness, to promote a product may result in a larger demand for the product. An additional form of popular entertainment is sports. The most popular of these include soccer, basketball, and table tennis (ping pong).
Turning our attention to the use of numbers, one must be aware of meanings behind certain numbers. The number eight is considered to be the luckiest in the Chinese culture. Four is thought of as the unluckiest number because in translation, the word “four: sounds like the word “death”. In addition to four, the number seven can also signify death. This is in great contrast to the American culture where seven is the luckiest number. Finally, the number one is related with loneliness. Like the meanings of colors, the significances of numbers are important to be aware of when composing an advertising campaign. If an American company decided to market a product in China as bringing luck, it is critical that the Chinese lucky number of eight is used, not the American lucky number of seven. Instead of marketing the product as lucky, the product would symbolize sadness and suffering.
One of the best known of the Chinese holidays is the Chinese New Year, also known as the Lunar New Year. The festivities for this celebration begin twenty-two days before the New Year, and continue for fifteen days after. Some key points to note for any business dealing with China is that all accounts are traditionally settled during the days before the New Year. This is done so that in the coming year one can begin with a clean, debt-free slate. Additionally, it is expected that employers hold a banquet in order to thank their employees for their work during the past year.
The official language of China is Mandarin Chinese. This developed out of various Northern dialects. Although Mandarin is widely spoken, there are two other main languages in China. Shanghainese is spoken in the Shanghai area, and Cantonese is spoken in Guangzhou, near Hong Kong, in the southern areas.
Turning to the writing of these languages, Hanzi is used. This is the use of Chinese characters to express words, the equivalent of our use of letters. More than 50,000 characters exist, but only 5,000 of these are frequently used. In comparison to the regional language use, these characters are fairly universally used in Chinese writing.
It is important to note the differences among the languages, and their regional use. The language and writing will appear on packages, in instructions, and in the advertising messages. A marketer cannot assume that the same slogan can be used for a product throughout all of China, or that package instructions written in Mandarin will be understood in the southern region of China. While Mandarin is broadly spoken, both Shanghainese and Cantonese must be considered. Marketers must look at which regional markets speak which language, or a costly blunder may be made.
Looking at the population of China, it provides for a sense of nationalism and pride in the country. With more than 1.29 billion people in China, 92% of them belong to the Han ethnic group. The other 8% of the population is comprised of more than fifty-five minority groups. Over 75% of the population live in the coastal areas, near the Pacific Ocean. The remaining, including almost all of the minority population, lives in the less densely populated Northwest and Southwest parts of China. Because such a huge majority of the people of China live in small areas on the eastern coast of the country, a sense of pride has been able to develop. This is important to be aware of because marketers can focus their attention to the twelve provinces and three special municipalities on the East coast, where the majority of the population reside. Additionally, attention can be paid to the rather homogeneous ethnic make up of those areas.
When examining the business ethics and mores of the country, there are many to be aware of. First of all, it should be noted that typical business hours are Monday through Friday, 8 to 5, with a two-hour break between 12 and 2. If business is done on Saturday, the hours are 8 to 12. During the Chinese New Year, festivities begin twenty-two days prior, and continue for fifteen days after. Businesses cannot be expected to operate during this period of celebration. When scheduling appointments, the best times of year are from April to June, and from September to October. Once an appointment is made, one must remember that the Chinese view punctuality as a virtue. Being late for appointments is viewed as a serious insult in the Chinese business culture, and arriving after the ten-minute grace period is an offense.
Once the meeting is taking place, there are some more Chinese norms to be remembered. When entering the meeting, members of the company should enter in order of seniority, and the senior most members should present information. Along with the idea of seniority, the most senior member of the Chinese company should be acknowledged first. When addressing your Chinese business associates, most people should be addressed with their professional title, and their last name. If there is no professional title, or it is unknown, “Mr.”, “Miss”, or “Madam” may be used with the last name. Chinese names do appear in a different order than Western names, and this should be paid close attention to. The last name, or family name, appears first. This is followed by a generational name, and then the first name. Some Chinese do adopt an English first name to make it easier for them in business dealings with Westerners.
Negotiating with the Chinese is also different than negotiating in America. Negative replies are considered impolite, so a straight out “no” may never be heard. Additionally, negotiations take a much longer time in the Chinese culture. More people must approve of business agreements, and even once a contract is signed, the Chinese may continue to try and negotiate.
Legal Environment: Control Being a communist government, China, as the host government for foreign businesses, definitely has the control. Your business is under their rule. You still own your own product, but the Chinese government reserves the right to force your company’s exit from the Chinese market. They promise reimbursement, but the Chinese government is known not to provide much reimbursement in such cases in the past (“Disputes with Chinese Companies or Individuals”).
