International Business Awareness

Macroeconomics
1027161
Joel van der Merwe

Investment Report: China

International Business Awareness

Macroeconomics
Table of Contents
Contents Pg no.
1. Introduction 2
2. PESTLE analysis 2
2.1. Political 2
2.2. Economic 3
2.3. Social 4
2.4. Technological 4
2.5. Legal 4
2.6. Environmental 5
3. Monetary and Fiscal policies 5
3.1. Fair trade
3.2. Tariffs
3.3. Duties
3.4. Quotas
3.5. Repatriating profits
4. International Trade Relations 5
4.1. Trade War
5. Conclusion and Recommendation 6
6. Works Cited 7

1
1. Introduction
China: the country with the second largest economy in the world in terms of GDP, not far behind
the US. China is located on the East coast of Asia, and is home to the largest national
population: 1.402 billion people.

China benefits from its huge population in that it has a large workforce as well as a large
market; both consumers and producers benefit from economies of scale. The low cost of
production and high profit margins has made China attractive to foreign direct investment. China
has a large coastal region and is home to seven of the ten largest container ports globally with a
fifth of GDP accounted for by its exports (World Shipping Council). It is no surprise that China
houses the largest number of exporters and manufacturers.

Since 1921 the Chinese Communist Party (CCP) has been in power. Despite its communist
regime, the country began to open up and reform its economy in 1978. Since then, China has
seen an average of 10% annual growth in GDP with more than 800 million people lifted from
poverty (Worldbank). In the same period of time China has managed to improve its people’s
access to health and education. China is now considered an upper-middle class economy.
Despite economic reform and its great strides forward on the global stage, the CCP has a dark
history of authoritarian governance. This is the political party who allowed Chairman Mao to out
do Stalin and Hitler, murdering an estimated 45 million people between 1958 and 1962 (Somin).
In the summer of 1989 when scores of thousands of students and workers protested for seven
weeks crying out for democracy and liberty the CCP let its military massacre and crush unarmed
protestors. Many protestors and leaders were executed and sentenced to prison (“Tiananmen
Square Massacre (1989)”). The CCP has since tried to wipe this horrific event from its history by
banning commemoration of it. Even in recent history the party continues to censor opposition;
as journalists reporting on the origins of the Wuhan virus suspiciously went missing (BBC
News).

This report will take a deeper look at the current investment climate of China and be written from
the perspective of a hypothetical foreign investment director considering a strategy of foreign
direct investment in China so as to answer the question, “Should my international company
pursue a strategy of foreign direct investment in China?”

2. PESTLE
A PESTLE analysis of China provides an impression of the external macroeconomic factors that
may affect business operations in this country.

2.1 Political

China is politically quite stable and is possibly one of the reasons why it attracts volumes of
Foreign Direct Investment (FDI) each year. Despite its stable political situation, the lack of

2
transparency in political affairs and want of political freedom is concerning not only from a
human rights perspective; the CCP is known for simply banning products or services if the party
deems it to be against the ideals of the government. Government regulations are a powerful
force which can result in limitations and even outright censorship. All businesses, companies
and foreign investors alike are required to comply with Chinese regulations. Even in private
enterprises, regulations call for CCP members to have influence in management and board
positions (Center for Strategic and International Studies).

Freedom of speech is technically in the Chinese constitution but in practice people are often
jailed for criticising the government (Buckley). This makes it extremely difficult for tech
companies to operate in China because of regulations surrounding foreign digital content;
Facebook, for example, is banned and Netflix simply decided to avoid the hassle (Tech in Asia).

China works hard in maintaining diplomatic relations, being a permanent member of the
UN security council and member of the WTO, APEC, BRICKS, BCIM, ASEAN Plus, and
G20. Despite its efforts in maintaining peaceful relations China does not have a perfect
relationship with all its stakeholders. Some examples include ongoing protests in Hong
Kong, the tension in the South China Sea (a territorial dispute), sanctions and heavy
tariffs by the US and China’s sanctions and tariffs on the US and Canada in retaliation.

