The government had to reform the population policy, for several reasons. First, there were too much people, and not enough food to feed everybody. The population was growing too quickly, at an average of 6 children per household. That is why it was a necessity for the government to set up a one child policy was effective in the cities (1,2 child per woman), but had less success in the countryside (2,5 child per woman). This can be explained because the people living in the countryside could not see the consequences of the policy in the future. Moreover, the authorities were less fussy, because the families needed the children to help them with the farming work.
Several years later, the one child policy has therefore led to a very negative consequence: there were 17 million more men than women, especially in the countryside. This can be explained because of the one child policy, where families preferred to have boys to help them with the field work.
Rural reform
There has been a need for a rural reform because the famers produced more and more bad food, because of a lack of incentives. Indeed, the land they farmed was a shared land, and did not belong to one farmer in particular. That means that there were no individual incomes, so the agricultural yield was not good, and quickly became not sufficient to feed the population. The government needed more incentive for the farmers to grow more and a better food.
The solution was, in 1981, to create the "household responsibility system": there are no more communes, the land is now shared between households. This system permitted to individual households to get separate plots to farm and be responsible for what they grow, and more important, they can now keep the leftovers to themselves and sell the excess on the market. This way, the government put a productivity incentive on the farmers.
The agricultural yields increased by 8%. The farmers then spent the extra money they made, which led to a rise in rural incomes, and then to a rise in demand, which boosted the economy.
Afterwards have been created the TVEs (Township and Village Enterprises), which are collectively owned firms, in order to meet that demand. It employed workers, and lowered the unemployment rate. The quota of food required by the government is sold at a price fixed by the government (usually a low price), and the price of the excess is based on the market price (higher prices): TVEs were ruled by a dual price system.
Reform of SOE's
The SOEs (state-owned enterprise) are entirely owned by the state, they are the "iron rice bowl" of the communist party, and employed millions of people. The problem is that they were considered overstaffed, inefficient and poorly managed. No profits came from the SOEs, despite a lot of investments from the government. So in the 80's, Deng Xiaoping established the "manager responsibility system". This reform was intended to slowly privatize the SOEs; the managers were given some freedom, for an increased autonomy over production and investments decisions. The aim was to improve the efficiency, quality, and relieve the state from that burden.
The state let go of the small SOEs, and kept the bigger ones. The main problem that appeared was the rise of corruption. Some managers bribed the local officials in order to negotiate the quotas.
As of today, there is still nearly 2000 SOEs that cannot be privatized, because of their lack of value, nobody will buy them. The reason why the state cannot let go of the biggest SOEs is because it would result in a mass unemployment, and therefore a risk of rise from the people.
Financial reform
The role of the banks is to collect money from people, then to land it to businesses. But in that new world of markets, Chinese bankers have no knowledge in the management of this kind of trade. So the Chinese banks would take savings from the people, and give it to entrepreneurs. To do so, they have to assess the risk, establish a business plan for example. However, they do not know any of this new banking system, and they lend money to businesses which are not bankable, and which will never pay them back. The problem of corruption is thus even stronger, as it is the local officials who appoint bank directors, which will lend money to their acquaintances based on the guanxi. As a consequence, the banks are bankrupt because of the bad loans which never get repaid. The state then has to recapitalize those banks, which result in great losses for the government.
The solution to recapitalize the Chinese banks would be to bring in foreign banks, which have the necessary expertise, or to open a stock market in order to sell shares, and raise money. That has already been taking place in the cities of Shanghai and Shenzhen since the nineties.
Trade and investment
During the Mao era, there has been a self-imposed isolation during the Cultural Revolution, with an isolated economy. There was little or no trade with the rest of the world.
Deng Xiaoping announced some trade reforms in 1979, for example reduction on import tariffs (without banishing quotas and licensing requirements though), or the liberalization of the foreign direct investment. These changes, as small as they were, led to an amazing growth of the industrial outputs in the late eighties.
After opening some of the barriers to trade, China started to behold a rise of businesses on its coasts, where the proximity with the sea fostered exchanges.
China then tried to enter the GATT (General Agreement on Tariffs and Trade) in 1986, but never end up. In fact leading trading nations have been worried about the pace of Beijing's economic reform and its control over subsidies and prices. (NY Times, 1988)
In 2001 China has been accepted in the WTO (World Trade Organisation), after 15 years of negotiations. This entry is expected to boost its economic reforms, and allowed it to open its huge market to the rest of the world.
