china

Background There is no doubt that nowadays globalization brings opportunities for companies to expand their business activities easily to take advantages of other country‘s growth through investing activities. However, before investing to overseas, a company should make a careful examination of the country they are intending to invest in especially the industry related to their investment. Examining the relationship between risks will help to measure the risks the company has to encounter and the information is actually helpful for company in decisions making. A PESTEL analysis is one of strategic tools for analyzing the environmental influences including political, economic, social and technological factors on the business. This document is going to explain about current China economy and analyze it with PESTEL tool, to see if there is a good business condition for running a business in China

Overview of Country “China”

China, officially the People's Republic of China, is a sovereign state located in East Asia. It is the world's most populous country, with a population of over 1.35 billion. China is the world's second-largest country by land area. The PRC is a single-party state governed by the Communist Party, with its seat of government in the capital city of Beijing.

As of 2013, it is the world's second-largest economy by both nominal total GDP and purchasing power parity (PPP), and is also the world's largest exporter and importer of goods

China Country Information (Source: OECD) Population

1.351 billion (2012)

GDP

$8.227 billion (2012)

Visitors/ Year

55.98 million

It exercises jurisdiction over twenty two provinces, five autonomous regions, four directcontrolled municipalities, such as Beijing, Tianjin, Shanghai, and Chongqing, and two mostly self-governing special administrative regions, such as Hong Kong and Macau.

China is a recognized nuclear weapons state and has the world's largest standing army, with the second-largest defense budget. The PRC has been a United Nations member since 1971, when it replaced the ROC as a permanent member of the U.N. Security Council. China is also a member of numerous formal and informal multilateral organizations, including the WTO, APEC, BRICS, the Shanghai Cooperation Organization, the BCIM and the G-20.

PESTLE ANALYSIS OF CHINA

Political Scenario 

The Chinese political system characterized as one-party communist dictatorship makes a great contribution to national stability, enabling the economy keep dynamic and sustainable. Nevertheless, when the economic system was deregulated from the command economy to market economy since 1978, the power of economic management was increasingly decentralized, raising the issue of uncoordinated development of regional economy.

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Its current political, ideological and economic system has been termed by its leaders as the "people's democratic dictatorship", "socialism with Chinese characteristics" and the "socialist market economy" respectively.

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Currently, though the central government has made effort to alleviate the gap among different areas in terms of developing standards, provinces tend to give a priority to local profits rather than considering the integrated advancement of the whole country.

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Since the introduction of economic reforms in 1978, China has become one of the world's fastest-growing major economies. As of 2013, it is the world's second-largest economy by both nominal total GDP and purchasing power parity (PPP), and is also the world's largest exporter and importer of goods.

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China is a regional power within Asia and has been characterized as a potential superpower by a number of commentators. China allows foreign businesses to enter.

Foreign relations 

The PRC has diplomatic relations with 171 countries and maintains embassies in 162. Along with Brazil, Russia, India and South Africa, China is a member of the BRICS group of emerging major economies.

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When it comes to foreign trade policy, the private sectors are moving forward fast after 1978 reforms. Foreign trade opening drives foreign direct investment increasing. In 2008, the foreign direct investment is up to 108 billion dollars in china.

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Much of current Chinese foreign policy is reportedly based on Premier Zhou Enlai's Five Principles of Peaceful Coexistence, and is also driven by the concept of "harmony without uniformity", which encourages diplomatic relations between states despite ideological differences.

Looking into the E-Commerce Sector 

In the past one decade, the Chinese government attaches great importance and focus to the development of e-commerce in the most populous country.

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For example, on issuing the Summaries of the Middle/Long Term Science and Technology Development Plans of China and the Development of Information Industry Plans in the Eleventh Five-year and Long Plan in 2020 Years in The Ministry of Information Industry, the ―application of e-commerce platform technology‖ has been listed as a key point.

The power of Xi Jinping 

Since becoming military chief and general secretary of the Communist Party in November 2012 and president in March 2013, Mr. Xi has been sending a clear message that the country is not just ruled by a faceless party—it is ruled by a man.

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These changes in style hint at a profound shift in the nature of Chinese politics. Even as he plays to the public gallery, Mr. Xi is tightening his grip on power among the elite. He has added a new layer of authority at the top, taken command of numerous committees, and now personally supervises overall government reform, finance, the overhaul of the armed forces and cyber-security.

