Business Environment in China - Research Paper Example

Running head: Business Environment Business Environment s China had been protective in openingits trading and distribution services sector. Prior to December 11th, 2004, when the 3-year transition period lapsed, foreign investors wanting their own distribution vehicles in China had to resort to trading companies established in free trade zones, minority-owned joint ventures, or China investment holding companies (for some 250 investors who are big enough to afford them). None of these structures were able to serve the full needs of foreign investors, due to restrictions imposed on geographical presence, source of products, import/export rights, business scope limitation etc. A significant breakthrough came when the Ministry of Commerce ("MOFCOM") issued its Administrative Measure for Foreign Investment in the Commercial Sector ("the New Measure"), commonly referred to as Circular 8. Circular 8 enables a foreign investor to establish a wholly-owned company anywhere in China, with full-fledged trading and distribution rights for as little capital as USD 60,000. The key barriers mentioned above have also been removed, and there is no longer a distinction made between foreign and domestic trade. As a result, companies are no longer required to segment their marketing efforts and can present a single, coherent "face" to the marketplace (Cassie Wong). Ever since China gained membership to the World Trade Organization (WTO), there has been increasing interest from foreign investors in the commercial possibilities that the country offers. The Banking industry of a country plays an important role in the economic well being of that country. The Chinese Banking industry is also effectively serving the purpose of supporting the process of economic growth in China. With the GDP growth rate of approximately 10% an year the assets of the Banking sector in China is also multiplying. Table 1. China's Annual Average Real GDP Growth Rates: 1991.2000 Year GDP* (billion Yuan) GDP growth rate** % Banking Assets* (billion Yuan) Banking assets growth rate* % 1991 2161.8 9.2 2397.3 31.6 1992 2663.8 14.2 2910.1 21.4 1993 3463.4 13.5 3705.6 27.3 1994 4675.9 12.6 4926.5 32.9 1995 5847.8 10.5 6262.9 27.1 1996 6788.4 9.6 7697.1 22.9 1997 7446.2 8.8 9418.2 22.4 1998 7939.6 7.8 11042.1 17.2 1999 8205.4 7.1 12323.1 11.6 2000 8900.0 8.0 13143.4 6.7 Source: China Statistical Yearbook, Almanac of China's Finance and Banking. *Data in value terms in these columns are calculated at current prices. ** The indices in this column are calculated at comparable prices Total FDI in China, 1990-2004 ($ billions) The country launched its open door policy 26 years ago. Since the policy introduction the FDI flows in the country received a quick response. In 2004 China was at no.2nd position in the world of FDI with $64 billion. The Chinese FDI trends can be examined in two phases. First phase: 1979-82 Second phase: 1984-91 Third phase: 1992-99 In the first phase the government establish for special zones with incentive policies. Although there was a high inflow into those regions, the total FDI flow reached US $ 1.8 billion. In the second phase the provinces were opened and recorded US $ 10.3 billion. In 1989 however the trend dropped. In the third phase Deny Xiaoping opened China for overall economic reform. The phase was very fruitful for China. The government introduced new policies and market oriented economic reform. In result of these reforms the FDI's started flowing into the Chinese economy at rocket speed. In November 1999 US-China had an agreement regarding the WTO, according to which many new reforms were made (Sandra, 2001) those included. The sectors relating to the distribution services will be opened for repair and maintenance and China will phase in trading rights and distribution services over three years. The Government for the investment opened the telecommunication industry of China. The professionals were also allowed access to the service markets of China. The services included according, consulting, Information Technology and Engineering (Lardy, 2000). FDI in China rose to a peak level of US $ 45463 million in 1998. China entered the market timidly; a small nibble at the market but grew into a solid business. China flooded Europe with low cost shirts, pants, underwear, socks and shoes. Ultra-cheap clothes, welcomed by consumers and retailers, undermine the fashion manufacturers, already challenged by the arrival of fast-fashion chains such as H&M and Zara, whose products are often made in the Far East. As Li Edelkoort, the respected fashion forecaster, warns, the Chinese whirlwind will flatten the fashion world as we know it and