Analysis of Commonwealth Banks Foreign Direct Investment in China - Case Study Example

Report of an Analysis of Commonwealth Bank’s foreign direct investment in China Executive Summary China is today being regarded as the fastest developing economy in the world. This particular fate can be attributed to various factors such as foreign policies, macroeconomic stability, political stability, and sound education policies among others. The country’s economy has been growing at an annual rate of approximately 10% over the last two decades, and as a result, the gap between the rich and the poor has considerably narrowed down whereby a new breed of middle class has emerged. China itself is the most populated country in the world with approximately 1.3 billion people, and with the new middle class, there is a huge market opportunity. It is this new market opportunity that has attracted foreign companies such as Commonwealth bank into venturing into the country so that they can claim lucrative slice of Chinese banking market (Kao et al, 2008, 615). However, the current Commonwealth Bank of Australia that has been operating in the Chinese market for the past decade is now being faced with new series of challenges. To begin with, more and more companies are now venturing into the Chinese market, and these organizations are now beginning to eat into the banks market share. Secondly the global financial crisis coupled with Euro zone debt crisis may affect the banks profit outlook because there will be less spending power overseas, and as we all know that China is already a net exporter of luxury goods such as electronics. Last but not least, there are looming major political announcements set to be announced in China and no one exactly knows how these will affect foreign company operations (Liao, 2009, p.44). It is in respect of the above that we deemed it necessary to conduct a country analysis and provide recommendations to the CBA executive management. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Environmental Indicators 4 Economic, Political, and Legal Systems 5 Infrastructure 6 Demographics 7 Overall Assessment 8 Recommendations 8 References 10 Introduction The Commonwealth bank of Australia commenced their operations in China way back in 1994 when the Beijing representative office in China provided liaison point for the bank that helped to nurture strong and valuable relationship with the Chinese government in collaboration with Hangzhou Bank of China and Bank of communications. Immediately after we opened doors to our first branch in Shanghai, we continuously focused on expanding our business in China and progressively searching for new opportunities. Current Chinese business environment is very lucrative. This particular position can be attributed from various economic aspects such as infrastructure spending, consumer power, and economic growth rate among others. This report is to analyze China’s business environment which highly influence CBA’s future in China. Secondly, reaching an overview and forecast towards CBA’s operation in China. Lastly, provide some useful recommendations towards the related problems and risks. Environmental Indicators According to Sullivan (2002) when a company is planning to expand internationally, it is crucial for the organization to begin by conducting a country and market analysis as well as an internal SWOT analysis. However, it is advisable to start with the internal country analysis mainly because countries that are known for high risks and poor infrastructures are poor candidates for any business activity regardless of the market potential. In a real case scenario, country analysis should encompass three main categories which are: Economic, political and legal conditions- This basically includes the business climate, general economic conditions, currency fluctuations, as well as ethics, government laws and policies. In our particular case we will assess how the above named conditions are likely to affect the future outlook of CBA, and this is going to be achieved by dwelling in on political and regulatory system, anti-competitive behaviors, and monetary policy. Infrastructure analysis- this mainly focuses on factors that support economic and business climate, and in evaluating the Chinese infrastructure the report will dwell on economic and social aspects, and how they are likely to trigger CBA long term operations in China. Managing and culture – even if a certain country boasts of the best economic and legal environment with top grade infrastructural systems, certain foreign culture are unacceptable within a globalized business environment. CBA has to evaluate if the Chinese culture are favorable for the long term operations in the country. Economic, Political, and Legal Systems Economics Over the past one and a half decade the Chinese government has increasingly opened up their market to external investors by crafting laws and regulations that harmonize World Trade Organization (WTO) guidelines, and as a result, this has really encouraged Foreign Direct