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China: Opportunities andRisks for Foreign Companies

M ORLEY FUN D M ANAGEMENT

INSIGHT INVESTM ENT

For financial advisers and investment professionals only



1

Introduction

Liberalisation of China’s economy and the country’s emergence as a major global economic power are among some of the

most significant world developments of the past decade. Many experts believe that just as Britain ruled the 19th century and

the US the 20th, so China will come to dominate the next 100 years. However, China currently remains a relatively poor

country with per capita income only a fraction of that enjoyed by neighbours such as South Korea. It will also have to

overcome huge problems if it is to become a global superpower. These include weak institutions, a rickety financial system,

an inadequate legal framework, massive environmental degradation and a huge army of unemployed and underemployed

migrant workers having little stake in society.

Few major international firms can afford to ignore China’s huge economic potential. The country already has a prosperous,

100 million-strong middle class, and is rapidly becoming the workshop of the world as companies in developed countriesoutsource production to factories in China. It has also become a much more attractive investment destination since its

accession to the World Trade Organisation in 2001 and successful bid to host the 2008 Olympic Games. Over US$60 billion

of Foreign Direct Investment flowed into the country in 2004 alone; meanwhile, China’s foreign trade surged to a record

US$1.15 trillion1 and the country became the world’s third biggest trading power after the US and Germany. Although China’s

potential as a market and investment opportunity continues to intrigue and attract many foreign companies, many are also

aware of the attendant risks of this enormous and complex country.

1 http://www.chinaembassy.org.in/eng/zgbd/t181360.htm

For Financial Advisors and Investment Prof esssionals only



2

Promoting responsible business in China

To investigate the risks for foreign companies operating in

China, Morley Fund Management and Insight Investment

hosted a series of seminars, involving companies, investors

and specialists, to facilitate debate on how foreign

companies can operate successfully and responsibly in

China. The aim of the seminars was to explore emerging

best practice for managing some of the key risks facing

foreign companies operating in or sourcing from China.

This paper provides an overview of the issues covered in the

seminars, and their key findings, including the experience of

some European companies that realised a tangible benefit

from putting in place effective risk management systems in

their Chinese operations or supply chains. The report also

highlights recommendations from the seminars with the aim

of encouraging continued progress and further dialogue

between investors and companies around issues relating to

operating in China.

The Seminars

Three seminars were held during the course of the year

which covered a number of themes:

• Seminar 1: Economic and Political Climate (January

2004): This seminar introduced the China Project to

participants. General macroeconomic trends, political

reforms, implications of the liberalisation of the Chinese

economy and WTO accession were major themes.

• Seminar 2: Legal and Regulatory Issues (April 2004): Thisseminar established Chinese laws and regulations that

currently affect businesses (e.g. corruption, intellectual

property rights), and looked at effective procedures that

can be implemented by companies in order to overcome

the lack of existing legal safeguards.

• Seminar 3: Managing Labour Issues (September 2004):

The final seminar was designed to increase awareness of

the risks to business posed by poor management of

labour standards in China, and to look at business

benefits that have accrued to companies who have

managed these issues effectively.

The seminars were small (between 15 - 20 participants) to

ensure that discussions remained focused and participants

were given ample opportunity to contribute their views. Allof the seminars were conducted under Chatham House

rules.

The report does not represent the formal investment view of

Morley Fund Management or Insight Investment, the

seminar sponsors. This paper is for information purposes

only and neither Morley Fund Management nor Insight

Investment can be held liable for any decisions you take

having read its contents.

Seminar Organisers

Morley Fund Management is the fund management arm ofthe Aviva Group UK, one of the UK’s largest insurance

groups. Morley manages assets in excess of £128bn2 across

world markets, and manages a range of specialist ‘Socially

Responsible’ global and regional funds.

Insight Investment is the asset management arm of the

HBOS Group. Insight manages its £77.7bn2 of clients’ assets

under management according to a responsible investment

policy

Morley and Insight take the view that as institutional

shareholders and fund managers, we have a responsibility toplay an active part in the governance of the companies in

which we invest. An integral part of this strategy is engaging

with companies to analyse risks and opportunities inherent

in their businesses to alert fund managers to any issues thatare likely to have an impact on shareholder value. We believe

this process is best undertaken through face-to-face

dialogue with company management.

For further information please contact:

Melissa Gamble or Harriet Parker at

Morley Fund Management

020 7809 6000

[email protected]

[email protected]

Rachel Crossley at Insight Investment

020 7321 1262

[email protected]

2 As at 31 December 2004.



3

Participants

We would like to thank guest speakers and panellists for

their valuable contribution to the seminars, which helped to

generate insightful and constructive discussions. We would

also like to thank the companies and other specialist

organisations that attended the meetings and contributed to

the findings of this report.

Guest Speakers

• Daniella Gould, Director of China Office, Impactt Ltd• Dr. Gerard Lyons, Chief Economist and Head of Global

Research, Standard Chartered Bank

• Dr. Linda Yueh, Fellow and Tutor in Economics, London

School of Economics and Pembroke College, Cambridge

Panellists

• Jo Carpenter, Control Risks Group

• Dr. Stephen Green, Royal Institute of International Affairs

• Rosey Hurst, Impactt Ltd.

• Callum Macleod, Great Britain China Centre

• Peter Nightingale, China Britain Business Council

• Pierre Robert, Future Considerations

• Graham Rodmell, Transparency International (UK)

• Hilary Thompson, Kingfisher (B&Q)

• Albert Wong, Royal Dutch Shell

Attendees

AccountAbility John Lewis

Acona Kingf isher (B&Q)

Associated Brit ish Foods Marks & Spencer

Aviva MFI

Boots Rotork

Diageo Safeway/Wm MorrisonGK Goh Sainsbury

GlaxoSmithKline Shell

GUS (Argos) Somerfield

GUS (Homebase) Standard Chartered

Imperial Tobacco Tesco

Inditex



4

Seminar 1: China’s Economic and Political Climate

Introduction

Despite the ever-growing importance of China to global

business, it remains a country with numerous social and

political problems including rising unemployment,

corruption, regional economic disparities and other factors

associated with capital markets in their infancy. While the

Government of China has adopted a wide range of policies

to promote market-based economic development, full

political and civil reform, through a shift towards a moredemocratic government, is still far from being realised. The

restructuring of State Owned Enterprises (SOEs) has led to

large-scale redundancies; and subsequent feelings of

resentment among former workers toward the government

could create a threat to the long-term social stability that is

essential to China’s development. China’s emergence in the

global economy over the last decade has also coincided with

the emergence of wider scrutiny of multinational behaviour,

both within and outside China, by non-governmental and

civil society organisations and extensive media exposure. This

is putting pressure on companies considering moving into

China to consider the full range of potential business risks

they face, including ‘extra financial’ risks such as those

related to human rights, corruption and environmental

issues.

Economic Background

China’s GDP per capita has risen on average by 8% per

annum over the past 25 years. The country recently overtook

the USA as the most popular destination for foreign direct

investment. China admittedly remains a low-income

economy with low productivity per head, but it also has

huge potential for sustained economic development. Thegovernment has pledged to continue stimulating domestic

demand and pursuing expansionary macroeconomic

policies. It further plans to address problems inherent in the

economic system, and to focus on rural development,

corporate and financial restructuring, and the reform of

government institutions.

