Executive Summary
This report represents the Economic, Political and Legal, Finance, Foreign Direct Investment and Socio-cultural factors which are analysed in detail to provide country profile of China in order to decide whether Blackmores should enter China in current conditions or in future.
There has been a significant change in the economic growth following Xiaoping's reforms and China's joining of World Trade Organization. The GDP of China shows an increasing trend after 2001, reduced after 2007 due to recession and will remain at an average of around 7.5% in 2011.China is facing increased unemployment, inflation and shows some signs of economy overheating. It is a major exporter globally and supplies 70% of the ingredients to the global dietary supplement industry.
China is a one party state, ruled by Chinese Communist Party. Chinese legal system is a combination of civil law and continental legal systems. Legal protections are inadequately implemented followed with an inconsistent protection of intellectual property rights. Power overrules law and corruption exists in both public and private sector. Regulations in China for nutritional and dietary supplements are the some of the strictest in the world.
The People's Bank of China functions as the central bank. China has a very primitive and complex banking rules which are considered to be of small operational issues as it impacts the ease of repatriating profits. Chinese currency, Yuan was pegged for a decade to the US dollar until 2005 and since then it fluctuates to US dollar within a narrow band.
Market size, Open door policy of China, loosening foreign ownership laws has resulted in china becoming the largest recipient of FDI among the developing countries and stood third globally in 2008. Tax incentives and exemptions are available for setting up advanced technology research and development enterprises in special economic zones.
The entire cultural system of China emphasises importance on interaction with one another and is exhibited in values such as Guanxi (networking, personal relations). Chinese people are becoming more open towards receiving knowledge on nutrition.
Upon detailed anaysis of various factors, this report recommends Blackmores Management to go for full scale investment in late 2011 and meanwhile assess the government support, onsult local lawyers, monitor major imbalances in economy and recruit managers with experience in China.
Table of Contents
1. Introduction
1.1 Company Profile
Blackmores Limited was established in 1930 by naturopath Maurice Blackmore, which supplied herbal medicines. With the passage of time, the company had a tremendous growth and was listed on Australian Stock Exchange in 1985. Blackmores focuses on developing and marketing of herbs, minerals, vitamins and nutrients.
1.2 Scope of the report
The purpose of this report is to provide Blackmores with an up to date and forecasted country scenario of China. This report examines the Economic, Political and Legal o, Finance, Foreign investment and Socio-cultural environment to decide whether or not to enter the Chinese market.
1.3 Methodology
The research for this report was done through Deakin library databases and Journals, Government and Company websites along with usage of statistical data from reputed organizations.
1.4 Limitations
There might be some inconsistencies due to the unavailability of all the statistical data from a single source. At some places, the data is clubbed from various sources to provide trend graphs and sources are indicated accordingly.
2. Economic Environment
2.1 Economic policy of China
The rate of economic change in China has been enormously rapid which has involved profound economic policy revolutions which started with the transformation in the agricultural sector, extending gradually to industry and services sector and effectively dismantling the price regulation by 2000 (OECD Policy Brief 2005).Government has enforced many competition laws and after China joining World Trade Organisation (WTO) in 2001, the growth sharpened by allowing foreign direct investment , ending multiple exchange rates, reducing tariffs and further changes to constitution with regards to role of non-state sector and private companies (OECD Policy Brief 2005).
2.2 GDP and Balance of Payment (BoP)
The fast growth in GDP initially was due to Xiaoping's reforms which led to increased foreign capital inflow; correspondingly increase is seen in BoP which then went negative due to tightening of monetary policy (Ma, 2009). There is decrease in GDP as well due to the same reason. The increasing trend from 2001 in GDP and BoP indicates loosening of trade policies in China (Ma, 2009). The recent dip is due to the Global Financial Crisis (GFC) (Zhang Xiang, 2010).The Chinese economy is considered to be 'still very robust' by the IMF and is expected to grow 10.5% in 2010 (Zhang Xiang, 2010).