change radically its familiar landscape. "Everyone is putting eggs in one basket - China - and that is potentially devastating for our cultural heritage." (Menkes, 2005) Most of the fakes come from China or other Asian countries with the low labour costs and no concern for social services, welfare and pollution control. Chinese products are dirty cheap. They underestimate the products to the level of prices for food. Some do not see a disaster in this situation. What Italian companies need is to be flexible, creative, and innovative. Their weapons are professional knowledge and a great sense in luxury. On the other hand China can be viewed as consumer. For example, such luxury companies such as Ermenegildo Zegna or Salvatore Ferragamo have already entered the market and gained brand recognition. China will remain an opportunity for many other brands, as the Chinese consumers are capable of understanding the value of these products. This is an opinion of Ferruccio Ferragamo, the company's chief executive. Still there's one more aspect to regard China as opportunity. China can be viewed as an outsourcing base. For example, Celine, a unit of luxury goods giant LVMH Moet Hennessy Louis Vuitton SA, is manufacturing some handbags in China, including its denim-and-leather Macadam bags, which sell for $500. (Greeks turn to Chinese) A lot of companies have long outsourced to China and China is for this reasons a big opportunity. The labour costs are much lower while in Italy only 8,000 is needed to establish a company. However, the problem is quality. The opportunity is only if Chinese play a fair game. More control is needed. Gucci once made some of its sneakers in China but was not satisfied with the quality. (Greeks turn to Chinese) Smaller companies as the production base can use China. However luxury companies can lose credibility putting the tags with "Made in China." There're two opposing views as to the future perspectives of fashion companies in Europe. Li Edelkoort believes that already the downward price spiral is leading to disaster. Europe will abandon a centuries-old heritage and the industry will end up with bland clothing, limited varieties of textiles and basic prints. Raffaello Napoleone is more positive believing that in the future there will be a sole and dominant culture. "We will be confronted with different strong cultures which will stay in competition, everyone with its own prevailing identity." (Menkes, 2005) European firms need to continue restructuring for the new textile world, where they must focus on quality and innovation, their only competitive advantages over China. China as an Opportunity: Andrew Tsuei, global procurement chief for Wal-Mart, recently told the Washington Post, "The overall balance of quality, reliability and price makes China probably the most competitive market in the world." (Finding opportunity in post quota textile world). The output of main products is ranked the first in the world and the export of the whole industry is still far ahead of other industries. In 1999, the export of textile and clothing began to recover from the after-math of the financial crisis in Southeast Asia. The domestic market became prosperous again and the reform in state-owned enterprises made significant headway. Along with China's fastened step toward the entry of WTO, China textile industry is marching toward a brand new development period. (Textile Industry in China Overview, 2005) Foreign trade in China is almost completely dominated by the state. In 1979, China relaxed certain trade restrictions, paving the way for increases in the relatively small foreign investment and trade activity. By the late 1980s, yearly exports totalled about $41.1 billion and imports $46.4 billion, and both have increased sharply since then. China has been undergoing a dramatic transformation to a market economy. As a result, it currently is the world leader in terms of economic growth, industrial expansion, and exports. It contains an array of potential consumers that far exceeds the markets in Europe or the Western Hemisphere, and it is rapidly emerging as a new epicentre for industry, commerce, and finance. In addition, the so-called "greater China" has substantial amounts of technology and manufacturing capability, outstanding entrepreneurial, marketing, and services acumen in Hong Kong, a fine communications network and a tremendous pool of financial. When these resources are combined with the very large endowment of land, resources, and labour on the mainland, China already is a major superpower in the global economy. References Wong, Cassie, "Accessing the Domestic Chinese Market: An Insider's Perspective", PriceWaterHouse Coopers, Global Read More