But serious structural problems continue to undermine the

economy’s potential, despite China’s impressive compound

growth and marked rises in real output and standards of

living. The country’s policy of gradual free market reform, as

opposed to the ‘big bang’ approach adopted by otherformer command economies, has allowed policymakers to

delay addressing major problems such as urban

unemployment or non-performing loans. But this strategy

may be unsustainable.

Foreign Direct Investment in China

Source: International Monetary Fund, International Financial Statistics;

Reproduced with the kind permission of Dun & Bradstreet.

There are many other medium to long-term economic

problems pose direct or indirect challenges to foreign

investors:

• Regional disparities: Direct investment (both foreign and

domestic) has tended to favour coastal areas and cities,

which have thus enjoyed much faster economic growth

than inland regions. Income disparities between inner

and coastal regions have widened.

• Ongoing deregulation and the dismantling of SOEs: has

precipitated massive job losses and the emergence of a

vast army of displaced migrant workers. State-run giants

were once at the heart of the planned economy. But

these companies are increasingly forced to sink or swim

in the face of market reforms, leaving employees without

work and deprived of a system of lifetime benefits.

• Weak banking system: The current debt-to-GDP ratio is a

problem, given the need for continued spending on

social security and the domestic banking sector.

Government-pressured lending has left domestic banks

with weak lending portfolios and large numbers of non-

performing loans. In addition, the state has bailed out

many recently privatised banks, increasing levels of

recurrent domestic expenditure.

• Welfare Spending: China’s rate of population growth

has decreased since the 1990s. However, the population

is forecast to peak at 1.45 billion in 2030, and an ageingdemographic profile will put pressure on welfare

spending and government finances. Some of this cost

may fall on foreign companies operating in China in the

form of increasing welfare benefits to the workforce.

US$ billion

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20

30

40

50

60

70

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004



5

• Currency: The international community strongly supports

an appreciation of China’s currency in line with WTO

accession commitments. Yet China’s domestic policies

are currently geared towards stabilising the economy,

with a gradualist approach to currency appreciation. The

currency has thus been allowed to fluctuate within

boundaries set by this policy framework. China is

currently the world’s fifth largest economy, accounting

for one-twentieth of total world exports. Three-quarters

of exporters in China are foreign (mainly US), hence aweaker currency, coupled with low-cost labour, work in

their favour. Upward pressure on the Yuan-Renminbi

would be unhelpful to foreign companies operating in

China.

Foreign companies in China

Foreign companies’ profits in China may have increased

rapidly in the past four years, but they remain modest in

comparison with other countries with smaller markets and

slower growth. China, with its billion-plus population and

dynamic economic growth, is seen a reservoir of untapped

potential by foreign companies looking for new markets.

But recent research paints a picture of a market characterised

not just by untapped potential, but by cut-throat

competition and incredibly challenging conditions. Many

foreign businesses in China are struggling to make money at

all because of low margins and local competition. Some

foreign companies have lost money in China by over-

investing too quickly, too early, and companies with smaller

investments have been successful within three to four years

because they knew where to position themselves, and make

the best use of their money.

Manufacturing has accounted for 60% of China’s GDP

growth over the past decade, with the low cost of

production, coupled with favourable economic policies and

preferential tax rates, among the drivers behind the growth.

As a result, foreign companies that make the most money

out of the China boom are those that use it as a base for

exporting or sourcing cheaply. It can be argued that most

foreign companies are neglecting 90% of the market - more

than 700 million people - by targeting just the wealthiest

minority. For example, the US companies that made the

biggest profits selling into the China market, rather thanexporting from it, were the fast-food giants Yum Brands and

McDonald’s. Major firms such as Coca-Cola and Nestlé now

record sales of over $1billion in the China packaged food

market, which is now estimated to be worth over 30 billion.

Some foreign businesses are now on the right track, and are

beginning to successfully target the Chinese mass consumer

market. These companies were able to target the mass

market after they acquired local companies that already had

channels in place.

Anecdotal evidence suggests there are some recurring

hurdles that keep tripping up foreign companies in China:

• Underestimating local competition: Domestic

corporations have less than 70% market share in only

two sectors (instruments and electrical and electronic

machinery). This suggests that mainland producers may

stand to benefit extensively by WTO entry.

• Lack of intellectual property rights: Many companies

(mostly in consumer goods, chemicals and auto parts)

have seen their Chinese markets diluted with cheaper,

fake goods.

• Underestimating the impact of company-government

relationships: For example, AT&T decided to withdraw

from China after 1989, but the State later excluded AT&T

from participating in particular JV’s so that they lost out

to rival companies.

• Concentrating predominantly on lowering labour costs:

Operating costs in China relative to the rest of the world

can be much higher than the labour cost savings that can

be made.

• Understanding infrastructure and distribution network

needs: Some companies signed JV’s before recognisingthat systems they thought were in place were not, or

were badly designed for their business needs. The effects

of this have sometimes been exacerbated when

companies have not been allowed to set up their own

systems or networks

• Inheriting demoralised workforces from SOE’s: often

these employees have not been receiving redundancy

packages/pensions. There is a need to identify what

company obligations must be met before entering into

agreements with former SOE companies, e.g. liabilities of

SOE’s to pay lifetime subsidies.



6

Political Stability

China is an authoritarian state under the unchallenged

dominance of the Chinese Communist Party (CCP). The

fourth generation of CCP leaders was elected in March

2003, when Hu Jintao replaced Jiang Zemin as

President /Party General Secretary of the CCP. This new

leadership aims to focus on restructuring State-owned

Enterprises (SOEs) and developing a free-market economy, in

order to address the problems affecting rural China. Mr Huhas pledged to strengthen the rule of law and secure clearly

defined property rights - moves that will go some way

towards aiding economic development.

Yet China may need a greater level of democracy nationwide

to guarantee a stable, free-market economy over the longer

term. China’s political environment is certainly more relaxed

than in the late 1980s, when the authorities clamped down

on dissent in the aftermath of the 1989 Tianamen Square

massacre. Many subjects, once taboo, are now openly

discussed, and the Chinese enjoy relatively free access to the

Internet, albeit subject to certain restrictions aimed at

monitoring or preventing debate on issues seen by

government as politically subversive. The central authorities

also encourage discussion of environmental questions and

consumer protection - again within fairly tight boundaries.

A civil society is also emerging in the form of increasing

numbers of community organisations and monitoring

groups (similar to non-governmental organisations). These

groups represent both a threat to corporate reputations and

an opportunity for corporate-community co-operation in

addressing issues such as labour standards. Foreign

companies could indeed benefit from working with such

groups. But the emergence of a civil society also poses risksto the CCP’s dominance of the political environment. Civil

unrest could certainly ensue if the CCP failed to deliver

improved living standards and economic stability.

Tibet remains a sensitive issue. Beijing claims a centuries-old

sovereignty over the region, but the allegiances of many

Tibetans lie with the exiled spiritual leader, the Dalai Lama,

who is regarded by China as a separatist threat. Under

international pressure, China eased its grip on Tibet in the

1980s, introducing “ Open Door” reforms and boosting

investment. Beijing says Tibet has developed considerably

under its rule, but many groups say China continues toviolate human rights in Tibet, accusing Beijing of political

and religious repression.