Figure 1: GDP growth and GDP per capita growth
C:\Users\Sohail K\Desktop\IBM ASSign\gdp gdp per cap.jpg
Source: World databank, 2010
Figure 2: Balance of Payment
Source: World databank, 2010
2.3 Consumer Prices (CP), Inflation and Gross National Income (GNI) per capita
The increase in inflation during 1990-1994 corresponds to increase in GDP. With tighter economic policies in place CP reduced and inflation turned to deflation in 1999. Excessive fluctuations in CP, mainly seen in food prices together with GDP growth trend indicates the instability in the policies, the monetary policies are either too tight or too loose which has given rise to a debatable topic of economy overheating in China.(Mao 2009). China's inflation touched 3.3 percent in July which was the fastest rise in the last 21 months (Li Yanping, 2010)
Figure 3: Inflation, consumer prices
Source: World databank, 2010
Figure 4: China's Food, Residence & Other Inflation rate C:\Users\Sohail K\Desktop\inflation.jpg
Source: World databank, 2010
GNI per capita shows an increasing trend but there is also increasing inequality of income per capita among various classes (Hering and Poncet n.d).
Figure 5: Gross National Income per capita
Source: World databank, 2010
2.4 Unemployment
The unemployment in China is seen continuously increasing which is mainly due to the rural-urban migration (Zhai and Wang 2002).
Figure 6: China's Unemployment Rate
C:\Users\Sohail K\Desktop\IBM ASSign\unemployment.jpg
Source: World databank, 2010
2.5 Infrastructure
China's road transportation infrastructure is relatively undeveloped in rural compared to its urban infrastructure (China Knowledge 2010). It has a good rail network (China Business Forecast Report, Business Monitor International, 2010). The Chinese seaports play a major role in its USD 2 trillion foreign trade and China ranks number one globally with respect to cargo throughput (China Knowledge 2010). Figure 7 shows top 10 ports which account for 55% of national trade (China Knowledge 2010).
Figure 7: Top 10 Seaports in China by Cargo Turnover
Ranking
Port
Cargo Turnover (million tons)
Growth (in %)
1
Shanghai
448.6
4.5
2
Ningbo-Zhoushan
437.2
14.0
3
Guangzhou
310.9
13.1
4
Tianjin
291.6
22.7
5
Qingdao
243.7
17.5
6
Qinhuangdao
226.8
22.8
7
Dalian
203.0
12.2
8
Shenzen
178.1
11.5
9
Suzhou
163.4
16.7
10
Rizhao
120.6
18.5
National Total
4,800.6
14.7
Source: China Knowledge 2010
2.6 Tariffs
Pharmaceutical products attract a tariff rate of 3-6% and Medical Consumables 5%. In addition value added tax of 17% is also applied to imports (Derek, 2009).
2.7 Trading Partners and key imports and exports
Figure 8 indicates that Europe, Unites States and Japan are the top trading partners of China with Australia taking a share of 2.3%.
Figure 8: Top Ten Trading Partners
Source: Ministry of Commerce of PRC 2010
Figure 9: Exports and Imports in billions of US$
Source: World databank 2010
Figure 10: Major Export and Import Commodities
Export Commodities
Electrical and other machinery, including data processing equipment, apparel, textiles, iron and steel, optical and medical equipment
Import Commodities
Electrical and other machinery, oil and mineral fuels, optical and medical equipment, metal ores, plastics, organic chemicals
Source: CIA- The World Fact Book, 2010
Figure 9 shows increasing exports and imports of China, the decrease in 2009 represents GFC. Apart from the major exports shown in Figure 10, China supplies 70% of the ingredients to the global dietary supplement industry (Crowther 2010).
