Analysis of the Chinese Economy - Example

INVESTMENT REPORT FOR SENIOR MANAGEMENT OF PAG Introduction This present paper is an investment report that is prepared for use by the senior management of Protector & Guud Limited (PAG), which is a British multinational company dealing with well-known branded domestic cleaning products, bathroom cleaners, kitchen cleaners, toiletries, soap, and deodorants. PAG currently operates in the United Kingdom and North America and it is exploiting the option of venturing into China. Therefore, this present report will offer insights into China’s political and business culture, which may pose challenges to the company’s ambition of venturing into China. In addition, this present report will analyse the dynamics of the Chinese economy to establish the viability of the new market in relation to the business model of PAG. Lastly, pending on the findings of the analysis, the report will suggest the best mode of entry that PAG can use to venture into the Chinese market. Analysis of the Chinese economy China’s background study According to Sang (2006), the People ’s Republic of China is located in East Asia, it has a staggering population of more than a billion people making it the world’s most populous nation, and consequently, it is ranked as the second largest nation in the World in terms of land area it covers. In reference to the writings by Selden (1979), it is noted that China was able to witness tremendous economic transformation in terms of improved performance after the implementation of the 1978 economic reforms, which transformed some of its communist economic practices. Because of these economic reforms, the Chinese economy has been growing steadily over the past decades and it has become to be known as one of fastest growing economy in the World, and this has placed it as position two in terms of the world largest economy in terms of purchasing power parity and gross domestic product (Farah, 2006). Rein (2012) further stated that China is ranked second in terms of World’s largest importers and equally it is the largest exporter in the World. On the political aspect, Jacques (2009) lamented that China has not opened up its political space and it still practices some form of dictatorship, which can be substantiated by the country’s controlled environment that is characterised by a single political party known as Communist Party of China. Lastly, Inch (2012) and Bergsten et al. (2006) have noted separate that China that presently China can be termed as a potential superpower mainly because of its financial and military capabilities or strengths. Quantitative data analysis According to the statistics documented by IMF (2012), it is stated that in the year 2012, China witnessed a real gross domestic product of US$6.094trillion which was an improvement compared to the previous year. The reports further stated that the projections of 2013 showed that China is bound to experience a slight growth of the real domestic product, meaning that the real GDP would stand at more than US$8 trillion in the year 2013. In comparison to the statistics released by the OECD (2012) it is projected that China’s real GDP growth would continue till the year 2014 when it is bound to be even higher than 2012 and 2013 figures, however, the real GDP is projected to decline in the year 2015 to stand at 7%. In terms of inflation, the IMF (2012) report indicated that the 2012 inflation stood at 2.6%, which was a big drop, compared to the 2011 figure. As for the future projections, the IMF report projected that China inflation will further decline to 2.2% in the 2013. The World Bank (2012) forecast for China shows that China inflation is bound to rise again starting from 2014 where it is expected to rise up to 2.9% through to 2015 where it is expected to stand at 3.4%. According to China’s National Audit Office, the country had a national debt of 43.5% in both 2010 and 2011. However, statistics released by the IMF (2012) showed that the country had a 25.8% public debt in 2011, which was a percentage of the country’s annual gross domestic product. It is important to note that the debt is made up of the central government debt and the local government debt but it excludes the country’s non-performing loans, policy bank bonds, China Asset Management Company debt, and Ministry of Railway debt. China’s economic challenges In their studies, Sanderson and Forsythe (2013) noted that despite the fact that China has witnessed rapid growth in the past thirty year it is currently undergoing a restructuring process that is posed to bring about several economic challenges that are likely to affect the operations of PAG in the country. One of the main economic challenges is slowdown in economic growth currently being witnessed, which will create a situation whereby companies will incur many losses. Secondly, as it was noted above the forecast shows that China inflation is bound to increase in the long-term meaning that PAG is likely to experience increased cost of production and prices of its products in China, which might lower the demand of the products thereby making the investment in China unprofitable. Thirdly, China faces increased pressure for raw materials and energy from its various industries, and equally the company is faced with immense pressure to reduce its carbon emissions. The existence of this problem means that PAG will experience problems in obtaining raw materials as well as energy and this is likely to increase their cost of operations. PAG mode of entry into China In terms of