Envi ronment al pressures

While economic growth has increased incomes and

improved health indicators as well as reducing overall

poverty levels, growth in China has not been entirely benign.

Environmental pollution from coal use is damaging health,

air and water quality, agriculture and ultimately the

economy. The World Health Organisation reported that

seven of the ten most polluted cities in the world are in

China. Sulphur dioxide and soot caused by coal combustionare two major contributors, resulting in the formation of acid

rain, which now falls on about 30% of China’s total land

area.

The Government recognises that such issues require

attention, and that rising water and air pollution, as well as

deforestation and desertification, may also threaten China’s

economic development. The authorities have issued

regulations to reduce the emission of greenhouse gases

signif icantly, and have recently launched a five-year pollution

control plan - estimated to cost around US$84 billion. The

Government has also introduced initiatives to cut back on

coal use (e.g. by introducing a tax on high sulphur coals).

Consequently, environmental regulation is expanding and is

relatively well monitored. New laws establishing

environmental regulations have been introduced. At the

national level policies are formulated by the State Council.

Managing energy and w ater scarcit y

Rising energy requirements, as well a widening gap between

oil supply and demand, have encouraged the Chinese

government to give priority to investment in energy

infrastructure. China is now the second biggest energyconsumer after the US, and the world’s third biggest oil

consumer. In 2001 China accounted for 9.8% of world

energy consumption. Of the 39.7 quadrillion Btu of total

primary energy consumer in China in 2001, 63.4% was coal,

25.8% was oil, 6.9% hydroelectricity, and 3.1% natural gas.

By 2025, the share of nuclear power used for China’s

electricity generation is expected to increase to 4% from the

lit tle over than 1% currently. The government has made

significant strides over the past few years in opening its

energy sectors to foreign capital. As yet, foreign direct

investment in energy typically involves foreign firms paired

with one of three major state-owned Chinese partners -CNPC, Sinopec and CNOOC - with the controlling interest

held by the Chinese firm.



7

After coal, renewables (including hydroelectricity) account

for the second largest share (18.6% in 2001), of China’s

electricity generation. With assistance from the United

Nations and the United States, China hopes to embark on a

multi-million dollar renewable energy strategy to combat

pollution. While solar and wind power provide significant

renewable energy potential, China’s growth in renewables

will in the next decade will be dominated by hydropower,

particularly with completion of the 18.2-gigawatt Three

Gorges Dam project in 2009. Although the Three GorgesDam is seen as both an important source of energy for

China’s growing electricity consumption needs and a means

of taming the Yangtze River, notorious for its disastrous

floods, the controversial dam also could prove to be an

environmental disaster. Thus far, few attempts have been

made to address concerns regarding the accumulation of

toxic materials and other pollutants from industrial sites that

will be inundated after construction of the dam.

Possibly the most serious environmental challenge for China

is access to clean water. About 60 million people find it

diff icult to obtain suff icient water for their daily needs. Water

demand is expected to triple during 1995-2030, from 120bn

tonnes to 400bn tonnes, and by 2030 per capita water

supply will fall from 2,200cu m to below 1,700cu m.

Suggestions for companies

• Companies considering operating in China should

exercise caution and carefully balance the significant

potential the country offers against the substantial

economic challenges that remain.

• While Chinese banking practice appears to haveimproved in recent years, fundamentally little has

changed. Increased foreign presence in the financial

sector could help to promote further but gradual reform.

• Using local partners can facilitate foreign company

operations, as local people have considerable experience

of Chinese laws, business practice, culture and superior

access to information. However, choosing the right

partner is difficult, and involves a significant degree of

risk. Some companies are addressing this challenge by

buying into an SOE venture; however it is important to

consider the partners’ ethical standards as well as their

business performance.

• Companies should not underestimate the cost of

bringing manufacturing standards up to match their

brand requirements. This can include expensive

expatriate salaries for managerial roles and training, as

well as high operating costs.

• Companies that invest in China should be wary of the

risks posed to their employees who may be targeted due

to their suspected involvement in groups or other

activities that may be regarded as contrary to the CCP’s

interest of maintaining social stability. Companies should

be particularly careful if they are involved in projects in

parts of the country where civil unrest exists such as Tibet

or Xinjiang as involvement in these areas may open up

companies to criticism from campaign groups and could

pose reputation risks.

• Greater environmental regulation will involve increased

costs for companies operating in China. Companies

operating in China should be aware that they are

increasingly expected to adopt measures to mitigate the

impact of their operations on the environment.

Companies should consider implementing robust

environmental policies and practices that meet

international standards so as not to be caught out should

regulation in this area be tightened.

• Demand for power and a poor infrastructure in the

power industry are increasingly causing power cuts.

Businesses must take this into account when organising

the work schedules and expected profit streams. In

Shanghai, more than 800 factories have changed work

schedules to avoid consumption peak times and more

than 300 factories are using power on a rotating basis.

• Growing concern about environmental issues also

presents new market opportunities to those firms

offering solutions to some of China’s more pressing

environmental challenges. Technologies that will treat

wastewater, provide clean energy, reduce air pollution

and improve environmental monitoring systems will be

set to benefit from this trend.

• Civil society groups represent both an increased threat to

corporate reputations, and an opportunity for companies

to co-operate with local organisations in order to address

stakeholder questions such as human rights (in areas

such as Tibet) and labour standards.



8

Seminar 2: Legal and regulatory challenges in China

Introduction

China has been strengthening its regulatory framework, but

lack of clarity characterises many areas of commercial and

economic law, a position that poses a major challenge for

foreign companies. Consistent application and transparency

of laws, regulations and practices is fundamental to a free-

market economy. Yet in spite of the need for large-scale

reforms, the government has hitherto adopted a cautious

approach to reforming the legal environment. Conversely,rising foreign investment has brought issues to the fore such

as corporate governance and accountancy standards, along

with the increased need for regulatory structures. Lack of

effective enforcement of existing laws also remains a major

concern.

China has many hurdles to overcome before it can comply

with international legal standards. Central and local

government regulations often conflict and in many cases

local lawmakers and officials interpret and implement laws

according to their own political interests. The current

devolution of power to provincial governments is

exacerbating the problem. In addition, the vast majority of

China’s judges have no legal training. Foreign companies

operating or planning to invest in China need to be aware of

several other issues that will undoubtedly affect their

activities. These include the status of China’s adherence to

World Trade Organisation (WTO) rules and continuing

reform of the state sector.

Enfo rcing t he existing legal fr amew ork

In recent years, the Chinese government has introduced a

number of economic laws to provide a framework forforeign investment activity. These include the Company Law

(1994), the Commercial Banking Law (1995) and the

Mergers & Acquisition (M&A) Law (2002). WTO accession

has heightened the need for more complex laws. For

example, China introduced the 1995 M&A Law to permit the

purchase of non-performing loans - estimated to account for

around 30% of GDP. The law authorised the State Economic

and Trade Commission (SETC) to sell and restructure various

financial instruments, thus allowing foreign firms to buy into

local firms through debt for equity swaps. This has

undoubtedly helped to attract foreign creditors, but the law

has proved inadequate in combating the endemic ‘crony

capitalism’ that still deters many potential investors.