2.8 Trade Agreements
China is the member of World Trade Organization (WTO) and Asia Pacific Economic Cooperation (Asia Pacific Economic Cooperation 2010).The figure shows the current status of China's trade agreements. The Free Trade Agreement (FTA) between Australia and China is under negotiation with 15 negotiation rounds taken place till date (Department of Foreign Affairs and Trade 2010).Figures 11 and 12 shows the status of China's trade agreements with various countries.
Figure 11: Current status of in force Trade Agreements
Agreement
Scope
Type
Status & Year
ASEAN - China Free Trade Area
Country - Bloc
Framework Agreement
In force since 2005
Asia pacific Trade Agreement
Regional
Non- reciprocal Agreement
In force since 1975
China - Chile FTA
Bilateral
FTA
In force since 2006
China- Hong Kong, China- Macao Closer Economic Partnership Agreement
Bilateral
FTA
In force since 2004
China - Niger Economic and Technological Cooperation Agreement
Bilateral
Framework Agreement
In force since 2005
China - Pakistan FTA
Bilateral
FTA
In force since 2005
New Zealand- China, China- Singapore FTA
Bilateral
FTA
In force since 2008
China-Pakistan Agreement on Trade in Services
Bilateral
FTA
In force since 2009
China- Thailand Economic Cooperation Framework Agreement
Bilateral
Framework Agreement
In force since 2003
Source: UNESCAP 2010, Wang 2006
Figure 11: Current Status of Proposed and under negotiation agreements
Agreement
Scope
Type
Status & Year
Australia - China, China- Korea FTA
Bilateral
FTA
Under negotiation since 2005
China-Taiwan
Bilateral
Framework Agreement
Under negotiation since 2010
China-South African Customs Union
Country- Bloc
FTA
Under negotiation
China- Gulf Cooperation Council FTA
Country - Bloc
FTA
Under negotiation since 2005
China- Norway, China Peru FTA
Bilateral
Preferential Trade Agreement
Under negotiation since 2009
Agreements with Chile on investment, Costa Rica, Iceland
Bilateral
-
Under Negotiation
Agreements with Mercosur (South American Common Market), Northeast Asia, Shanghai Cooperation
-
-
Proposed
Agreements with India, Switzerland
Bilateral
-
Under Feasibility study
Source: UNESCAP 2010, Jiang 2010, Wang 2006,
3. Political Environment
3.1 Type of Government and its Structure
China is a one party state, governed by Chinese Communist Party (CCP) since 1949, which is currently headed by the President, Hu Jintao (Martin 2010). The CCP presides over the State Council, a de- facto cabinet (Martin 2010). The political structure of China is vertically integrated, but interlocking institutions, headed by CCP. National People's Congress (NPC) is the eminent channel of the state power, with the president and the vice- president as its highest officer, who are directly elected by the members of NPC. The State Council reports to NPC and is considered as the executive arm of the government (Chinese Law and Government 2009).
3.2 International Relations with other countries
China built its first official union with ASEAN in July 1991 and China - ASEAN trade had a rapid growth of 21% from 1991 to 2005 (Lijun 2007-2008). China also signed economic and trade co-operation agreements with Russia worth more than $ 4 billion (Ying 2009).The Australia - China council was established in 1978 to foster good relation between both the countries (Department of Foreign Affairs and Trade 2010).
For further information on International Relations see Appendix 1
3.3 Political risks associated with Blackmores in China
Success for investments are not without political risks as CCP controls the states fate in China, the financial system is vague and supports the state owned companies, legal protections are inadequately implemented followed with an inconsistent protection of intellectual property rights (Ian, Fareed 2006).
Chinese government consistently pushes the foreign companies to settle disputes through unofficial resolution, else arbitration is encouraged which is very time consuming and unreliable process (Business Anti-Corruption Portal n.d).
China is a country where power over rules the law as Chinese government officials are the key players in the functioning of a business (Aaronson, Ariel 2010).
3.4 Level of corruption
According to the Global Competitiveness Report 2009-2010, corruption is attributed as a sixth biggest impulsion for carrying business in China. It is found both within the public and the private sector (Business Anti-Corruption Portal, n.d).