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Mr. Xi‘s change in political style was clear from the moment in November 2012 when he walked before live cameras into a room in the Great Hall of the People to greet the country as its new leader.

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Since becoming leader, Mr. Xi has not given any press conference about his domestic policies, nor granted any interviews. He has tightened controls on online social networks and launched a sustained campaign against political dissent, including the rounding up of

dozens of activists. Even those calling for officials to be more open about their wealth are being targeted. 

But there are many Chinese who want changes that he appears reluctant to make: not least a bigger say in the running of their local governments and the protection of their communities from environmental damage.

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In the years ahead, as the economy slows, China‘s new middle class is likely to get more restless. By painting himself as the main man, Mr. Xi will have no one else to blame if things go wrong.

Recent political events 

Since Tiananmen, 13 rounds of human rights dialogue between the U.S and China has been conducted. In May 2010, the most recent round was taken placed; topics were turned around religious freedom, the rights of labor, freedom of expression, rule of law, the discrimination of race, and multilateral cooperation as well. A foundation to continue these rounds in the future was adopted by The U.S. and China leading to unanimous approval for the next round of dialogue in China in 2011.

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In recent years, riots have been happened in China that has created the unstable condition for foreign companies‘ investment in China. However, China Government has taken strict measures to prevent and stop this situation that creates safe environment for foreign investors.

Political Risk

A unique form of political risk occurs in China, and this is the constant battle between the country‘s central government and the provincial and local governments over applicable law, and observance or non-observance of it. This makes it difficult for companies operating in China to know exactly what the rules are. The concept is captured by the Chinese saying: "The Mountains are high and the Emperor is far away."

The Road Ahead

Progressing toward the year 2020, China's political structure is unlikely to develop along a direct, linear trajectory. Just as China's rapid economic development and global integration shocked the world over the past two decades, so too might the country's future political course defy projected expectations.

Which road China ultimately takes will depend on the interplay of current political trends, key players in decision making roles, and demographic factors that will be important in the future. Possible Scenarios – 

The emergence of a democratic China — A wealthier and better-educated middle class, a stronger currency, and a more robust civil society, among other phenomena, lead to greater cultural and political pluralism.

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Prolonged chaos — Economic disparities among urban and rural populations, rampant corruption among the elite, health crises, and environmental degradation trigger intense sociopolitical and economic crises that undermine the stability of the Communist regime.

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A resilient, authoritarian China — Problems among the world's democratic countries make democracy less appealing to the Chinese people, while stable development strategies by the party-state are necessary for growth and economic stability, further entrenching the ruling power of the CCP

Economic Scenario 

China is the 2nd largest economy in the world according to both GDP (current prices, US dollars) and GDP (PPP). In 2012, China‘s GDP (current prices, US dollars) was US$8.227 trillion and its GDP (PPP) was US$12.405 trillion.

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In 2012, China was the 18th fastest growing economy in the world, with a real GDP growth rate (constant prices, national currency) of 7.8 percent.

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Since 1949, the Chinese government has been responsible for planning and managing the national economy. But it was only in 1978 – when Deng Xiaoping introduced capitalist market principles –that the Chinese economy began to show massive growth, averaging 10 percent GDP growth over the last 30 years.

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During that period the size of the Chinese economy grew by roughly 48 times, from $168.367 billion (current prices, US dollars) in 1981 to $8.227 trillion.

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From 2003 to 2010, the Chinese economy experienced near-uninterrupted double-digit growth – with the exception of 2008 and 2009, during the global economic downturn. Nevertheless, the Chinese economy still managed to post respectable growth figures during that period – 9.635 percent and 9.214 percent respectively.

China in the global economy 

China is a member of the WTO and is the world's largest trading power, with a total international trade value of US$3.87 trillion in 2012. Its foreign exchange reserves reached US$2.85 trillion by the end of 2010, an increase of 18.7% over the previous year, making its reserves by far the world's largest. As of 2009, China owns an estimated $1.6 trillion of US securities.

 China, holding over US$1.16 trillion in US Treasury bonds, is the largest foreign holder of US public debt. In 2012, China was the world's largest recipient of inward foreign direct investment (FDI), attracting $253 billion.

 China also invests abroad, with a total outward FDI of $62.4 billion in 2012, and a number of major takeovers of foreign firms by Chinese companies. China's undervalued

exchange rate has caused friction with other major economies, and it has also been widely criticized for manufacturing large quantities of counterfeit goods.