While the regulatory framework is improving, enforcement

remains a problem. Many of China’s judges start their careers

as bailiffs and ‘work their way up’ through the system;

hence, they lack adequate legal training. Businesses can

request arbitration, which operates according to

international standards and guidelines to resolve disputes.

This mechanism is fairly sophisticated but time-consuming.

The WTO also has a dispute settlement mechanism;

however, only member countries can bring actions on behalf

of a company, rather than the company itself.

Businesses report experiencing difficulties at the local level

because local lawmakers and officials often interpret andimplement national laws and regulations to achieve their

own political ends, and operate according to a host of

unwritten cultural rules. They sometimes try to extract

bribes, or seek to protect local businesses. Furthermore,

central and local government laws frequently conflict and

local officials may lack knowledge of national laws.

Reforming the state sector

The growth of the private sector, as well as continuing

reform of the state-owned sector, is helping to liberalise the

economy. The private sector currently numbers some 2.5

million large firms - which employ 70-100 million people -

and millions of smaller enterprises. The private sector

generates 30% of gross domestic product, despite limited

access to bank capital, while foreign-owned enterprises

generate 55% of China’s exports (a figure that highlights the

level of foreign investment flowing into China).

The state has already sold off many small and medium-sized

SOEs. But around 160,000 large-scale, provincial-level SOEs

remain; these have been incorporated into the ‘State Asset

Management Commission’. This strategy allows the state to

maintain its key role in major firms, while selling off minoritystakes in smaller enterprises. Ninety percent of listed

companies are former SOEs sold to retail investors. Thus, the

stock market has essentially served as a vehicle to enhance

SOE performance, with no concomitant commitment to the

private sector. This suggests that reform of the state-owned

sector has not been as successful as might at first appear.

Yet reforms are beginning to have an impact - at least in

terms of companies regulated by the China Security

Regulatory Commission (CSRC) in Shenzhen and Shanghai.

Investors are now able to seek legal redress in the event of

fraud. Consequently, the level of foreign capital is increasingand private investment at the provincial level is also growing.

Meanwhile the gradual reduction in the state’s equity in the

industrial sector is reducing the incidence of asset stripping

and the use of soft loans to prop up unviable firms.



9

WTO Accession

Some foreign companies have expressed concern at China’s

slow adoption of WTO rules. They see ambiguous property

rights, weak implementation of laws, the absence of a

framework for corporate governance and financial sector

distortions as factors constraining private sector

development. Yet China only recently joined the WTO (in

2001) and, in some respects, has made remarkable progress.

It has gradually reduced tariff rates and barriers, and has metits obligations on import regulations and the agricultural

sector. The legal environment will undoubtedly become less

risky as China’s economy opens up and rule-based trading

becomes the norm. But the impact of WTO accession and

development of the private sector varies from sector to

sector.

The diagram below highlights those industries (such as

banking) that remain highly protected.

Source: McKinsey Quarterly and China Business Council

Under WTO rules, China is committed to opening up its

financial sector to foreign competition and investment by

2006. Regulators are monitoring progress, yet much ground

remains to be covered. The majority of larger banks have a

deeply ingrained ethos of non-commercially driven lending,

with around 85% of loans going to SOEs. And the

government’s monetary policy encourages banks to maintain

old lending habits, while limiting the level of lending to the

private sector. The introduction of best practice via a foreign

presence within the financial sector could encourage such

developments.

Protection of Intellectual property right s

China suffers from serious intellectual property rights (IPR)

infringements. Ineffective laws, local protectionism and

weak enforcement by the Chinese government contribute to

the counterfeiting problem and pose a threat to the

reputation and sales of international brands. The US

estimates the value of counterfeit goods in China at

between $19 billion and $24 billion, with losses to US

companies exceeding $1.8 billion a year.

Although these problems are generally unavoidable in

developing market economies, the situation in China is

particularly concerning. For the past 40 years, until China

began putting intellectual property laws in place, all patentswere owned by the government, and could be shared with

any company that was willing to use them. The Chinese

government encouraged this, and that has left a deep

impression on Chinese companies that intellectual property

is there for anyone to use it. The practice of copycat

production is also fuelled by the fierce competition among

Chinese companies and provinces to join the global

economy.

Chinese Authorities have drafted new laws to protect

intellectual property rights. For example, protecting clinical

trial data used in the drug approval process and software

registration rules to protect copyrights of domestic and

foreign software. The State Intellectual Property Off ice deals

with IPR issues. Beijing has been improving its record in

combating piracy and counterfeiting amid mounting

pressure on the government to improve its performance in

implementing its WTO commitments. The government

signed an agreement on trade-related aspects of IPRs under

the auspices of China’s WTO accession. The EU has also

recently launched a formal dialogue with the Chinese

government to try and improve enforcement of IPR rules.

Western companies have won some legal cases, although

enforcing the judgements has proven difficult.

The country’s efforts at improving enforcement, though

steady, require more time to reach the standards of

intellectual property rights protection in many industrialised

countries. Lawyers who represent Western companies

embroiled in intellectual property disputes in China point to

major loopholes in Chinese law and in the country’s

trademark and patent system as parts of the problem. Many

Chinese patents, for example, are granted without any

examination of their originality, making it easy for local

companies to claim others’ innovations as their own.

There has been some progress towards greater protection inChina’s courts particularly in the richer provinces along the

country’s east coast. But local and provincial governments

eager to bolster their economies sometimes subsidise patent

filings for local companies and provide pointers to them on

how to beat foreign claims of infringement. One problematic

area is joint venturing between foreign and Chinese

I m p a c t o f m a r k e t i s a t i o n ,

W T O A c c e s s i o n , c o m p e

t i t i o n

Tariff and non-tariff barrier protection per sector (in China/Abroad)Low High

High

Electrical Equipment

Pharmaceuticals

Textiles Chemicals

Internet Services Banks

Insurance DistributionRetailing

Processed goods,consumer goods

Auto

Energy

Agriculture/Agrobusiness

Securities

Telecom Services



10

companies. When the joint venture dissolves, or sometimes

even while it remains active, the Chinese party illegally

makes use of the technology or manufacturing processes.

Pharmaceut icals companies and IPR

The pharmaceuticals sector aptly illustrates the impact of

WTO membership on China’s investment environment. The

country’s huge population and prospective ageingpopulation profile represent enormous opportunities for

pharmaceuticals companies, but the lack of clear intellectual

property rights protection and the threat of parallel imports

pose significant risks. China has adopted trade-related

aspects of intellectual property rights (TRIPs) rules as required

by the WTO. These resemble intellectual property rights laws

in the US but are still inconsistent and incomplete. As a

result, few pharmaceutical companies currently have

manufacturing operations in China, and those that do exist

are generally joint ventures. Some companies have protected

their interests by including international arbitration

agreements within their contracts. But technology transfer

agreements are likely to materialise in the future.