4. Legal Environment
4.1 Legal system and how it works
Chinese legal system is a combination of civil law and continental legal systems. NPC is the absolute organ of the state power in proposing and drafting laws (China's Policies and the Year Ahead 2010). The Chinese courts are categorized into different court systems:
At the apex, Supreme People's Court deals with the administration of justice.
Local People's Courts looks after criminal and civil cases.
Courts of Special Jurisdiction include the Military Court of China, Railway Transport Court of China, Maritime Court of China (Zhang 2003).
Courts are not independent of the government. This arbitrary court system does not fully protect the rights of the foreign investors.
4.2 Government Rules and Regulations
In China it is mandatory for any foreign investor who wants to set up a business to get an approval from China's Ministry of Foreign Trade and Economic Co-operation (MOFTEC), the application must have legal certificates of the foreign investor, approved project proposal and study report accompanied with the list of Board of Directors (Hoffmann, Richard 2009). The approval when granted, the registration and license follow with the certificate and other formalities like opening bank account, foreign currency registration are done after the business license (Xinpung 2009).
4.3 Labour employment law
Chinese government requires the employee and the employer to enter into a contract as soon as the employee starts to commence work which states all rights and obligations of both the parties (Novexcn.com 2000). The recent labour contract law that came into effect from 2008 protects the employee with 10 years of standing from getting dismissed without cause. It also states minimum standards for wage and work time (IHLO 2008).
For further information on Labour Laws see Appendix 2
4.4 Ownership of business, land and office
Chinese law has no notion of private land ownership. In lieu, "Land use rights" which provide rights to use the land over a fixed period of time, is followed (Cheung 2009). However, state owns the land in urban areas and rural collectives own the land in countryside and rural area (Cheung 2009).
5. Finance
5.1 Banking system and types of banks
China has four types of banks:
Policy banks
State owned commercial banks.
Rural cooperative banks
Foreign banks and branches
(Neftci and Menager-Xu 2007, p 106)
The People's Bank of China (PBOC) functions as the central bank. It is responsible for formulating and implementing monetary policy, autonomy of state owned banks, holding and managing foreign exchange and gold reserve, supervising the commercial banks and also focuses on macro economy (Cho n.d. pp. 36-37). China banking regulatory commission authorises, supervises and regulates banks in China (China Commercial Banking Report, Business Monitor International 2010).
For further information on Types of Banks see Appendix 3
5.2 Access to Finance
China has a very primitive and complex banking rules which are considered to be small operational issues as it impacts the ease of banking (Menzies, Chung and Orr 2008).Also the shareholding structure is quite complex due to presence of different types of shares such as A shares, B shares etcetera. The cost of debt as well as the perceived risk is higher compared to equity, which has resulted in many companies using equity finance.(Zeng 2009)
5.3 Interest Rates
The interest rate variation is closer to the benchmark rate 5.31%, until 2006 (Figure 13).China's Central Bank increased interest rate in 2007 to curb inflation and prevent economy from overheating (Yan 2007).Interest rate cuts further was to protect the economy from GFC (Ruan 2008).
Figure 13: Interest Rate trend data
Source: World databank 2010
5.4 Type of Exchange Rate System and trend data for currency
The Chinese currency is Renminbi. The popular unit of Renminbi is Yuan.
1 Yuan = 10 Jiao = 100 Fen (Chinatour.com 2010)
Yuan was pegged for a decade to the US dollar (as shown in figure 14) until 2005 and since then the authority has adopted a narrow band of 0.3% on either side of the central rate within which the Yuan can fluctuate against the dollar (Jin 2009). Figure 15 shows the trend data of exchange rate between Yuan and AUD, currently 1 Yuan = 0.161525924 AUD.