venturing into the Chinese market, it is noted that there a various modes of entry that PAG can pursue and these modes of entry include making direct foreign investment in China. Others are forming a joint venture with an already established company in China, export directly finished products from their UK plants to China, or license production to a Chinese company. Under the option of undertaking a direct foreign investment in China, PAG will be required to register the company at China’s Company Registrar Office, acquire land for construction of its manufacturing plant, or lease an already available space. Thirdly, PAG will be required purchase machinery, recruit staff for the new plant, and afterwards carry out intense marketing campaigns. The FDI option will be costly, time consuming and it will involve many logistics, which makes the option not a viable choice. Under the option of exporting from its UK branch, it is noted that this option will lead to an increase in the cost of the company’s products since exporting finished products will incur extra cost of transportation and export licensing. The license production mode of entry is not a viable option because PAG will not only seek to produce in China but it will also seek to sell in China and this would mean that ones the products are manufactured, PAG will again have to the service of another company to sell the products. Moreover, through license production PAG will lose the exclusive preference of producing where it sells. Therefore, the company will enter into China using the joint venture option. This option is much cheaper than foreign direct investment and it does not involve many formalities. Secondly, this option is viable because it will allow PAG to be in-charge of the production process and the marketing or selling of its products in China (Lynch, 1989). Political and cultural risks in China One of the main political risks in China that is likely to affect the business of PAG in the country is the risk associated with resistance to market reforms by China’s political risk. The resistance to reforms means that the political class is striving to revert the country’s economy to communism practices that were evident before economic reforms were implemented in the 1970s. By reintroducing communism practices to the Chinese economy it means that, China will experience even slower economic growth and Chinese companies will face greatly difficulties in participating in the international business environment (Suisheng, 2000). In regards to cultural risk, PAG will encounter problems in dealing with their partner in the joint venture because of cultural difference that exist between the Chinese and British people. The cultural differences will create problems in communication within the company and secondly, the joint partners will experience problems arising from their different negotiations styles (Meng, 2011). Conclusion From the background information, it can be stated that China has witnessed tremendous economic growth over the past decades, which is attributed to the economic reforms that were instituted in 1978 by the then government that was lead by Deng Xiaoping (Selden, 1979). However, the current projections shows that in the near future China is set to witness a slow pace of economic growth, the inflation rate is set to increase and the cost of doing business is likely to increase due to the increase pressure on the country’s limited raw materials and energy. Despite of this fact, this present study would still encourage PAG to venture into the Chinese market mainly because of the massive population, which provides a wide market for the company’s products. Secondly, by venturing through a joint venture, PAG will not face many hurdles and even the cost will be low as compared to other modes of entry (Perez, 2011). References Bergsten, C. Gill, B. Lardy, R. and Mitchell, D. (2006). China: The Balance Sheet: What the World Needs to Know about the Emerging Superpower. Public Affairs Farah, P. (2006). Five Years of China’s WTO Membership. EU and US Perspectives on China’s Compliance with Transparency Commitments and the Transitional Review Mechanism, Legal Issues of Economic Integration, Kluwer Law International, Volume 33, Number 3, pp. 263–304, International Monetary Fund. (2012). Economic Issue 8- Why China is Growing So Fast? Retrieved from: http://www.imf.org/external/pubs/ft/issues8/ Accessed on [5.01.2013] Inch, J. (2012). Chinas Economic Supertrends: How China is Changing from the Inside Out to Become the Worlds Next Economic Superpower. InChina Publishing Jacques, M. (2009). When China Rules the World: The End of the Western World and the Birth of a New Global Order, Penguin Books Lynch, R. (1989).The Practical Guide to Joint Ventures and Corporate Alliances: How to Form, How to Organize, How to Operate. U.S: Wiley Publishers Perez, J. (2011). The Definitive Guide to Joint Ventures. Retrieved from: www. OvernightGuides.com Accessed on [5.01.2013] Rein, S. (2012). The End of Cheap China: Economic and Cultural Trends that Will Disrupt the World. U.S: Wiley Publishers Meng, F. (2011). Phenomenon of Chinese Culture at the Turn of the 21st century. Singapore: Silkroad Press. Organisation for Economic Co-operation and Development (OECD). (2012). OECD Statistical Profile of China. Retrieved from, http://www.oecd.org/. Accessed on [5.01.2013] Sang, Y. (2006). China Candid: The People on the Peoples Republic. University of California Press. Sanderson, H. and Forsythe, M. (2013). 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