Those reforms helped keep the Chinese society together. China has successfully opened to the world. By opening its borders, the country has been able to feed its people through massive importation of food. Especially in cities, the incomes went up, and the demand rose.
Write about 1000 words explaining the key challenges that a business may face when operating in China and what strategies a firm may use to overcome those challenges.
There are many issues facing western business when operating in China. Among them are:
Staff - issues of rising wages, poor productivity, high churn (produire à tour de bras), talent deficit. 1, 2
Corruption . 7, 6
Regulation and legal issues including intellectual property and property rights. 3
Cultural differences.+ business etiquette . 8
Good answers will clearly explain these challenges together with measures to overcome them.
Explain challenges + find measures to overcome them
Staff
Labour quality: levels of productivity is bad
Lack of skills, lack of right equipment (technological machines)
Staff turnover: hard to keep skilled workers (skill shortage)
Pb with quality of the supply chains
Efficiency: poor technology, lot of waste of energy (electricity…)
In a very detailed article, economists Li et al. (2012) show that over the past 15 years, real wages in China have risen considerably. Between 1978 and 1997, this increase was almost non-existent: Chinese urban annual salary went from 1004 dollars to 1026 dollars. But since Chinese wages exploded in 2010, the average wage rose to 5487 dollars, representing an increase of almost 14% per year, higher than the growth rate of the country over the period.
In China, with the gap between provinces, it could be interesting for entrepreneurs to look at the central provinces, where wages often remain lower by about a third. Another solution for the companies would be to start producing for the local growing market, middle classes having now a higher spending power.
The productivity level was really low until 1990. The Chinese workers were inefficient, and they could not compete with the productivity levels in the west. The reasons for such a low productivity are the following: Chinese workers do not have the right equipment to be productive. The companies do not have sufficient technology and sophisticated machines to be able to compete on the productivity level. However, even if the productivity improved recently (rise of 7,5% a year during 1993 and 2004 (Kujis et Wang (2006)), there is still a big gap between the industrial and the agricultural sectors. In 2000, the productivity of the industrial sector was equivalent to six times the productivity of the agricultural sector.
The decrease of the productivity can also be explained by an important staff turnover. In fact, it is now hard for the factories to keep their skilled workers. It arises from it a skill shortage and a talent deficit. A recent survey (2001) revealed that there is a talent scarcity across all sectors, with a large shortage in senior and middle managers. This problem has even been increased recently because the economy has shifted from manufacturing to high value-added industries.
China's education system can also be blamed for the skill shortage. Indeed, the education system focuses on technical abilities rather than teach to manage and lead. This way, many graduates have a hard time to adapt themselves to that working environment.
To overcome this challenge, the firm could invest more in technological machines, and train their employees to use them.
Corruption
Some figures from the Chinese central bank made the front page of China Daily (2011). In less than twenty years, politicians and executives of public companies misappropriated 800 billion Yuan. China's central bank called on the Government to be firmer. Many foreign entrepreneurs denounce the proliferation of discriminatory and unnecessarily complicated measures taken against them by the Chinese authorities.
The corruption became a great problem in China. People that are well connected with many acquaintances ('guanxi') get favourable treatments in terms of government loans, investments and license. It is a lot harder to get in the market for those without connections. It is then essential for companies to get in touch with specialised business agents, who will help them with the right connections. This is highly demonstrated in the documentary 'Brits get rich in China' featuring the business man Vance Miller, who can only rely on his Chinese 'partner' to help develop his business in China.
Regulation and legal issues (property rights & intellectual property)
Copyright: intellectual property, copies (1 for 10 is real)
The Chinese laws and regulations do not act in favour of foreign companies. The protection of intellectual property is poor, and China stays a nightmare for copyrights, patents and trade secrets. Despite the Chinese government' promise not to discriminate against foreign property, it has not been an idle theatre for non-local businesses. However, since the accession of Beijing in 2001 to the World Trade Organization (WTO), the Western countries insist that China aligns with international standards of copyright in order to defend their interests in court (libération 2012). The United States criticized the Chinese for their counterfeiting permissiveness when not organized on a large scale, and some worry that the seized goods are back on the market once the signs of forgery are destroyed. They also deplore the lack of protection for products entering the Chinese market (aujourd'hui la chine 2007).