Figure 14: US Dollar to Yuan Renminbi Exchange Rate
Source: United States Federal Reserve Bank of New York 2010
Figure 15: Yuan Renminbi to Australian Dollar exchange rate
Source: United States Federal Reserve Bank of New York 2010
5.5 Repatriation of profit regulations
Up to 90% of the profits can be repatriated provided a local office is set and all the regulations have been complied with. Before remitting profits fourth quarter tax returns must be filed with China's State Administration of Tax (SAT). A Wholly Foreign Owned Enterprise (WFOE) cannot repatriate all of the profit, at least 10% of profit should be moved to reserve account which to 50% of the total registered capital. In order to distribute the remainder of profit the company needs to file an application in Chinese with SAT.
Figure 16 shows the detailed procedure. The documents needed are annual audit & tax receipts amongst others. (New Zealand Trade & Enterprise 2008)
Figure 16: Documents and Procedures for Remittance of Profits
Source: Hong Kong Trade Development Council 2005
5.6 Taxation Rules
The State Tax Bureau and Ministry of Finance are in charge of taxation. There are different types of taxes such as Business Tax, VAT, and FIEs Income Tax etcetera. The tax year is from January 1 to December 31. If a foreign company faces difficulties in computing tax based on calendar-year, it can adopt its own fiscal year on approval from tax authorities. (China Window 2010)
The major taxes applicable to foreign business in China are shown in figure 17.
Figure 17: Taxes applicable to Foreign businesses in China
Category
Type of Tax
Tax on income
Corporate income tax - 25%, but the tax rate could be reduced to 15% for qualified enterprises which are engaged in industries encouraged by the China government (e.g. New/high Tech Enterprises and certain integrated circuits production enterprises). Tax holiday is also offered to enterprises engaged in encouraged industries. Other CIT incentives are also available for tax resident enterprises in China.
Withholding income tax on payments to non-residents - a concessionary rate of 10% is currently applicable to interest, rental, royalty and other passive income.
Individual income tax - progressive rates range from 5% to 45%.
Tax on transactions (turnover tax)
Value-added tax - 17% with certain necessities taxed at 13%.
Consumption tax - applies to 14 categories of consumable goods, including tobacco, alcoholic drinks, cosmetics, jewellery, fireworks, gasoline, diesel oil, tires, motorcycles, automobiles, golf equipment, yacht, luxury watch, disposable chopsticks and wooden floorboard.
Business tax - applies to the provision of services (excluding processing services and repair and replacement services), the transfer of intangible properties and the sale of real estate properties in China. Tax rates range from 3% to 20%.
Tax on specific objective
Land appreciation tax - a tax levied on the gains realized from real property transactions at progressive rates ranging from 30% to 60
Tax on resource
Resources tax - a tax levied on natural resources, generally on a tonnage or volume basis at rates specified by the Ministry of Finance.
Tax on property
Real estate tax - a tax imposed on the owners, users or custodians of houses and buildings at the rate at either 1.2% of the original value with certain deduction or 12% of the rental value.
Tax on behaviour
Vehicle and vessel tax - a tax levied at a fixed amount annually on the owners of vehicles and vessels used in the China.
Motor vehicle acquisition tax - 10% of the taxable consideration will be levied on any purchase and importation of car, motorcycles, trams, trailer, electric buses, cart and certain types of trucks.
Stamp tax - a tax levied on enterprises or individuals who execute or receive "specified documentation" in China and the tax rates vary between 0.005% to 0.1%.
Tax levied by the Customs
Customs duties - duties are imposed on goods imported into China and are generally assessed on the CIF (cost, insurance and freight) value. The rate of duty depends on the nature and country of origin of the imported goods.
Tax levied by finance department
Deed tax - a tax levied on the transferees or assignees on the purchase, gift or exchange of ownership of land use rights or real properties, with the tax rates generally range from 3% to 5%.
