Business Environment in China

QIU Guixi 邱贵溪 (David)Dean, Associate Professor

School of International StudiesShanghai University of International

Business & EconomicsEmail: qiuguixi@suibe.edu.cn

Part 1 The Profile of Business Environment in China

Location of China in the world

Macao

China’s Local Governments(34)

• Municipalities--4

( Beijing, Tianjin, Shanghai, Chongqing)• Provinces--23• Autonomous Regions—5

( inner Mongolia, Guangxi Zhuang, Tibet,

Ningxia Hui, Xinjiang Uygur)• Special Administrative Regions—2

(Hong Kong Special Administrative Region,

Macao Special Administrative Region )

Geographical Division

• North-east China(3 provinces)

• East China (10 provinces and municipalities)

• Central China (6 provinces, i.e. Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan)

• West China (13 provinces, municipality and autonomous regions )

• SAR (2)

China is a Particular Country, why so?

• Vast in land (the 3rd,next to Russia and Canada) • Large in population ( the 1st,1.3 billion in

Mainland)• Comprehensive ( 56 ethnic groups)• Diversity (history, culture, language)• Dynamic ( developing country, keeping changing)• Different consuming behaviors in different regions• One country, two systems

China is a Particular Country, why so?

• Sky-high housing price (average price:2962US$/per square meter)• High demand of luxury goods (China has become the second largest consuming

country for luxury goods (next Japan), accounting for 25% of the global market shares)

• Face-saving consuming behavior• China ranks No.1 in both auto manufacturing

and auto selling for 4 years. (19.27m auto and 19.30m auto-2012)

China is a Particular Country, why so?

• China has leapfrogged Japan to become the world's second-largest economy, a title Japan has held for more than 40 years.

• Japan's nominal GDP was $5.47tn in 2010, less than China's total of $5.87tn (7.61tn in 2011)

• China still ranks 104 according to per capital GDP.• For the total global stock market value, the USA

accounts for over 30%, China 7.38%,Japan 7.05% (by BIG)

China is a Particular Country, why so?

• China’ GDP accounts for 9.5% of the total volume of the world’s GDP in 2010, while in 2005, only 5%.

• The US’ GDP accounts for 23.8% of the total volume of the world’s GDP in 2010.

China is a Particular Country, why so?

PetroChina tops Financial Times' Global 500 list ranked by market value($329.3b)

(issued by FT on May 30, 2010)

54 Chinese enterprises leaped into the world’s top 500 enterprises club in 2010.

Most of the state-owned enterprises have monopoly on resources, energy and capital possession.

China is a Particular Country, why so?

• One week a book

• One month a paper

• One year nothing

Some Important Events in China

1. 1949– the founding of the People’s Republic of China

2. 1966-1976 Great Culture Revolution

3. 1978 –the reform and open policy started (initiated by Deng Xiaoping- the general architect of China’s reform and open policy)

4. 1993—the establishment of market economy

5. 2001- China’s accession to WTO

Chief Chinese Top leaders (from1949-now)

1. Mao Zedong (1949-1976)

2. Deng Xiaoping(1979-1989)

3. Jiang Zemin(1989-2002)

4. Hu Jintao ( from 2002-2012)

5. Xi Jinping ( from 2012-

Part 2 The Legal Environment in China

• China’s Legislative System

• China’s Judicial System

• The Vehicles for Doing Business in China

• The Investment Environment in China

• Intellectual Property Protection in China

• The Settlement of Disputes

China’s legislative system

• NPC and its standing committee (NPC--constitution and basic laws, NPC Standing

committee--other laws--239)• State council—administrative rules and regulations—

(690 existing and effective)• Provincial (or municipality ) people’s congress and

their standing committee--Local ordinances• Autonomous regional people’s congress and their

standing committee— autonomous ordinances and separate regulations (8600 local ordinances and separate regulations) (up to March 8 2011)

China’s judicial system

• The supreme people’s court

• Higher people’s court

• Intermediate people’s court

• District court (basic-level people’s court)