According to Artus and al. (2011), the lack of a stable and transparent legal system, which do not protect the validity of contracts, creates a great uncertainty for potential investors. Anyone can be expropriated at any time - the experience of Danone is from this point of view the most iconic (the French giant has lost a legal dispute against his former partner Wahaha and was forced to sell its shares and withdraw from the Chinese market).
The disrespect of intellectual property creates a hazard which is not favourable to investment. Foreign companies have to be aware of the difficulties occurring when operating in the Chinese territory to protect their intellectual property rights.
There are some advices companies can use in order to protect their legal rights (Perkowski, 2012):
Set up a joint-venture should be avoided, when the foreign company fully owns its own business it provides more control over who has access to the know-how and technology
Break the manufacturing process into several operations located in different premises to prevent the employees to see the whole process
Manufacture more components in-house rather than outsourcing
Cultural differences
Business etiquette: - key issues discussed during leisure time (dinner, foot massage, golf…)
-say "yes" to everything
-punctuality: often late
-complicated relationship: unclear business cards, unclear positions
'Guanxi': relationships, network, connections, build long lasting relationships
'Mianxi': faith, respect, humility
In the Chinese hierarchy, managers are accustomed to deal only with managers a rank just below theirs. Employees must obey their manager, the same way that managers must refer to their direct superior for certain decisions. The reason is that they want to deal with people belonging to a level close to them. Question of respectability.
Then, the "face" is one of the most ubiquitous concepts in China, and even more in a professional environment. One must at all costs avoid to "lose face" in front of his subordinates, but also avoid to lose face with external parties like suppliers. So in general, praises should be public while reprimands should be made in private.
Foreigners working with Chinese are constantly faced with problems arising from a lack of clear communication or miscommunication when it is linked to the question of the "face". Indeed, a Chinese who is asked to do something will always answer "yes, okay" even though he did not understand what is being asked. It is therefore essential to encourage the Chinese with whom the company deals to understand the importance of asking questions and train them to do so.
The Chinese attach a much wider importance than in the West to the "guanxi" (relationships). Indeed, the principle of recommendation from one person to another through their guanxi is very common. It is then strongly advised for a company to take the time to build a strong guanxi with its business partners, to be able to enjoy long lasting relationships. Also, the guanxi as well as the key issues in business are often discussed during leisure time (dinner, foot massage, golf…).
The Chinese economy faces both immediate and long-term challenges. The immediate problems stem largely from the fall out of the global credit crunch.
Write about 500 words explaining the potential problems facing the Chinese economy currently, and explain what the authorities are trying to do to address those problems.
Immediate problems stem from falling demand globally for its exports and insufficient domestic demand to offset export falls. Also, property bust following decade long boom and overinvestment. Potential financial problems of banks following loose lending. Unemployment following fall in demand. Inflation, particularly in basic foodstuffs.
Policy seems to be to stimulate via loose monetary policy and infrastructure spending.
Insufficient domestic demand (compenser la baisse des exports)
Property bust (overinvestment & decade long boom)
Financial problems of banks (loose lending)
Unemployment (fall in demand)
Inflation (basic foodstuffs)
Write about 1000 words explaining the potential problems facing the Chinese economy in the longer term, together with what measures the Chinese authorities may need to implement to address those long term problems.
Long term issues:
Rebalancing of economy from investment and export to domestic consumption.
Pension and welfare costs of aging population.
Rising wages and loss of competitiveness.
Poor regulation and property rights - corruption and weak legal framework / Lack of accountability of local officials.
Lack of innovation.
Rural / urban wealth divide.
Lack of accountability of local officials.
Good answers will highlight these plus measures to address them.
Word count:
Hand in date: TBC
Notes:
This is the only piece of coursework and accounts for 40% of the overall unit mark.
The word guidance for each section is a guide to what you should write on each section. You are free to write more or less. HOWEVER - The essay should be no longer than 3500 words in total.
Please write your report in 4 sections - clearly headed.
A list of the sources (books, articles) consulted for the assignment should appear at the end (under the heading: References). The list of References should be set out alphabetically, using the Harvard style of presentation, as is the convention in the business school. For a guide see:
http://www.library.mmu.ac.uk/pdfhelpsheet/mmuharvard1.pdf
Marking criteria will be provided in a separate document. Please state the word count at the end.