 China ranked 29th in the Global Competitiveness Index in 2009, although it is only ranked 136th among the 179 countries measured in the 2011 Index of Economic Freedom. In 2011, 61 Chinese companies were listed in the Fortune Global 500.

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Measured by total revenues, three of the world's top ten most valuable companies in 2011 were Chinese, including fifth-ranked Sinopec Group, sixth-ranked China National Petroleum and seventh-ranked State Grid (the world's largest electric utilities company).

China Economic Forecast 

From 2003 to 2010, the Chinese economy experienced near-uninterrupted double-digit growth – with the exception of 2008 and 2009, during the global economic downturn. Nevertheless, the Chinese economy still managed to post respectable growth figures during that period – 9.635 percent and 9.214 percent respectively.

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Since initiating market reforms in 1978, China has shifted from a centrally planned to a market based economy. More than 600 million citizens have been lifted out of poverty as a result, but over 170 million people still live below the $1.25-a-day international poverty line.

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In 2012, China‘s GDP (PPP) per capita was $12,405.67. This is 37 times higher than what it was just 30 years ago. By 2018, China‘s GDP (PPP) per capita will climb from the 90th to 75th highest in the world – at $16,231.50. This however will still be below the forecasted world average of $18,867.17.

China Economic Structure 

China has one of the most diverse spread of industrial production in the world, fitting for a country that is called 'The World‘s Factory'. Since 1978, the nation has gradually reduced its reliance on state-owned enterprises (SOEs) – though they still account for 46 percent of China‘s industrial output, down from 77.6 percent 35 years ago.

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The government has in recent years renewed its drive to support state-owned enterprises in sectors it considers important to national economic security – particularly natural resources, banking and telecommunications.

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The three wealthiest and most important economic regions are all on the east coast: the Pearl River Delta close to Hong Kong, The Yangtze River Delta surrounding Shanghai and the Bohai Bay region near Beijing.

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It is the rapid development of these areas that is expected to have the most significant effect on the Asian regional economy as a whole, and Chinese government policy is designed to remove the obstacles to accelerated growth in these wealthier regions.

China’s Exports, Imports and Trade 

China is the world‘s second largest trading nation behind the US – leading the world in exports and coming in second for imports. From 2009-2011 its trade to GDP ratio was 53.1 percent, while its trade per capita was $2,413.

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For many countries around the world, China is rapidly becoming their most important bilateral trade partner. In 2011, they were the largest exporting/importing partner for 32 and 34 countries respectively.

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However, there have been concerns over large trade imbalances between China and the rest of the world. The US in particular has the largest trade deficit in the world with China at $315 billion, more than three times what it was a decade ago.

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Domestically, the Chinese government has been keen to reduce the economy‘s reliance on exports and focus on internal consumption.

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In March 2013, China‘s new leadership announced that they would move to recalibrate the economy, acknowledging that there is a ―growing conflict between downward pressure on economic growth and excess production capacity.‖

Social and Cultural Scenario:

To understand the social and cultural environment involves close analysis of the society. Demographic changes such as population growth, movements and age distribution will be important, as will changes in cultural values and social trends such as family size and social behaviors. Such factors could include: Consumer, lifestyles, Environmental, issues Demographic issues, Education, Immigration/Emigration, and Religion China is an extremely high-context country where people prefer to receive implied messages. For establishing a business in China, strong private-relationships with different stakeholders is the key to success.

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Income distribution is unequal within different areas and industries. For example, the average income has 2.26 times in east of china of the west of china. There are several reasons for it: the laid-off people who do not going to work, less desire for consuming due to the recession of economy, less social guarantee from chinese government, huge income gap between urban and rural.

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As to lifestyle changing, nowadays, there are more people choose working at home, it will be more convenience and easier for employment who want to keep balance between family and work. Also, with the number of single households increasing, company more like to assign this type of employees to work abroad or other regions where is far away from home. Because they have less responsibility for family and less homesick. They will more easier to devote all themselves into work and adapt new multicultural work environment.

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Moreover, education is becoming more and more important for everyone. Therefore, Chinese government encourage international schools join venture with Chinese public schools to exchange culture and learning skills, also as business company, they will organization business presentation for employment, or assign them to study abroad, to introduce more advanced knowledge and valuable experience from people who are from different culture background.