The Vehicles for Doing Business in China

• Direct sales to Chinese end-users

• Trade with commission agents

• Representative offices

• Sino-foreign joint ventures (JV)

• Sino-foreign co-operative enterprise

• Wholly foreign-owned enterprises (WFOE)

• Franchising

Constitution, laws and regulations

• Constitution of P.R. China (Art. 18)

• Company Law

• Sino-foreign Joint Ventures Law

• Sino-foreign Co-operative Enterprise Law

• Wholly Foreign-owned Enterprises Law

• Catalogue for the Guidance of Foreign Investment Industries(2010 version)

Article 18 of the Constitution of the P.R. China

Article 18. The People s Republic of China permits foreign enterprises, other foreign economic organizations and individual foreigners to invest in China and to enter into various forms of economic co-operation with Chinese enterprises and other economic organizations in accordance with the law of the People s Republic of China. All foreign enterprises and other foreign economic organizations in China, as well as joint ventures with Chinese and foreign investment located in China, shall abide by the law of the People s Republic of China. Their lawful rights and interests are protected by the law of the People s Republic of China.

Catalogue for the Guidance of Foreign Investment Industries

• Focusing on advanced manufacturing, high-tech, modern services, new energy and energy-saving sector.

• Encouraged industries

• Restricted industries

• Prohibited industries (e.g. gambling and eroticism)

China to promote seven new strategic industries

一、 Energy-saving and environmental protection

( 节能环保 )

二、 New-generation information technology

( 新一代信息技术 )

三、 Biotechnology ( 生物 )

四、 High-end equipment manufacturing( 高端装备制造 )

五、 Alternative energy ( 新能源 )

六、 Advanced materials ( 新材料 )

七、 Alternative-fuel cars ( 新能源汽车 )

（ 2010 年 9 月 8 日国务院常务会议决定）

Some Data

• Up to the end of 2009, China has approved 683,000 foreign-funded enterprises with the total FDI value of 945.4b US$.

• According to the 2009 report issued by UNCTAD, transnational investment went down by 50% in Brazil, 19% in India, 93% in the UK, 57% in the US, 53% in Japan and only 2.6% in China.

• China records No.1 in absorbing FDI in developing countries for 17 years.

Summary of IP Protection in China

• Short history

• Great progress

• High standards

• Wider range of protection

Overview of IPR in China

• The formulation of IPR laws and regulations could be traced back the early 1980s.

• China has finished its IPR legislative work in less than 30 years.

• China has revised its IPR laws in line with TRIPS Agreement aiming at world dimension and world standards.

(WTO: trade in goods; trade in services; trade for TRIPs)

Work to be improved

• Enhancing the awareness of both the public and the business owners over the protection of IPR

• Reinforce the implementation of the laws and regulations over IPR

• Lower the threshold of fixing criminal liabilities to IPR infringers.

Ways of Settlement of Trade and Investment Disputes

• Mutual consultation

• Mediation

• Arbitration (CIETAC)

• Litigation

• the International Center for Settlement of Investment Dispute (ICSID)

Governing Law and Jurisdiction

• Contract-based way of settlement

• Arbitration vs litigation

• Governing law vs arbitration body

• Judicial assistance

Part 3 Cultural Environment in China

Regional Culture Differences in China

East part of China and the coastal cities:

focusing on written contract, more internationalized.

North-east of China::

focusing on oral contract

The West China:

focusing on commercial practice

The way of treating guests:

drinking culture in China (alcohol and tea)

Face Consumptions Culture in China People purchase the luxury commodities merely to show off and

gratify their vanity. The following are the top six luxury commodities consumed in

China: Band-name garment (75.3%), Gifts-jewelry, watch, handbag (60.7%) Cars (59.5%) Electronic products (55.6%) Wine and tobacco (49.5%) Cosmetics (43.9%)Ages: 30-40Groups: urban white-collar workers, the second- generation

wealthy kids(By the Social Survey Center of China Youth Daily)

Focusing on Two Areas of Market

You can always do good business in the following two areas:

The area of commodities for ladies

The area of commodities for kids

Drinking Culture in China

North-east of China and the western China

Good drinker of alcohol can be an advantage.