Source: PricewaterhouseCoopers 2010
6. Foreign Direct Investment
6.1 History of FDI in China
Encouraging FDI has been one of the key elements of China's economic reform progress. As per figure 18, the FDI inflows started from 1979 when foreign investment was granted a legal status and took a dramatic increase after 1990 when amendments to "Joint-Venture Law" were passed.Joining the WTO in 2001 marked a new era of FDI liberalization (Tang, Selvanathan, E. A. and Selvanathan, S 2008). Apart from market size and cheap labour, open door policy of China, establishment of SEZ, opening up of coastal cities, north port cities combined with tax incentives in SEZ, loosening foreign ownership laws has resulted in china becoming the largest recipient of FDI among the developing countries and it stood third globally in 2008 (Sethi, Judge and Sun 2009).
Figure 18: History of FDI
Source: Tang, Selvanathan, E. A. and Selvanathan, S 2008
6.2 Inflow/Outflow amounts and where it comes from
The major sources of FDI Inflows are HongKong, US, Taiwan and Japan with 0.6% from Australia (Fung, Iizaka and Hitomi 2004).The major sources of outflows are HongKong, Europe, Africa and North America (Chang and Ma 2007).
Figure 19: Top Sources of FDI Inflows
Source: Fung, Iizaka and Hitomi 2004
China has encouraged foreign investment mainly in manufacturing with emphasis on advanced-technology production; recently, FDI is seen increasing in services sector (WTO 2010). Figure 20 shows increasing amount of FDI inflows until 2008 and there is decrease in 2009 which reflected the global financial crisis and also the declining demand for the exports of China (WTO 2010).
Figure 20: FDI flows in billions of dollars
Source: UNCTAD 2009, UNCTAD 2010, OECD 2005
China also encourages outward FDI in areas such as research and development, production and marketing, and energy (WTO 2010). The falling asset prices abroad and significant exchange-rate fluctuations in 2009 have increased outflows by creating Merger and Acquisition opportunities for companies in China (UNCTAD 2009).
6.3 Industry access for Blackmores in China
Regulations in China for nutritional and dietary supplements are the some of the strictest in the world (Dennis 2010). SFDA is in charge of approving health and nutritional supplements to enter and be sold in the Chinese market (SFDA n.d.). The process takes around two years and costs around 50,000 USD to complete (Nutrition Business Journal 2010).
6.4 Government rules and regulations concerning FDI
The following are the basic laws attracting foreign capital:
Law of the People's Republic of China on Foreign-capital Enterprises
Law on Wholly Foreign-Owned Enterprises
Law on Sino-Foreign Cooperative enterprises
(Ministry of Commerce of PRC 2004)
The regulatory agencies often maintain internal (neibu) regulations governing the approval of FDI projects apart from public (gongkai) regulations and it is reported that these local neibu regulations are not transparent and are more restrictive (OECD 2003). Neibu regulations have arduous product testing requirements, potency restrictions on vitamins that can impede investment in supplement market (Nutrition Business Journal 2010).
6.5 Government Incentives or any special economic zones
Regional Incentives such as reduced tax rates of 15% are provided for investment in SEZs which are Shenzhen, Shantou, Zhuhai, Xiamen and Hainan (UNCTAD 2000). The SEZs were expanded to free-trade zones and bonded areas which provide exemptions on customs duty (WTO 2010). FIEs certified to be technologically advanced or FIEs planned to operate for minimum of 10 years and engaged in specific sectors are exempted from tax from 2 years. Also FIEs may obtain tax refunds by reinvesting the profits in export oriented or technologically advanced enterprises. (UNCTAD 2000)
For further information on Foreign Direct Investment see Appendix 4
7. Socio-cultural Environment
7.1 Language, Religion, Ethnic groups, Culture, Social Stratification, Holidays & Festivals
Most widely used language in China is Mandarin which is also the official dialect. Yue , Wu, Minbei, Minnan, Xiang, Gan, Hakka dialects and some minority languages are also spoken. (CIA- The World Fact Book, 2010)
CCP is formally atheist, but however is now gaining tolerance of other religious activities as well (Bhattacharji 2008). The major religions in China include Daoism, Buddhism, Christianity 3%-4%, Muslim 1%-2% (CIA- The World Fact Book, 2010).