Tackling corrup tion

Corruption is one of China’s biggest political and economic

challenges. Estimates suggest that large-scale incidents of

corruption between 1995 and 2000 caused economic losses

of between Rmb 988 billion and Rmb 1.3 trillion, the

equivalent of between 13.2% and 16.8% of China’s GDP.

The central authorities have taken numerous steps to fight

corruption, including forbidding government, police and

military officials from participating in business enterprises,designating different accounting channels for revenues and

expenditures, and launching a system of ‘accountant

accreditation’. Corruption is most common among lower-

level government officials, a phenomenon that results from

central government’s policy of devolving political power to

the regions. The probability of officials getting caught or

punished remains low.

Chart 2: Corruption Perceptions for Selected AsianCountries, 2003

Source: Transparency International, Corruption Perceptions Index,

http://www.transparency.org.uk

Companies are often asked to make a payment for a

contract, or related to a business deal when it is not legally

required. Companies with experience of operating in China

report that local officials are very creative in finding ways toearn a little extra and often invent payments that need to be

made. One large international company found that only

30% of licences it secured were legally necessary. Culture,

language and an entrenched and sophisticated system of

extortion means that companies often face this kind of

situation and do not know how to navigate through it. A

new Administration Permit Law, which recently came into

effect, attempts to streamline the various permits required

for business into a “ one-stop” system that will insist on

written applications and the avoidance of face to face

contacts.

Adopting an anti-bribery and corruption (B&C) policy is

essential prior to beginning operations in China.

Transparency International, the leading non-governmental

organisation working to combat B&C has produced

principles and guidelines for companies to follow - reference

and link on page 12.

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Singapore

Australia

Hong Kong

Japan

Taiwan

S. Korea

China

Thailand

India

Indonesia

0.0= most corrupt 10.0 = least corrupt



11

CASE STUDY

Managing Corruption - Shell’s experience in China

Shell takes the issue of bribery and corruption seriously. The

Anglo-Dutch oil giant is active in over 145 countries, many

of which experience such problems. Over 95% of Shell’s

118,000 people around the world are locally recruited and

the company has extensive, indirect influence over its

business partners (i.e. its suppliers, Joint Ventures,

contractors, customers and host governments). Shell alsoencounters ‘social corruption’, which is difficult to tackle.

This is where the company is asked to ‘contribute’ schools,

clinics, universities, etc. in local areas that do not receive

sufficient funding for such development from central

government.

Shell adopts six measures to counter corruption:

1. Upholding Shell General Business Principles;

2. Facilitating internal communication and training;

3. Creating an anti-corruption culture;

4. Adopting assurance processes;

5. Ensuring regular, transparent reporting; and

6. Engaging with stakeholders and experts.


• Prior to investing in China, companies could undertake

extensive research into the relevant laws and regulations

governing their sector and the problems likely to arise

due to non-enforcement and corruption.

• Companies should adopt a comprehensive policy

committing to combating bribery and corruption. They

should ensure that the policy is communicated internallyto facilitate an anti-corruption culture and ensure all

reporting and processes are transparent and secure and

whistle blowing mechanisms are in place to identify

breaches.

• Companies asked to pay for a contract or any other kind

of business deal should try and establish whether the law

requires such payment.

• Where relevant, companies should take practical steps to

prevent the theft of IPRs. They can do this by splitting the

production of a component between several factories, so

that no single manufacturer has a blueprint of the final

product. In addition, international arbitration

agreements signed into contracts can be key to

protecting intellectual property.

• Companies could work to influence the central

government: but should do so carefully. A collective

effort, working with other companies or via industry

associations, is preferable in China. This is harder for the

government to resist and has been effective in the past.



12

TRANSPARENCY INTERNATIONAL (UK) and Business

Principles for Count ering Bribery

Graham Rodmell, Director, Corporate and RegulatoryAffairs, Transparency International

TI is a not-for-profit, independent, non-governmental

organisation formed in 1993, whose objective is to counter

corruption, primarily in international business transactions

TI promotes the message that corruption needs to be and

can be overcome. It bases its case primarily on economic and developmental grounds. TI does not investigate and

expose individual cases of corruption.

The Global Ant i-corrupt ion “ Revoluti on”

Anti-corruption measures have assumed increasing

prominence around the world in recent years. Of most

importance to UK companies among the numerous

international conventions is the OECD 1997 Convention on

combating the bribery of foreign public officials in

international business transactions, signed by all 29 OECD

states and 5 non-OECD states, but not China. The effect is

to criminalise the bribery of foreign public officials to obtain

business anywhere in the world. China has signed the UN

Convention against Corruption.

For England and Wales, the criminalisation of foreign bribes

was included as Part 12 of the Anti-terrorism, Crime and

Security Act, which came into force in February 2002. This

extended the components of our corruption prevention

offences, the common law and statutes, so that they would

apply to UK nationals and companies incorporated under the

laws of the UK, wherever the offence takes place and even

if no part of t he offence took place in the UK. Proceeds of

corruption and the economic benefit that accrues tosomeone or a company from foreign bribery can be

confiscated under the Proceeds of Crime Act 2002.

For there to be real change, there has to be a commitment

to integrity throughout a company’s structure and this

cannot be created and sustained by criminal penalties alone.

Voluntary codes are important as part of a company's risk

management programme.

Practical measures companies can take to combat

corrupt practices

• Develop a robust integrity policy. A corporate code of

conduct should be fully and regularly communicated

throughout the company and promoted through

training, supported by internal control systems and

records designed to identify and prevent bribery. The

more transparent these measures are, the more readily

they will be communicated to suppliers, agents,consortium and joint venture partners etc. In this

situation, the easier it will be to communicate the risk of

prosecution in the UK.

• When an enterprise engages in a new joint venture, it

should use its influence to persuade other partners to

adopt its anti-corruption policies.

• An enterprise should not channel improper payments

through an agent and should ensure that agents

conform to the requirements of its policies, are hired only

for bona fide business purposes and that compensation

paid to agents is appropriate and justifiable

remuneration for services rendered.

• It can sometimes be daunting to stand out against

extortion. It might be possible to agree upon joint action

to counter corruption and perhaps in more serious cases

to enlist the help of the British Embassy.

• Set up full corporate responsibility structures, of which

anti bribery and corruption measures should be a part

and perhaps in more serious cases to enlist the help of

the British Embassy.

TI has recently published their Business Principles for

Countering Bribery. These should be valuable to businesses

(including small and medium-sized enterprises) in setting up

their own policies and codes to counter bribery and

corruption.

These can be accessed at:

http://www.transparency.org/building_coalitions/

private_sector/business_principles.html

Over time, business integrity will be seen as a competitiveadvantage.



13

Seminar 3: Managing Labour Issues

Introduction

The gradual shift from a central command towards a more

market-based economy has had a significant impact on the

labour market. Millions of state workers in urban areas have

lost their jobs or seen their wages cut as a result of industrial

reforms. At the same time, rural unemployment and

underemployment (now estimated to be over 30%) has

produced a large and expanding migrant worker population.

Tens of millions of peasants have left their homes in searchof better jobs and living conditions. This ‘floating population’

was recently estimated at between 80 and 130 million

people.