Investment (FDI) inflows in the country (Pigott, 2002, p.152). When there are increased FDI inflows in the country, there is increased banking activity, the economy is growing, more people have money in their pockets, and can spend more. This in return will provide an opportunity for CBA to roll out new banking products and also issue loans and mortgages to the new middle class. One notable risk is that the Chinese Communist and social philosophy continues to be at the core of Chinese culture, and such systems may impact negatively with the present political/legal environment hence inhibit future FDI inflows. There is also some discontent with the Chinese poor and interior provinces, and certain foreign companies may even be barred from venturing into such marginalized areas. This may affect CBA activity because they will be marginalized form accessing certain key areas. Legal Systems However, lately the Chinese government has taken necessary steps in order to enforce a strict legal system, support free commerce, and embrace the global marketplace. For instance, the people’s republic of China manages to pass the Sino Foreign Equity Joint Venture Law in 1979, and this particular legal documentation was the first step by the Chinese government to nurture a legal structure that governed FDI (Rosen, Rozelle, & Huang, 2008, p.14). With proper legal procedures in the country, organizations assets are safeguarded in terms of any investments are guarded by the rule of law. For instance, it becomes possible for institutions such as CBA to recover assets such as non-performing loans and defaults. Politics In addition there have been laudable moves in relation towards political liberalization. Today in China open contested elections are now held at the village and town levels, and legislators likewise have also begin to show some signs of assertiveness. However, the ruling party largely retains the most effective control over government appointments. In addition, Chinese level of public support and management of the nation is one of the highest in the world, with 86% of the citizens expressing satisfaction with their country’s economy (Jiang, 2004, p.147). The country also boasts of a relatively stable political climates, and thus investors are more likely to keep on investing, this provides some avenue to grow the asset base because CBA does not need to get worried that their business will soon get eroded because of cheap politics. Foreign Exchange reserve In 1978 the country’s foreign exchange reserves were minimal at approximately $17.4 billion. Come 2001, the country joined the World Trade Organization (WTO) and this rapidly contributed towards imports and expanded exports, and as a result, FDI inflows surpassed $60 billion mark in 2006. Come 2008, the country’s foreign reserves totaled $1.9 trillion (Adams, Gangnes, & Shachmurove, 2004, p34). This ensures that there is economic stability against major currencies and that the country’s overall economy does not shrink easily, and at the same time the country can maintain its international competitiveness. With this, institutions such as CBA rest assured that they can now even begin to implement their medium to long term plans. Infrastructure In 2012 the Chinese government gave out a green light for 60 infrastructure projects that totaled a whooping $150 billion (this is roughly a quarter of the stimulus package released in response to the global financial crisis) signaling Beijing’s government latest attempt to bolster economic growth. These funds are set to be channeled to wards gas related infrastructure because the Chinese government is focused on re-aligning the energy mix away from the coal and towards gas. The government will therefore invest in gas distribution infrastructure, Liquefied Natural Gas terminals, and gas fired plants. With these funds the government is also considering to build 82 new airports and refurbish and refurbish some 101 old airports by 2015 taking the number of airports in china alone at around 230 (Cornelius, 2003, p.115). Chinese people’s level of living standard do matter our future in China. It will attract more attentions on the whole financial industry. Secondly, the improving infrastructure will reduce our labor cost in China. For instance, Chinese people start to use phone banking instead of unnecessary human-based service. With the right infrastructure in place, it is very easy to conduct business and this implies that CBA will not incur lots of expenses that are related to logistics purposes. Demographics According to National Census 2010 china’s population is approximately 1,338, 612, 968. Approximately 21% of the population 145,461,833 males; 128,445,739 females) were 14 years old or younger, 71% (482,439,115 males; 455,960,489 females) were between 15 and 64 years old, and 8% (48,562,635 males; 53,103,902 females) were over 65 years old (Luiz, p.64, 2010). Recently, we opened 5 country banks in Henan Province of China which is a good explanation to answer why Demographic is so important. As the one of the