Ethnic groups includes Chinese 91.5%, Zhuang, Manchu, Hui, Miao, Uyghur, Tujia, Yi, Mongol, Tibetan, Buyi, Dong, Yao, Korean, and other nationalities 8.5% (CIA- The World Fact Book, 2010)
The entire cultural system emphasises importance on interaction with one another and is exhibited in values such as:
Guanxi - Networking, personal relations
Mianzi - face, loss of face
Renqing - favour
Bao - reciprocation (Wang and Lin 2009)
Xinyong - interpersonal trust (Kiong and Kee 1998)
Social Stratification exists in terms of inequalities between
privileged state workers and their deprived collective counterpart
Cadre - Workers
Rural - urban people through household registration system
(Bian 2002)
Figures 21 and 22 show the official holidays and traditional festivals of China.
Figure 21: Official Chinese holidays
Date
Official Chinese holidays
January 1
New Year's Day
March 8
International Women's Day
April 1
Tree-Planting Day
May 1
International Labour Day
May 4
Youth Day
June 1
Children's Day
July 1
The CCP's Birthday
August 1
Army's Day
September 1
Teacher's Day
October 1
National Day
Source: Cultural China, 2007
Figure 22: Traditional Festivals
Date
Chinese Traditional Festivals
15th of the 1st month
Lantern Festival
5th of the solar term
Qing Ming (Pure & Bright in Chinese)
5th of the 5th month
Duan Wu (Dragon Boat) Festival
7th of the 7th month
The Seventh Eve
15th of the 8th month
Mid-Autumn Festival
1st of the 1st month
Spring Festival (Chinese New Year)
Source: Cultural China, 2007
7.2 How business is done in China
People are formal with outsider (Hays 2008).The business relationship in China becomes a social one after a while (Tsui 2001).Gifts are always appreciated. Care should be taken that senior people get better gift than the junior staff. The business talks are conducted with at least one trip to a grand restaurant. Punctuality, Body language and movement, being calm and controlled is very important for doing business in China. Chinese are known for their tough negotiations as well. (kwintessential n.d.)
7.3 Hofstede's dimensions on China
Figure 22: Hofstede's dimensions on China
::Desktop:hofstede_china.gif
Source: Hofstede 2009
Hofstede's dimensions on China shows its collectivist nature, higher degree of inequality in the society, great respect for power distribution or hierarchy gap and stand moderate at uncertainty avoidance index (Hofstede 1967-2009).
7.4 Health Awareness
Due to increase in diet-related chronic diseases, Chinese people are becoming more open towards receiving knowledge on nutrition though there exists prevalence of traditional Chinese medicine (Crowther 2010).
8. Forecast
Figure 23 indicates China's strong growth with increase in GDP per capita, decrease in Unemployment rate, low and stable inflation rate. The growing inflation rate till 2011 will create problems for PBOC. The exports and imports are expected to grow slowly in comparison to previous years. The strength of Yuan is expected to reduce, however further decisions of PBOC on appreciation may have negative consequences for export sector. The balance of trade in goods is expected to decrease. The increase in interest rates might make debt financing more risky.