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With a population officially over 1.3 billion and an estimated growth rate of 0.494%, China is very concerned about its population growth and has attempted with mixed

results to implement a strict birth limitation policy. It can be said that China has huge population that supply to the market a profuse workforce which is an opportunity for to expand its business in China. 

Another affecting factor that can be considered is the trend of employment with relation to the unemployment level. The current unemployment rate in China in January 2010 is 4.3% which demonstrates that this project would help the society and in turn the economy by creating positive job opportunities.

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Recently, China Government has increased the minimum wages that is a challenge for because they have to paid more for labor costs that will decrease business profit

Technological Scenario

Government and industry focus on technological effort, so government spend large amount of money on research, to develop and explore high technology innovation, also to speed the technology transfer.

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Science and technology in China has in recent decades developed rapidly. The Chinese government has placed emphasis through funding, reform, and societal status on science and technology as a fundamental part of the socio-economic development of the country as well as for national prestige.

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High technology information development has a significant role in the china economy. As the internet and technology moving forward, it drives the success of the china economy.

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China has made rapid advances in areas such as education, infrastructure, high-tech manufacturing, academic publishing, patents, and commercial applications and is now in some areas and by some measures a world leader.

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China is now increasingly targeting indigenous innovation and aims to reform remaining weaknesses. China has increasingly encouraged multinational corporations to create R&D centers in China. Chinese critics have argued that foreign owned R&D mainly benefits foreign companies and removes many talented Chinese researchers from indigenous companies and institutions. Chinese supporters have argued that the foreign R&D serves as a role model and encouragement for indigenous companies and creates skilled communities from which labor and knowledge can easily flow to indigenous companies.

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The trade barriers decrease, which produce more job opportunities in the field of information Technology.

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Moreover, the expenditure of high-technology consumers are covering all over the world, such as computer and networking hardware, software and services, that is over than $1.4 trillion in 2005. Also, that worldwide IT spending increase by 10 % over every year.

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Chinese science strategists realize China's greatest opportunities in technology fields such as computers and biotechnology, where creates a chance for China to make innovation in these areas.

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Technology Agreement is the model for bilateral cooperation between The U.S and China in science field. In April 2006 the Science and Technology Agreement was extended by a 5-year agreement was signed. The agreement encompasses cooperation between U.S. and China in variety fields like marine conservation, renewable energy, and health. Besides the U.S China also has close relationship with Japan and the European Union in science and technology cooperation.

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A number of districts for high-tech development have been established for researching and developing technological purpose. For example in 1996 the Silicon Valley was built with an CNY101.5 billion investment in the infrastructure construction. Up to now there have been approximately 17,000 high-tech enterprises operating in those districts, with the employees more than 2.2 million.

Environmental Scenario 

The environmental factors affect organizations. Firstly, capital markets are determined by Chinese government. Government increases their expenditure, which could increase money supply for organization and make capital markets boom. Based on organization performance, the shareholders will decide to provide more equity funding or sell the shares.

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The labor market indicates that the availability of certain skills and the labor costs at different regions or industries in China, which are under the power of the training and government policies, as well as the inflation, industries sectors‘ needs, and trade unions.

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At last but not the least, China focus on being environment-friendly society. As china daily said, china will have an international green industry expo in Beijing in Nov of 2010, which will let others know more about domestic corporations and offer a new stage for them, also foreign companies are likely to explore Chinese green market develop a green economy in china, such as clean energy, emission reductions, low carbon technology and so on.

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But in contrast, along with China's rapid industrial development are the serious negative impacts on environment these include increasing pollution and decreasing natural resources as well. Some research estimate pollution costs hold the Chinese economy from 7% to 10% of GDP per year.

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Currently, like any Government, China's leaders are increasingly paying attention to environmental problems in the country. Realizing the important of environmental protection, The State Environmental Protection Administration was officially upgraded to a ministry-level agency, the Ministry of Environmental Protection in 1998.

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Recently, China‘s environmental legislation has been strengthened and some progress in stemming environmental deterioration has also been made. China took part the Asia Pacific Partnership on Clean Development in 2005, which unites industries and government to implement common strategies together that reduce pollution and global climate change.

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It can be said that China is participating actively in climate change talks as well as other multilateral environmental negotiations, especially discussions about how developed countries deal with serious environmental issues that help developing countries to a greater extent.