Traditionally, foreign direct investment in China has been

concentrated in labour-intensive manufacturing industries,

accounting for over 50% of China’s main exports. These

industries have been attracted by government policies that

favour foreign investors and low wages that remain

suppressed by massive unemployment. The huge increase of

foreign direct investment into the manufacturing sector has

increased the demand for low cost labour.

China’s legislation covering health, safety, labour standards

and the environment is comprehensive and demanding, but

there are widespread reports of Chinese production facilities

violating health and safety standards, discriminating against

workers, paying low wages and requiring excessive working

hours. Many foreign companies operating in China have

now started to adopt ethical trading codes, modelled on

core International Labour Organisation (ILO) Conventions,

requiring their suppliers to demonstrate that they uphold

certain labour standards. These codes include provisions to

limit excessive overtime, ensure payment of minimum wages

and to freedom of association. Most companies reportfinding it particularly hard to uphold these provisions in

China due to systemic labour market problems. However,

companies recognise the commercial imperative of trying to

tackle these issues, whether it is in their own factories or in

their suppliers’ factories, to ensure high quality products and

avoid brand and reputational damage in their home markets.

Managing specif ic labour i ssues

A Company’s ability to exert influence on workplace

conditions is often correlated with ownership and thepercentage of suppliers’ production that they account for. It

is not unusual for companies to have contracts for goods

ranging across of workplaces spread across China. In many

of these cases, the company in question may only account

for 1% or 2% of a manufacturer’s total output, making it

difficult to encourage change. Suggestions have been made

that companies that source from the same supplier should

collaborate to audit the factories and develop improvement

plans, but there are as yet few examples of this approach

being taken.

Minimum Wage

Chinese law sets a nationwide minimum wage. Wages are

then determined at the local level to reflect regional

differences in economic development. But massive

unemployment means that the labour market is heavily

skewed in the employer’s favour. Comparisons between UK

and Chinese legislation on working hours, overtime and

holidays show that China’s laws are more stringent. In the

UK, the legal number of working hours per week exceeds

that of China by 8 hours, or a staggering 37 hours in the

case of workers opting out of the 48-hour week. China’s

requisite time off work is double that of the UK’s (two days

as opposed to one day). Chinese legislation on overtime pay

stipulates that workers should receive 150 percent on top of

ordinary wages for ordinary overtime, 200 percent for

weekends and as much as 300 percent for holidays. In stark

contrast, the UK provides no legal requirement for employers

to pay overtime rates.

But while Chinese labour law stipulates the number of hours

(including overtime) that employees may be requested to

work, the system is open to abuse and unreasonable hours

are not uncommon. A large bureaucracy and a lack of

communication and co-ordination between separatebureaux make enforcement difficult. The government is also

reluctant to enforce laws too stringently for fear of losing

current investors and discouraging further investment. Some

problems have arisen as a result of regions competing for

investment on the basis of lowest wage on offer. Many

Chinese workers are paid on a ‘piece-rate’ basis, which

reflects the number of items produced. Management

stipulates the number of items that a worker or team of

workers must produce in a set period (usually a day), and

workers are paid according to the pieces completed. In some

cases, quotas are so high that workers need to work double

shifts to meet them. Minimum wage requirements aredifficult to enforce, as most factories work on a low piece-

rate basis.



14

Migrant worker profile

The majority of factory workers in China are young, single

migrants from rural areas who are willing to accept overtime,

given that often the sole purpose of moving to urban,

industrial areas is to make money to send home. In many

cases, workers eventually settle in industrial areas and either

create families of their own or bring family members to join

them. But since education and healthcare are increasingly

expensive in China, workers are often left with little, ifanything, to send home.

The average worker would ideally like to work around two

hours overtime each night and to have four days off each

month. In reality, many workers clock up excessive overtime,

are permitted inadequate rest and receive poor food and

wages. Dormitory conditions tend to be rudimentary and

lack adequate arrangements for married couples (these are

generally forced to sleep in separate dormitories). There are

no paid holidays or ‘days off’, and no transparency of pay on

piece rates - a key factor in the sustained depression of

wages.

Payment in arrears and excessive overt ime

While China has generally stamped out the practice of

forcing workers to pay a deposit for guaranteed work, new

devices such as payment of wages in arrears, or charging

workers for the use of machinery or uniforms have become

more commonplace. The transfer of benefits and insurance

packages between factories is often prohibited,

compounding the problem.

Impactt , a UK consultancy with an off ice in China, specialises

in helping companies to improve labour standards in their

supply chains. Their research reveals that around 80% of

factories have issues with overtime; the latter can be as

much as six times in excess of legally stipulated hours.

Companies obtain authorisation for overtime and seasonal

fluctuations in working hours by applying to local

authorities. Yet according to the central government, many

factories claim to have special permits that are neither legal

nor issued by the proper authorities. Experience has shown

that a reduction in workers’ hours is not automatically

accompanied by an increase in productivity. Factories are

often given ult imatums that add to existing problems. One

factory was asked to quickly cut working hours by 90 hours

per month, which resulted in a 10% decrease in already-low

wages, and an increase in labour turnover.



15

CASE STUDY - Overtime Project

Rosey Hurst, Managing Director, Impactt Ltd.

Ms. Hurst presented the findings from the 'Overtime

project' carried out by Impactt. The project findings showed

that for improvements in labour standards to be made,

companies must meet the economic and the social needs

of both supplier factories and staff.

Impactt's experience from the Overtime project suggeststhat the high labour turnover rate in China is the key

problem affecting the management of labour issues, with

some factories incurring an annual labour turnover of 120

percent. Other common problems include excessive

overtime, ill and tired workers and low wages. The

subsequent low quality of output often results in a high

level of reworking (in some cases 60% of output needed to

be reworked) leading to low productivity. Some factories

included in the Overtime project were found to be

operating at just 35% efficiency.

A combination of poor management, poor planning and

lack of communication tends to underpin low productivity.

Fewer working hours result in higher quality output,

reducing the need for costly and time-consuming

reworking. Other factors that contribute to low productivity

include lack of training on the part of management, order

delays and late sample approval from buyers, resulting in

complete lines having to be reworked. In many cases

production lines were a fiasco, lacking any semblance of co-

ordination. Furthermore, workers were not provided with

any incentives for increasing their output.

Factories have problems attracting and retaining skilled

workers. Traditionally, labour is hired on sight, rather than

on the basis of skill. Factory management tend to use

negative techniques, such as fines, deposits and retaining

wages to keep workers at the factory. In the face of the

current labour shortage in South China, these techniques

are proving increasingly ineffective. Factory recruiters should

concentrate on attracting the 'right' workers, by offering

decent packages to retain a happy, skilled labour force,

rather than hiring cheap labour and paying more in the longterm due to low quality output and high staff turnover.

However, it is important to identify exactly what workers

want and what kind of benefits would meet their needs -

communication is essential. Hierarchy and cultural issues

can create signif icant communication barriers. If these

barriers are not dismantled it becomes difficult to find

common solutions. Facilitating discussion groups is

important.