Eastern and southern China:

Tea is often served during negotiations, businessmen often choose the tea house as the place for negotiations.

Localization of the Employees and the Products

The employment of the local people can be a great help.

The localization of the products can suit the need of the local people.

( KFC offers breakfast with local flavor;

and Volkswagen improves the models of Polo and Passat)

Car with no boot

Saloon with a boot

Guanxi in China

Guanxi means connection or relationship between or among people. e.g. try to establish a relationship with somebody, or someone has very good social connections.

The logical development of close relationship is the Chinese concept of “guanxi”. According to business analyst Tim Ambler of London Business School, the kernel of guanxi is doing business through value-laden relationship. In a highly-centralized ,bureaucratic state, the use of personal contacts is the only way or important way to get things done.

In China, guanxi is important, but is not everything. Sometimes, guanxi means you keep a good relationship with the people in the business circle and outside the business circle, and you keep a good relationship with the competent authority of the government.

Part 4 Other Influential Factors in Business Environment

The Most Influential Factors in Business Environment

Legal environmentGovernment efficiencyNationalization of foreign assetsEnterprises' business efficiencyInfrastructure construction Education

(the 2010 global competitiveness report by International Institute for Management Development )

Competitiveness Ranking in 2009

1. The U.S.A. 2. Hong Kong, China 3. Singapore 4. Switzerland 5. Denmark…20. China{Issued by the International Institute for Management

Development (IMD)}(four items including general economic performance, government

efficiency, enterprises' business efficiency, and Infrastructure construction )

Competitiveness Ranking in 20101. Singapore2. Hong Kong, China3. U.S.A4. Switzerland5. Australia…16.Germany18. China22. U.K.24. France27. Japan(the 2010 global competitiveness report by IMD on May 19,2010) China leads the BRICKS (India-31; Brizil-38; Russia-51)

Competitiveness Ranking in 20111. Switzerland 2. Sweden3. Singapore4. U.S.A5. Germany…11. Hong Kong, China27. China (China leads the BRICS)51. India54. South Africa58. Brazil63. Russia (the 2011 global competitiveness report by IMD)

Competitiveness Ranking in 20121. Switzerland 2. Singapore3. Finland

4. Sweden5. Netherland6. Germany7. U.S.A8. U.K.9. Hong Kong, China10. Japan…29. China48. Brazil52. South Africa59. India67. Russia (the 2012 global competitiveness report by IMD)

The most problematic factors for doing business• Inflation..........................................................................26.7

• Inadequately educated workforce.................................14.0

• Inefficient government bureaucracy…………………....12.2

• Foreign currency regulations................................... ......8.5

• Access to financing........................................................6.2

• Policy instability..............................................................6.2

• Tax regulations ...............................................................6.2

• Restrictive labor regulations...................................... ...5.4

• Inadequate supply of infrastructure ......................... ......4.9

• Poor work ethic in national labor force ..................... .....3.9

• Tax rates .........................................................................2.3

• Corruption........................................................................1.6

• Poor public health...........................................................1.0

• Government instability/coups ................................... .... 0.5

• Crime and theft....................................................... ... ... 0.3

Websites for General Information

Chinese Government’s Official Web Portal

www.gov.cn

Shanghai Municipality Official Website

www.shanghai.gov.cn

Websites for Investment

The Ministry of Commerce:

www.mofcom.gov.cn

Shanghai Municipal Commission of Commerce

www.scofcom.gov.cn

Investment in Shanghai website

www.investment.gov.cn

Websites for the Settlement of Disputes

• CIETAC: www.cietac.org.cn

• Court : www.court.gov.cn or www.chinacourt.org

• ICSID: http://icsid.worldbank.org