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As long as China is huge country thus water scarcity is regarded as a big issue that also is the project‘s disadvantage. Besides that, climate change is considered as one of the major systematic risks because climate change is affecting how companies operate and the products they offer.

Environmental Concerns that lie ahead – 

China is the world‘s worst polluter but largest investor in green energy. Its rise will have as big an impact on the environment as on the world economy or politics.

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Strict environmental laws passed by Japan in the 1970s followed the realization that poisonous mercury spilled from a plastics factory was claiming thousands of lives around the bay of Minamata.

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China‘s hyperactive microblogs logged 2.5m posts on ―smog‖ in January alone.

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In three weeks from the middle of June, the government unveiled a series of reforms to restrict air pollution. It started the country‘s first carbon market, made prosecuting environmental crimes easier and made local officials more accountable for air-quality problems in their areas

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It is also said China—meaning companies as well as government—would spend $275 billion over the next five years cleaning up the air.

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Many environmentalists, both in the country and outside, fear it is too little, too late. A study released by America‘s National Academy of Sciences in July found that air pollution in the north of China reduces life expectancy by five-and-a-half years.

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China‘s greenhouse-gas emissions were about 10% of the world‘s total in 1990. Now they are nearer 30%. Since 2000 China alone has accounted for two-thirds of the global growth in carbon-dioxide emissions.

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This will be very hard to reverse. While America and Europe are cutting their emissions by 60m tonnes a year combined, China is increasing its own by over 500m tonnes. This makes it a unique global threat.

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China‘s wildlife is under particular threat. The China Species Red List, an official document, classified almost 40% of the country‘s mammals as ―threatened‖ in 2004.

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The worst problem is water. Pictures of China often show green and watery landscapes. But most of northern China is as dry as straw.

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The housing ministry‘s chief engineer for water safety says only half the water sources in urban areas are fit to drink.

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Yet China also has advantages in addressing its—and the world‘s—environmental problems. Its leaders understand the challenge of climate change better than their predecessors and perhaps their international peers, too.

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They are good at taking action on high-priority issues. Because the country is a late developer, it should be able to learn from the mistakes of others—and not build energyguzzling cities.

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They are good at taking action on high-priority issues. Because the country is a late developer, it should be able to learn from the mistakes of others—and not build energyguzzling cities.

Legal Scenario Laws support foreign investors 

In order to encourage foreign companies to invest in China, China Government has gradually set up a relative complete law system. In 1979, The Law of the People‗s Republic of China on Chinese-Foreign Equity Joint Ventures was published. 20 years later, the Chinese government has promulgated and issued a series of laws and statutes about the establishment, operation, termination and liquidation of foreign-invested enterprises.

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The main laws and regulations include the three basic laws ― The law on ChineseForeign Equity Joint Ventures, The Law on Chinese- Foreign Contractual Joint Ventures, and The Law on Wholly Foreign-Owned Enterprises; detailed rules for the implementation of the three basic laws; The Company Law of the People‗s Republic of China; The Income Tax Law of the People‗s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises; Interim Provisions for Guiding Foreign Investment; Industrial Catalogue for Foreign Investment; Interim Provisions Concerning the Investment within China of Foreign-invested Enterprises, Provisions Regarding the Merger and Separation of Foreign-invested Enterprises, and Liquidation Measures for Enterprises with Foreign Investment.

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These provide legal bases from which to guarantee the independent operation rights of foreign-funded enterprises and to protect the legitimate rights and interest of both domestic and overseas investors.

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Currently, the China‘s government is considering its existing laws and statutes in accordance with the model of the WTO. It has abolished certain obsolete laws and regulations, and will gradually revise the laws and regulations that are incompatible with the rules of the WTO.

China Tax Regime 

China is known as one of the most attractive incentives packages in Asia. Tax incentives and other facilities for the manufacturing sector are provided for in the Promotion of Investment.