Research shows that when working hours are higher,

productivity is lower. By reducing the amount of overtime

worked, through implementing better basic managementand production systems, four out of the six participating

factories made substantial improvements in terms of

productivit y. Overall factories incurred a 25 percent

reduction in garments/products requiring reworking (in

some cases, there was a 75% reduction) and total take-

home pay increased in all factories. Management gained a

better understanding of the labour laws, and was happier

with the increased profitability and reduced production

costs. Most of t he workers were much happier than before.

As a result, the turnover rate also declined.

For more information on the overtime project please see

http://www.impacttlimited.com/site/casestudy.asp



16

Occupat ional Healt h and Safety

Before November 2002, China had no generic Occupational

Health and Safety (OHS) law to prescribe minimum health

and safety standards. Regional differences also created

confusion regarding best practice and minimum standards.

Weak factory monitoring, poor law enforcement and

inadequate public education further limited the effectiveness

of OHS in China. Factory managers and workers generally

remain unaware of health and safety issues and often do notknow that a workplace could be made safer. Corruption also

represents a serious obstacle to effective implementation,

with well-connected owners and managers able to avoid

inspections of any kind. At present, the safety net for injured

workers is virtually non-existent, and compensation

represents the exception rather than the rule. The most

effective avenue for improving working conditions is by way

of incremental steps, such as training and workforce

participation in various OHS init iatives.

B&Q’s policy of dialogue

B&Q views the factory audit as the start of a process, not an

end in itself, and identifies a need for greater dialogue with

factory managers and workers. B&Q found, for example,

that many factories in China were prepared to admit - at

small B&Q workshops - that they knew little about handling

chemicals and meeting the relevant regulatory requirements

associated with them. B&Q responded by producing a FAQ

sheet on chemicals and the hazards of working with them; it

also provided health and safety advice.

The company encourages its suppliers to ask questions

about B&Q's code of supplier conduct, and holds workshopsto facilitate problem solving. B&Q believes it is important not

to 'scare off' factories from the outset by grilling

management on employment procedures and working

conditions but prefer to work in partnership with factories to

agree a way forward that is right for all parties. For example,

on worker/employer dialogue B&Q sees worker meetings on

health and safety as a non-controversial issue, that it can use

as a starting point for discussions on broader questions. B&Q

believes that trust-building and the engagement of

managers facilitate dialogue on all issues.

But B&Q also employs factory record and factory assessmentreports with highly specific entry requirements that must be

backed up by hard evidence (e.g., pay roll sheets,

employment contracts, chemical registers, etc.). The

company sees these records as the start rather than the end

of the audit, enabling the establishment and monitoring of

action plans which are the important part of the process

leading to real and sustainable improvements in factory

working conditions.

B&Q has found that auditing home workers presents

particular problems, given the enormous difficulties in even

the fundamental requirements. Its solution has been to

engage the help of outreach workers, who go to individual

workers' homes to discuss health and safety issues and agreegradual improvements.

Audit ing and compliance

Foreign buyers tend to work with huge supply bases and, in

many cases, lack the resources to engage with factories

suppliers on an individual basis. Instead, they favour sample

audits as a tool for monitoring compliance with their ethical

trading codes. Chinese factories can find the burden of

audits immense, as they often have to deal with tens of

different customers, each with slightly different codes of

practice and approaches to auditing, as well as with an

independent assessor carrying out audits. Western

companies frequently report that Chinese suppliers engage

in elaborate cover-ups, such as double book keeping and

staged worker responses to audit questions, to create the

illusion of compliance rather than actually meeting the

necessary standards..

Companies are increasingly realising that audits typically

present a long list of problems that need to be addressed in

each factory, but they do not offer solutions. They also do

not take into account progress that has been made, as they

provide a snapshot at one point in time. And Chinese factorymanagers fear negative repercussions if they openly discuss

compliance-related problems with clients.

Another disincentive to co-operate with audits is that even

though a factory may make considerable efforts to comply

with the rigorous demands of a key supplier, that supplier

may move their business elsewhere the following season.

Auditing, can therefore, lead to factories spending a great

deal of time, money and effort in creating the illusion of

compliance with standards, rather than spending that time

more fruitfully improving productivity and working

conditions. This erodes incentives for factory managers andtheir customers to develop long-term improvement

strategies, while providing huge incentives for elaborate

cover-ups such as double book keeping and staged worker

responses to audit questions.



17

Union Representation

In 1992 the Chinese Government passed the ‘Trade Union

Law’ preventing workers joining a union of their own

choosing and the 1995 Labour Law states that workers do

not have the right to strike. China has also made a

reservation to article 8(a) of the UN International Covenant

on Economic, Social and Cultural Rights (to which it is a state

party), which guarantees the right to form trade unions.

According to the Human Rights Watch, ‘China’s lawsrecognise only one government-sponsored workers’

organisation, the All China Federation of Trade Unions

(ACFTU), which exerts leadership over some 590,000 official

grassroots unions and their sub-branches.’ This makes it

particularly difficult to manage labour conditions in Chinese

factories

The All-China Federation of Trade Unions (ACFTU) remains

the only umbrella trade union in China authorised to

represent workers. However, as a quasi-governmental

organisation, it is limited in its ability to defend workers’

rights. In terms of collective bargaining, the ACFTU has

generally favoured the ‘partnership’ or collaborative

approach to solving problems rather than the

‘confrontational’ approach However, a dearth of Chinese

representatives equipped with the requisite negotiating skills

make ‘partnership’ difficult to achieve.

Cultural differences between China and the West should not

be underestimated. In China, the ACFTU is accustomed to

representing the interests of the state before those of

individual workers; in the West, unions generally aim to

reach a compromise either with the state or with private

business following negotiations on behalf of workers.

According to the Chinese system, convergence and theavoidance of confrontation between the state and the union

occur from the outset.

The ‘Advisory, Conciliation and Arbitration Service’ (ACAS)

principles currently form the basis for dispute resolution in

China, with academic and training institutions increasingly

interested in this approach. But the picture in the non-SOE

sector is unclear. Whether the traditional ‘partnership’

approach will continue to produce results as state

intervention in the corporate arena diminishes is open to

question. The rising incidence of non-standard working

conditions and irrational pay distribution may help togalvanise real trade union action. But trade unions currently

play a very limited role within companies.


• Foreign companies entering China should familiarise

themselves with national and local labour laws.

• They should try to put in place well-enforced codes in

line with international labour laws, which guarantee

workers their fundamental rights - including the right to

organise and bargain collectively, to have limits on

working hours, to be paid a minimum wage and to befree from discrimination.

• Companies could also refrain from acceding to requests

by the Chinese authorities to discriminate against, fire or

in any way discipline workers who attempt to form their

own unions, peacefully protest about their working

conditions, or go on strike. Similar commitments should

apply to subcontractors and suppliers, and the

implementation of workers’ rights should be regularly

monitored.

• Foreign companies should attempt to understand the

issues facing Chinese factories, rather than to take a

black-and-white ‘blanket’ approach of simply auditing.

Foreign companies need to consider carefully how best

to engage with suppliers and business partners in China,

rather than whether to engage at all. They will likely have

to balance their role as ‘partner’ with that of ‘regulator’

in their relationship with their Chinese contractor. Many

foreign firms discover that a supportive/collaborative

approach to improving conditions in their Chinese

partners’ operations is more effective than an

authoritarian, ‘policing’ line.