(China Business Forecast report, Business Monitor International 2010)
Figure 23: China - Macroeconomic data and forecasts
2009e
2010f
2011f
2012f
2013f
2014f
Population ,mn
1357.5
1368.2
1378.9
1389.6
1400.3
1411.0
GDP growth ,%
8.7
8.8
7.5
8.6
7.6
7.1
GDP per capita, US $
3493
3976
4535
5198
5837
6547
Unemployment,%
4.8
4.4
4.4
4.3
4.2
4.2
Inflation rate, %
1.9
3.4
3.1
2.4
2.0
1.8
Interest rate, %
5.31
5.85
5.85
6.12
6.39
6.66
Exchange rate CNY/US$
6.85
6.6
6.3
6.1
5.9
5.7
Goods exports, US$bn
1202
1420
1491
1587.9
1705.4
1831.6
Goods imports, US$bn
1003.9
1330
1401
1513.1
1647.4
1784.5
Current account balance, % of GDP
6.0
3.7
3.6
3.1
2.5
2.0
Source: China Business Forecast report, Business Monitor International 2010
China will remain a communist country in the near years but the government will face more challenges with increasing labour strikes and environmental issues. China is becoming more westernized year by year though Chinese values and traditions might still remain to be deep routed. (China Business Forecast report, BMI 2010)
China will continue to remain as a top destination for foreign investors (China Business Forecast report, BMI 2010). It is expected to surpass US as the leading consumer and exporter in nutraceuticals by 2013 provided rules and regulations are eased or by adoption of GMP standards (Winter 2010)
9. Conclusions
The economy of china is growing very rapidly with policymakers committed to continuing gradual reform of economy. China has a huge trade surplus. GFC has resulted in declining exports and hence the growth of economy. The economic policies have led to major imbalances and high inflation. Increasing domestic consumption and urbanization will be the major drivers of growth.
Political environment looks stable for business but ruling of power over the law makes it essential for the foreign investor to have government association in its investment.The commercial law of China is liberal for establishment of business but the registration process is time and capital consuming due to the presence of non-transparent regulations and corruption.
Archaic banking system affects the ease of debt form of financing and repatriating profits as well. FDI offers a lot of opportunities for investment with tax incentives being provided for setting up enterprises in advanced technology research and development. Although China's cheap labor might seem as an appealing factor to many foreign investor, however their social security is given due consideration. Success for business in China requires a careful understanding of Chinese business culture.
10. Recommendations
Full-scale investment in China is recommended in late 2011.In the interim Blackmores Management is recommended to:
Monitor the imbalances happening in the economy.
Assess the support available from Australian and/or Chinese government.
Employ Western or Australian Managers with extensive Chinese experience or other way round. Also invest in training the employees who are required to work in China.
Consult local Chinese lawyer before setting up the business and also to understand rules and regulations for repatriation of profits.
Plan the amount of finance and ensure sufficient availability of capital for the project.
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Appendix
Appendix 1
International Relations with other countries:
China and Russia have a very close trading relationship, where Russia being the biggest trade partner of China, having hit the highest volume of trade recorded at 58.8 billion U.S dollars, however this trade volume got hit by the global economic crisis, came down to 31.8 percent that is 38.8 billion U.S dollars but the bilateral trade emerged back to 67.9 percent on a yearly basis in the first two months of 2010 which is quite near to the pre-crisis level (Xinhua 2010). Further China and Russia signed 15 co-operation documents worth 1.6 billion dollars largely covering different aspects (Xinhua 2010).
The trade between U.S and China had firm results in previous years and both the countries are looking forward to strengthen their trade ties as there is a bilateral arrangement of trade between both the countries as the eighth annual report of U S Trade Representative's office stated that China is satisfying the WTO requirements (Xinhua 2010). There was a drastic increase of trade between them with U S exports increasing nearly 270 percent from 2001, which totals to 19 billion dollars to 70 billion dollars in 2008, though trade was back trotted due to economic crisis in 2009, but the future looks bright as both the countries are formulating good relations with each other (Xinhua 2010).
Appendix 2
Important Labour Laws
Labor Law of the People's Republic of China (1994) ("Labor Law")
Labor Contract Law of the People's Republic of China (2007) ("Labor Contract Law")
Labor Arbitration and Dispute Resolution Law of the People's Republic of China (2007) ("Labor Arbitration Law") (effective May 1, 2008)
Trade Union Law of the People's Republic of China (1994).
(Novexn.com, 2008)