three major rice-producing area in China, Henan plays an significant role in developing country banks. Our targets are the small-median agricultural enterprises which need specific financial products from foreign institutions instead of local one. Overall Assessment China as a country is rapidly growing, and it is even anticipated that by 2025, Chinese economy would have overtaken the US economy in terms of GDP. This particular growth will be driven by companies that operate within the Chinese market regardless of whether they are foreign or locally based. Each sector in the country is poised to grow considerably and the banking industry is not an exception. More and more people are set to open new bank accounts, peasant farmers operating in rural provinces are also expected to open up bank account and accept mainstream banking as the new form to conduct financial transactions. The young population who are just clearing school, expects to get into the job market, and take personal loans for motor vehicles, furnishing their homes, or even mortgages. With heightened economic activities, more companies are also expected to venture into the Chinese market which is expected to provide opportunities for premium business services and retail banking as a service. With such opportunities, CBA is likely to reap because each year there are approximately over 50 million Chinese getting into the job market, and these individuals approximately 90% are of the middle class status which means they would readily accept some form of financing either to buy a vehicle, furnish the home, take a wedding, or even get a mortgage. This clearly demonstrates that there is clear opportunity for CBA both in the short and the long term. Recommendations In the business world today, the Chinese economy plays a very vital role in our globalized economy. China is home to approximatelty1.3 billion people, and its economy has steadily grown with a double digit for the last 2 decades. The country’s foreseeable financial future is very bright and its newly crowned middle class citizens desire a standard of living similar to their western counterparts. Due to this multinational companies such as commonwealth bank are jostling each other for a piece of the market share. It is evident that foreign brands have entered into the Chinese market and established themselves successfully. Various items such as electronics, personal care products, automobiles, fashion labels, and Iconic service companies have successfully ventured into the Chinese market and bolstered their brand name. However, each brand must be customized according to the Chinese rich cultures and traditions. For instance, fast food outlets such as KFC, Pizza Hut, and McDonalds have done so well in China but their menus have been altered a little bit to reflect the country’s palate. It is therefore advisable for commonwealth bank to study the peculiarities related to the Chinese market, and companies that are operating in China must compete in various categories such as brand name, quality of products. However, it is also vital to understand that success in china as a foreign company is not 100% assured, and this success is only a reserve for companies that do their homework properly. Research and preparation are vital pre-requisites in entering or continuing to operate in any market and China is not an exception. Commonwealth bank has to evaluate different macroeconomic factors that are already glittering in China, and it is now up to the bank to prepare itself for a challenge because there is the market potential for 1.3 billion people who are encouraged by a favorable macroeconomic climate and relatively stable political environment (Bulis & Skapar, 2012). References China Business Review (CBR) 2013, US Companies Report Views of China Business Environment, retrieved 27th January 2012 fromhttps://www.chinabusinessreview.com/public/1011/business-environment.html Aldis Bulis, Robert Skapars 2012, Competitiveness of European Companies in China: A SWOT Analysis. International Journal of Economics and Finance Studies, Retrieved 27th January 2012 fromhttp://www.sobiad.org/eJOURNALS/journal_IJEF/archieves/2012_no_2_new/aldis_bulis.pdf Kao, Chiang, Wann-Yih Wu, Wen-Jen Hsieh, Tai-Yue Wang, Chinho Lin, Liang- Hsuan Chen (2008), “Measuring the national competitiveness of Southeast Asian countries”, European Journal of Operational Research, Vol.187, No.2, pp. 613- 628. Carl J. Dahlman, Douglas Zhihua Zeng, Shuilin Wang 2007, Enhancing China’s competitiveness Through Lifelong Learning. WBI development studies, illustrated edition, World Bank Publications. Daniel H. Rosen, Scot Rozelle, Jikun Huang 2004, Roots of competitiveness: China’s evolving agriculture interests, volume 72 of policy analysis in international economics. Published by institute for International Economics originally from University of California. Chun Liao 2009, the Governance Structures of Chinese Firms: Innovation, Competitiveness, and Growth in a Dual Economy. 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