Features & Analysis
China – flying with the dragon
Chinese economic performance has certainly caught the eye over the last three decades. China experienced a remarkable period of rapid growth as it shifted from a centrally planned to a market-based economy with reforms begun in the late 1970s. During the period 1979 to 2011, China’s average annual GDP growth was 9.9%, with annual growth averaging 11.6% from 2003 to 2007.
Guoqi Wang, Beijing, China
China became the world’s second largest economy after the United States in 2010; by 2011 nominal GDP was worth around 47 trillion Renminbi (RMB) or 7.3 trillion US dollars. China is playing an increasingly important role in the world economy.
Until the dawn of the global financial crisis in 2008, foreign trade provided the main stimulus for economic growth. Between 2001 and 2008, net exports and investment in related infrastructure accounted for more than 60% of China’s growth. However, the European debt crisis and uncertain US recovery have hurt demand for exports. Add this to falling investment in domestic real estate and it is estimated that weakening global demand will slow GDP growth to 8% in 2012, down from 9.2% in 2011.
Reacting to this pressure on exports the Chinese authorities called for economic restructuring to aid future high-quality economic growth. The 12th Five-Year-Plan, covering the period 2011 to 2015, stresses the need to rebalance towards a more demand-led, service-sector-oriented pattern of growth while, at the same time, boosting investment.
This is clear from recent stimulus measures such as government investment in strategic industries and basic infrastructure in underdeveloped areas, and the first cut in one-year benchmark interest rates since the end of 2008.
Roles of the public and private sectors
The private sector in China has developed gradually since the late 1970s alongside a more liberated view from Chinese leaders on whether a private sector is socialist or capitalist. The private sector boomed when, in the 1990s, it received official recognition as an important part of the socialist market economy. By September 2011, the number of individualowned businesses exceeded 36 million with total capital investment of 150 billion RMB. The number of private enterprises was more than 9 million with total registered capital of 25 trillion RMB. And the private sector contributed more than 50% of China’s GDP and one-third of exports.
However, state-owned enterprises still play an important role in the economy and continue to dominate in oil, power, tobacco, steel, petrochemical, communication, motor, rail, aviation and financial services. While the role of the government in managing the economy may have reduced, preferential treatment for the public sector continues, and the administrative structure clings too closely to that of the pre-reform era.
Foreign direct investment
To attract foreign investment, the Chinese government has offered many incentives. This is especially true of taxation, which varies from that applying to domestic enterprises. China is now one of the leading recipients of foreign investment and this has contributed greatly to its economic success.
Foreign investors are encouraged to operate in priority areas needing modern technology and environmental protection. A condition of China’s entry to the World Trade Organisation was that it should open up areas that were previously closed to foreign investment.
However, China still carefully controls the process by imposing certain restrictions on foreign investors. These include the requirements for approval, specific requirements on the amount and nature of capital contributions and restrictions on foreign participation in certain sectors.
Secrets of business success in China
Most foreign investors form joint ventures with local partners as it aids familiarity with the local environment, access to market information, and relationships with government agencies. The exception may be wholly foreign-owned enterprises that are export driven, provided the sectors in which they operate are not subject to 100% equity restrictions.
Networking is key. Establishing and keeping good personal relationships with business partners, government officials and employees is a big part of doing business in China. So it is useful to learn about basic Chinese culture and business etiquette. For example, ‘face’ or reputation is very important and you should avoid losing face or causing someone else to lose face at all costs. Seniority is also very important to the Chinese especially when dealing with the public sector.
Constant change characterises modern-day China. A flow of new laws and regulations means there is a continual need for investors to adapt their businesses quickly. Frustratingly, although there are good intentions to cut bureaucracy, people often find that officials on the ground haven’t necessarily understood this message. Staying up to date and coping with rapid change represents a challenge for everyone doing business in China.
The importance of professional advice
Business people used to working in mature and stable economies will find China a new experience and discover challenges as well as opportunities. However, before you set up business in China be sure to seek professional advice, especially in the areas of business structure and taxation.
Until the dawn of the global financial crisis in 2008, foreign trade provided the main stimulus for economic growth. Between 2001 and 2008, net exports and investment in related infrastructure accounted for more than 60% of China’s growth. However, the European debt crisis and uncertain US recovery have hurt demand for exports. Add this to falling investment in domestic real estate and it is estimated that weakening global demand will slow GDP growth to 8% in 2012, down from 9.2% in 2011.
Reacting to this pressure on exports the Chinese authorities called for economic restructuring to aid future high-quality economic growth. The 12th Five-Year-Plan, covering the period 2011 to 2015, stresses the need to rebalance towards a more demand-led, service-sector-oriented pattern of growth while, at the same time, boosting investment.
This is clear from recent stimulus measures such as government investment in strategic industries and basic infrastructure in underdeveloped areas, and the first cut in one-year benchmark interest rates since the end of 2008.
Roles of the public and private sectors
The private sector in China has developed gradually since the late 1970s alongside a more liberated view from Chinese leaders on whether a private sector is socialist or capitalist. The private sector boomed when, in the 1990s, it received official recognition as an important part of the socialist market economy. By September 2011, the number of individualowned businesses exceeded 36 million with total capital investment of 150 billion RMB. The number of private enterprises was more than 9 million with total registered capital of 25 trillion RMB. And the private sector contributed more than 50% of China’s GDP and one-third of exports.
However, state-owned enterprises still play an important role in the economy and continue to dominate in oil, power, tobacco, steel, petrochemical, communication, motor, rail, aviation and financial services. While the role of the government in managing the economy may have reduced, preferential treatment for the public sector continues, and the administrative structure clings too closely to that of the pre-reform era.
Foreign direct investment
To attract foreign investment, the Chinese government has offered many incentives. This is especially true of taxation, which varies from that applying to domestic enterprises. China is now one of the leading recipients of foreign investment and this has contributed greatly to its economic success.
Foreign investors are encouraged to operate in priority areas needing modern technology and environmental protection. A condition of China’s entry to the World Trade Organisation was that it should open up areas that were previously closed to foreign investment.
However, China still carefully controls the process by imposing certain restrictions on foreign investors. These include the requirements for approval, specific requirements on the amount and nature of capital contributions and restrictions on foreign participation in certain sectors.
Secrets of business success in China
Most foreign investors form joint ventures with local partners as it aids familiarity with the local environment, access to market information, and relationships with government agencies. The exception may be wholly foreign-owned enterprises that are export driven, provided the sectors in which they operate are not subject to 100% equity restrictions.
Networking is key. Establishing and keeping good personal relationships with business partners, government officials and employees is a big part of doing business in China. So it is useful to learn about basic Chinese culture and business etiquette. For example, ‘face’ or reputation is very important and you should avoid losing face or causing someone else to lose face at all costs. Seniority is also very important to the Chinese especially when dealing with the public sector.
Constant change characterises modern-day China. A flow of new laws and regulations means there is a continual need for investors to adapt their businesses quickly. Frustratingly, although there are good intentions to cut bureaucracy, people often find that officials on the ground haven’t necessarily understood this message. Staying up to date and coping with rapid change represents a challenge for everyone doing business in China.
The importance of professional advice
Business people used to working in mature and stable economies will find China a new experience and discover challenges as well as opportunities. However, before you set up business in China be sure to seek professional advice, especially in the areas of business structure and taxation.