SWOT ANALYSIS OF CHINA FOR BUSINESS PROSPECT

Strength  Economic Factors

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 Innovative System

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Effective Leadership Open-to-Door Policy Strong FDI presence An emerging private sector

Increase in the R&D investment Well established state key labs & techno parks

Weakness   

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 Information Infrastructur e

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Improvement in ICT access Strong capability in ICT hardware manufacturing & exports

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Weak IPR protection Weak financial policies Inequality in increase of urban & rural cities

Opportunity 

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Strengthen the institutional regime and improve governance Strengthen the financial factor Establishing a monitoring system to enhance government accountability, transparency

Weak indigenous innovation capacity Low productivity of R&D spending Lack of venture capital

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Lack of clear & efficient regulatory framework

 Improve the regulatory regime  Expand access for rural & local communities

Improve efficiency & quality of domestic R&D

Threat/ challenges 

Increasingly competitive and complicated global environment

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Imbalance between growth and the environment

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Increasing energy constraint

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Risk of increasing regional & ruralurban development gaps

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Knowledge Divide

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Income disparity

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Digital divide

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Discrepancies in health & medical care

China Market Overview 

By the U.S. Department of Commerce, U.S. Commercial Service, the Chinese economy is roughly half that of the United States with a comparable land mass. While China‘s GDP growth is slowing, it remains among the world‘s top performers expected to reach 7.5 percent in 2012, with analysts targeting similar growth in 2013. In response to this growth, U.S. exports to China have increased 468 percent since China‘s 2001 World Trade Organization (WTO) entry, and it is likely to maintain its position as the thirdlargest buyer of American goods after Canada and Mexico in the coming year.

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Small and medium-sized enterprises (SMEs) are the leading exporters to China, representing 92 percent of American businesses exporting to China (35 percent of value), with overall export product categories led by machinery, computers and electronics, chemicals, transportation equipment, and waste and scrap.

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China‘s economy has seen enormous benefits from fixed asset investments. This investment-led growth, however, is widely perceived as non-sustainable and China‘s leadership addressed this concern in its 12th Five-Year Plan (5YP), which came out in 2011. The plan continues through 2015 and aims to increase consumer spending from approximately 35 percent of GDP to 50 percent by 2015.

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Given China‘s rising incomes and demand for raw materials and finished foodstuffs, the U.S. Foreign Agriculture Service forecasts that China‘s imports will continue to grow well into the future. China‘s inbound foreign direct investment (FDI) reached US$116 billion in 2011, and stood at US$83.4 billion for the first three quarters of 2012, down 3.8 percent from a year earlier, according to China‘s Ministry of Commerce. Meanwhile, China‘s outbound direct investment (ODI) in the first nine months of 2012 totaled US$52.5 billion, up 28.9 percent year-on-year.

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China‘s Ministry of Commerce reports that ODI is expected to register an annual growth rate of 17 percent from 2011 to 2015, reaching US$150 billion in 2015.China‘s rapid economic growth, especially in the urban areas, has led to a booming consumer market for high-end goods and services, including tourism and education.

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China will account for about 20 percent of global luxury goods consumption by 2015, or US$27 billion. About 80 percent of people buying luxury items in China are 45 years or

younger, whereas that percentage is only half for the United States. By 2020, China‘s middle class is expected to account for around 45 percent of the population, or approximately 700 million people. 

Despite these remarkable changes, China is still a developing country with significant economic divisions between urban and rural areas, albeit one with vast potential. The number of migrant workers remains high. In 2011, the urban population exceeded that residing in rural areas for the first time, with 691 million urbanites (more than double the U.S. population) versus 657 million rural dwellers. As of 2011, the per-capita disposable income of urban residents was US$3,454 and the per-capita disposable income of rural residents stood at US$1,105.

Market Challenges 

China often lacks predictability in its business environment. China‘s current legal and regulatory system can be opaque, inconsistent, and often arbitrary. Implementation of the law is inconsistent. Lack of effective protection of intellectual property rights is a particularly damaging issue for many American companies. Both those that already operate in China and those that have not yet entered are well advised to assess their IP risk exposure and develop a plan to mitigate that risk. Guidance is available at www.stopfakes.gov.

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China has made significant progress toward a market-oriented economy, yet it continues to rely heavily on an export-led growth model. For this reason, parts of its bureaucracy still seek to protect local firms, especially state-owned enterprises, from imports, while encouraging exports.

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China retains many characteristics of a planned economy, with five-year plans setting economic goals, strategies, and targets. Provincial and local officials are accountable for delivering on the 5YP and their priorities reflect that mandate. In addition, the State and the Communist Party directly manage the only legal labor union.

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The scale and complexities of China can stress a firm‘s capabilities, resources and patience. Well-targeted and informed efforts and a network of contacts at various levels across a broad range of organizations are often linked closely with market success and ability to resolve problems.