• There is an emerging consensus among retailers sourcingfrom China (and elsewhere) that more could be done to

share audit results and lessen the burden of audits on

factory managers. Sedex, a database into which suppliers

enter their audit results and by which buyers can track

performance of suppliers against ethical standards across

their supply chain has recently been set up and could

prove an effective vehicle for driving change.

www.sedex.org.uk

• Cultural and other differences have in the past held back

foreign companies from raising labour standards issues

with the Chinese government. A direct approach doesnot work well in China. But a more subtle tack is

possible, for example, by working with Chinese think-

tanks such as the Chinese Academy of Social Science and

with experts from local universities, to find ways of

raising labour issues in policy circles in such as way that

does not offend the Chinese government.



18

Further Information

For further information on topics discussed in the seminars

we provide a number of references and links to some of the

organisations that participated in the discussions:

China Brit ain Business Council

CBBC is the UK’s leading agency helping British companies

do business in China, delivering a range of practical, cost-

effective services to British companies wishing to export

goods and services to, invest in, or establish manufacturing

under license arrangements with China.http://www.cbbc.org/

Control Risks Group

Control Risks Group is the leading, specialist, international

business risk consultancy that aims to enable clients to take

risks with greater certainty and precision and to solve

problems that fall outside the scope of mainstream

management resources. Control Risks offers a full range of

value-added services to companies, governments and private

clients world-wide, including: political and security risk

analysis, confidential investigations, pre-employment

screening, security consultancy, crisis management and

response and information security and investigations

http://www.crg.com/

Dun and Bradstreet

Dun and Bradstreet’s Country Risk Services produce a

comprehensive information source for evaluating cross-

border risks and opportunities around the globe. For

information relating to the content of D&B’s Country Risk

Services, please contact the Country Risk Services Group in

the UK. Email: [email protected]

Future Considerations

Future Considerations is a management consultancydedicated to creating sustainable business results through

integral approaches, emerging ideas and new practices.

http://www.futureconsiderations.com/

The Great Britain China Centre

The Great Britain China Centre is a centre of excellence in

the promotion of understanding between Britain and China

particularly in the areas of legal and judicial reform, and

labour reform. The Centre has experience of running

exchange projects with Chinese partners and working with

many different UK organisations. The Centre is able to

respond rapidly and effectively to the need for dialogue in aparticular area and is recognised on both the Chinese and

UK sides as being a trusted facilitator.

http://www.gbcc.org.uk/

Impactt Ltd

Impactt is a consultancy working with companies,

organisations and individuals to open their eyes to new

possibilities and to develop business practice which extends

the number of people who benefit from international trade

and investment. Its role is to empower and support

individuals, organisations and companies to gradually

transform the way they work, bringing about positive social

change

http://www.impacttlimited.com/

London School of Economics (Dr Linda Yueh)

Dr.Yueh’s areas of expertise span economics and law,

including the Chinese economy, WTO and international

economics, as well as international law. Other areas of

interest encompass unemployment, imperfect labour

markets and social capital. Dr. Yueh is both an economist

and a qualified attorney who has practised corporate law in

the U.S., Europe and Asia, including China.

http://www.lse.ac.uk/people/[email protected]/

Royal Institute of International Affairs

Chatham House is one of the world’s leading organizations

for the analysis of international issues. It is membership-

based and aims to help individuals and organizations to be

at the forefront of developments in an ever-changing and

increasingly complex world.

http://www.riia.org/

Standard Chartered Bank

Standard Chartered employs 30,000 people in over 500

locations in more than 50 countries in the Asia Pacific

Region, South Asia, the Middle East, Africa, the United

Kingdom and the Americas. It is one of the world’s most

international banks serving both Consumer and WholesaleBanking customers. The Bank is trusted across its network

for its standard of governance and its commitment to

making a difference in the communities in which it operates.

http://www.standardchartered.com/

Transparency Int ernational (UK)

Transparency International is an international non-

governmental organisation devoted to combating

corruption, and brings civil society, business, and

governments together in a powerful global coalition. TI

works at both the national and international level to curb

both the supply and demand of corruption, raise awarenessabout the damaging effects of corruption, advocate policy

reform, and works towards the implementation of

multilateral conventions.

http://www.transparency.org/

http://www.transparency.org.uk/



19

China: Key Economic and Development Information

2001 2002 2003e 2004f 2005f

GDP (nominal)

Y billion 9,731 10,479 11,669 13,242 14,719

US$ billion 1,176 1,266 1,410 1,600 1,732

8.3 8.3 8.3 8.3

Breakdow n of GDP

Agriculture (%) 15.8 15.3 14.6 14.2 14.1

Industry (%) 50.1 50.4 52.3 51.8 53.0

Services (%) 34.1 34.3 33.1 34.0 32.9

Economic ind icators

Real GDP growth (% change) 7.3 8.0 9.1 8.9 7.5

Inflation, annual average (%) 0.7 -0.8 1.2 4.2 3.4

Government balance (% GDP) -4.4 -3.1 -2.5 -2.0 -2.2

Urban unemployment (%) 7.5 8.2 8.4 8.5 8.5

Current account balance (% GDP) 1.5 2.9 3.3 -0.4 0.2

Long-term real GDP growth potential, annual average, 2000-10: 6.0-8.0%

Development indicators China Hong Kong Indonesia Japan Thailand

Population, 2000 (m) 1,265.10 6.8 210.4 126.8 60.7

Population, 2010 (m) 1,352.20 7.4 237.6 126.3 66.3

Population, 2050 (m) 1,505.00 6.8 314.9 104.5 78.0

GNI per capita (US$) 840 25,920 570 35,620 2,000

GNI per capita (US$ PPP) 3,920 25,590 2,830 27,080 6,320

Life expectancy (years) 70 80 66 81 69

Dependency ratio, 2000 0.48 0.40 0.54 0.47 0.45



Polit ical Info rmation

Head of state President Hu Jintao

Head of government Premier Wen Jiabao

Political system Communist

Present constitution adopted 1982

Ruling party Chinese Communist Party

Last elections December 2002 to March 2003 (heavily controlled)

Next election before March 2008 (heavily controlled)

Sources: International Monetary Fund, International Financial Statistics; World Bank, World Development Indicators; United Nations Development Programme,

Human Development Report; National Bureau of Statistics of China, China Statistical Yearbook; Reproduced wit h t he kind permission of Dun & Bradstreet from

the company’s annual report on China published in July 2004



Insight Investment Management (Global) Limited is registered in England with No. 827982.

Registered office: 33 Old Broad Street, London EC2N 1HZ. Authorised and regulated in the UK by the Financial Services Authority

and a member of the Investment Management Association. Part of the HBOS Group.

Morley Fund Management is a business name of Morley Fund Management Limited, registered in England No. 1151805.

Registered Office: No. 1 Poultry, London EC2R 8EJ. Authorised and regulated in the UK by the Financial Services Authority and a

member of the Investment Management Association.

Morley Fund Management is also a business name of Morley Fund Management International Limited. Both are Aviva companies.

Contact us at Morley Fund Management, No. 1 Poultry, London EC2R 8EJ.

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