The Protection of Intellectual Property “Losses to international businesses through Intellectual Property piracy in China are said to amount to $1.42 billion a year. The true depth of the problem is hard to fathom though all experts agree it is growing. Brand owners claim that China is the global capital of Intellectual Property piracy. Some estimate that counterfeiting accounts for as much as 8% of China’s GDP” (“The China Business Collection: Intellectual Property Protection in China”).
Even considering these numbers, China has explicit laws for the protection of intellectual property, similar to the laws of the U.S. You are required to register trademarks, patents, and even copyrights. China follows a strict first-to-file rule, concerning these things. Once registered, your ideas are protected under Chinese law. China also happens to be a member of The International Convention for the Protection of Intellectual Property, which protects Intellectual Property for a multitude of nations (“Selected laws of the People’s Republic of China”).
It is amazing to think that even though your intellectual property is protected under a multitude of laws, that it is still very easy to steal someone’s intellectual property. When conducting business in China, one should take extra care when protecting intellectual property. Constantly monitor the market, and take every effort to spot stolen intellectual property.
Competition Chinese law encourages fair competition in the same ways that U.S. law in many ways does. It protects against unfair competition imposed by businesses with monopoly status. The Chinese government cannot force a company to split up because of its monopoly status but it can force them to lower prices to stimulate competitors to act. Bribery is also illegal in China, and is punishable by law. You are also not allowed to sell any items at less than its cost, as to push away competition. However, you are allowed to have seasonal sales, and you are also allowed to sell a commodity at a reduced cost to clear your debt. Finally, a business is not allowed to add tie-ins, or conditions to a sale, against the will of the purchaser (“Selected laws of the People’s Republic of China”).
Even though the government cannot legally force a monopoly to split up in China, monopolies rarely exist because of the illegality of selling at lower than cost. Therefore, barriers to entry into many different areas of business are relatively low. This is what makes the Chinese market so favorable a place to enter.
Product Quality The government in China controls product quality, similarly to how the U.S. does. Examples of some of these similar requirements are as follows: 1.Products shall be free from danger; 2.Possess only the properties and functions they ought to possess; 3.Conform to the product standards marked on the package, and to the state of quality indicated by the product’s directions or markings.
In addition, all marks on the products shall meet the following requirements: 1.Have certification showing that the product has passed inspection; 2.Have name of the product, name and address of the factory that produced the product, all being marked in Chinese 3.Have warning marks or warning statements for products which, if improperly used, may cause damage to the products per se or may endanger the safety of human life or property (“Selected laws of the People’s Republic of China”).
When entering the Chinese market, concerning product quality, if one obeys the laws that they are used to from doing business in the U.S., no problems should arise legally.
Advertising There are a few restrictions that an organization should keep in mind while advertising. These include that you cannot use the national flag or the national anthem in your advertisement. Also, you cannot use the words, highest grade, or the best in your advertisement. You also cannot have information suggesting pornography, superstition, terror, violence or hideousness in your advertisement. The ad cannot carry information of ethnic, racial, religious or sexual discrimination. An advertisement shall not belittle commodities of other producers and dealers or services of other providers. It is also prohibited to publish advertisements for tobacco through broadcasting, motion pictures, TV programs, newspapers or periodicals (“Selected laws of the People’s Republic of China”).
These advertising restrictions can have many implications for some types of businesses entering the Chinese market. Especially if you are a tobacco company or a pornography business, these laws will affect you substantially. Also, the fact that you cannot use the words “best,” or “highest grade,” puffery is pretty much out of the question for your advertising campaigns. Therefore, the ways in which many companies would go about advertising in China is very different than a company operating in the U.S. would go about it.
Legal Disputes As far as legal disputes are concerned, the Chinese government handles civil disputes in the exact fashion that the U.S. does. The parties in dispute may handle the matter at first through placation. If this does not suffice to either party, they may apply for arbitration, through a government run organization called the China International Economic and Trade Arbitration Commission (CIETAC).
If arbitration fails, or either party does not agree to it, the dispute would be settled through normal litigation procedures. A business can file a suit in either basic-level or intermediate courts, depending on the dispute. However, most observers remark that Chinese courts are not up to international standards. Most judges do not even have any legal training whatsoever, so dispute resolution is recommended to take place either in the form of placation or arbitration (“Disputes with Chinese Companies or Individuals”).
Therefore, as a result, many companies operating in China will try and keep disputes to a minimum. This is exactly what any company entering the Chinese market should focus on. By keeping disputes to a minimum, your company’s success in the Chinese market is that much more probable.
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