Establishing and Running a Business in China What are options for investment? Foreign investment into China can come in several foreign-invested entity (FIE) forms, and choosing the appropriate investment structure depends on a number of

factors, including

planned activities, industry, investment size, etc. Key points that differentiate investment structures include: • Business scope: Business scope is the one sentence description of the business activities in which a business will engage. The business scope must be approved early on in the establishment process, as the approved scope will appear on the business license. The business can only conduct the business activities in its business scope and any amendments to the business scope require further application and approval, and can be quite time consuming. • Registered capital: Registered capital is the initial investment in the company that is required to fund the business operations until it is in a position to fund itself.

In practice, the official requirements for

registered capital vary by industry and region. The absolute minimum capital requirements under Chinese law are RMB30,000 (US$4,724) for multiple shareholder companies and RMB100,000 (US$15,748) for single shareholder companies. Registered capital contributions can be made in cash or in kind, as a lump sum or in installments. Locally obtained RMB cannot be injected as registered capital - it must be sent in from the overseas investor. The payment schedule of the registered capital needs to be specified in the company‘s Articles of Association. 45. After the registered capital has been contributed, this amount cannot be wired out again freely. If a company wishes to expand its scope of business later on, there may be a requirement to increase the amount of registered capital.

In addition to the registered capital, a total investment figure also needs to be specified. The total investment quota is the total amount of funds planned to be contributed to the project over its lifespan. The difference between registered capital and total investment represents the debt of the investment and can be made up by loans from the investor or foreign banks. • Legal personality liability: A company in China is an enterprise legal person. An enterprise legal person bears civil liability for the operational activities of its legal representatives and other staff. The company is liable for its debts to the extent of its entire property. The shareholders of a company with limited liability status assume liability towards the company to the extent of the capital contributions subscribed by them respectively.

Representative Offices A representative office (RO) is an attractive way for foreign investors to get a feel for the Chinese market, as it is the easiest type of foreign investment structure to set up and has no registered capital requirements. The defining characteristic of an RO is its limited business scope; an RO is generally forbidden from engaging in any profit-seeking activities and can only legally engage in: 

Market research, display and publicity activities that relate to company product or services; and

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Contact activities that relate to company product sales or service provision and domestic procurement and investment.

An RO has no legal personality, meaning it does not possess the capacity for civil rights and conduct, cannot independently assume civil liability, and is limited in its hiring ability. Local employees can only be hired through government HR agencies and no more than four foreign employees can be hired per RO.

Wholly Foreign-Owned Enterprises A wholly foreign-owned enterprise (WFOE), the most commonly used foreign investment structure, is a limited liability company wholly owned by foreign investor(s). Since China joined the World Trade Organization in 2001, WFOEs can do almost any type of business in China. The Foreign Investment Industrial Guidance Catalogue, the most recent version released in 2011, divides industries into three categories: encouraged, restricted and prohibited for foreign investment (industries not listed in the Catalogue are generally permitted). A foreign-invested commercial enterprise (FICE), which can be set up either as a WFOE or a joint venture, is a type of company for retailing, franchising or distribution operations. A WFOE or JV can be established exclusively as a FICE, or can combine FICE activities with other business activities, such as manufacturing and services.

Joint Ventures A joint venture (JV) is a company owned partially by foreign investor(s) and partially by Chinese investor(s). There are two types of JVs in China, which differ primarily in terms of the way in which profits and losses are distributed. Equity JV (EJV) 

Profits and losses are distributed between parties in proportion to their respective equity interests in the EJV

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The foreign partner should hold at least 25 percent of the equity interest in the registered capital of the EJV

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Limited liability as a Chinese legal person

Cooperative JV or Contractual JV (CJV) 

Profits and losses are distributed between parties in accordance with the specific provisions in the CJV contract

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Can operate either as a limited liability company or as a non-legal p

Industrial Opportunities:

References 

http://www.economist.com/news/briefing/21583245-china-worlds-worst-polluter-largestinvestor-green-energy-its-rise-will-have

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http://www.ficci.com/international/75154/Project_docs/FICCI-china.pdf

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http://www.economist.com/news/china/21618882-cult-personality-growing-aroundchinas-president-what-will-he-do-hispolitical?zid=306&ah=1b164dbd43b0cb27ba0d4c3b12a5e227

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http://www.marketresearchreports.com/countries/china

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http://www.economywatch.com/world_economy/china

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http://www.chinaabout.net/pestle-analysis-chinese-market-e-commerce-sector/