The Trump administration weakened Chinese-American relations in its promise to

protect and keep America first. The communist system with its secretive policies and
censorship is what caused Trump to perceive China as a threat to freedom of speech
and national security. Biden’s administration, however, seems to be more cordial in its
approach to dealings with China (China Briefing).

(include the corruption thing) transparency.org

2.2 Economic

Just over 40 years ago, the Chinese economy, relatively isolated from the global economy, was
centrally controlled, poor and quite stagnant. Starting in 1979 the Chinese government started
implementing new policies that would reform the economy, opening up to foreign trade and
investment. The country has since been among the world’s fastest growing economies with
GDP growth averaging 9.5% in the last 40 years (Morrison). The Worldbank has described it
as “the fastest sustained expansion by a major economy in history.” Some analysts say
Chinese GDP may even soon pass the US.

The economic growth that China has enjoyed in the past four decades has lifted more
than 800 million out of poverty which created a large middle-class in China. China, with
its comparably cheap labour and large potential middle-class market is appealing for
FDI. The growth it has enjoyed, however, has come at the cost of environmental

3
damage, urbanisation and inequality which leaves the country open to scrutiny from
investors. These are challenges which will need to be addressed by China to ensure
sustained growth and to keep its competitive spot in global trade.

Some more critical analysts have a more pessimistic outlook about the future of the
Chinese economy. GDP growth is starting to slow down possibly because of an ageing
population (smaller working class), rising debt (inflation problems), and government
meddling. This is shown in that China had accounted for ⅓ of global GDP growth before
the pandemic while currently this figure is at ¼. These analysts say that China may
have seen its peak in growth.

2.3 Social

China has an impressively high literacy rate of 90% which is an indicator of an educated
population and a labour force with advanced skills. Most of the population has access to the
internet and analysts predict a surge in internet shopping. The average wages have increased
over the past years which has increased consumer spending.

The ageing population, however, is a concern for the people of China as their labour market is
shrinking and the dependent population is growing.

2.4 Technological

Statistics vary depending on the sources, but there are an estimated 450 to 914 million internet
users in China. Some of the largest tech giants, Tencent, Alibaba and Baidu are located in
China. The presence of these companies and heavy regulation makes penetrating this market
extremely challenging.

With its mass entrepreneurship and innovation programme launched in 2015, China set the
vision to be a global leader in science and technology. China is making an effort to inspire and
export innovation which would be beneficial to both its domestic market as well as foreign direct
investors.

China has made it clear that innovation is one of its top priorities in economic planning
with initiatives such as, “Made in China 2025.” This plan, announced in 2015 to improve
and modernise manufacturing in 10 key sectors through extensive government
assistance with the goal of China becoming a major global player in these sectors.
These measures raise concerns about China heading in the direction of becoming less
reliant on foreign technology while simultaneously aiming to dominate global markets
with its own technology (Morrison).

2.5 Legal

4
The legal environment in China is fairly tricky to navigate considering its heavily regulated
communist governance. There are laws which regulate business and employment practises
which cover issues such as labour standards, labour disputes, employee benefits and
remuneration. Since E-commerce in China is relatively new, legislation surrounding property
rights, consumer rights, tax policies etc. There is, for example, no law yet which validates the
online contract between a buyer and seller which could be a reason for lack of trust in
e-commerce.

More legal aspects are considered in other sections of this investment report.

2.6 Environmental

China’s rapid industrial growth has been cause for detrimental effects on the environment.
Accounting for slightly less than a third of global emissions, industrialisation has led to loss of
biodiversity, air and water pollution, industrial waste and deforestation. China is heavily
dependent on coal, and consumes more coal than the rest of the world combined (Goldstein).

Due to climate concerns and pressure groups, many industries in China are forced to spend
money on improving its environmental standards in production which may negatively affect profit
margins as production costs increase. This could be damaging for China’s attractive production
costs and weaken its economy.

China is technically still a developing nation which excludes it from many carbon taxes
giving it an advantage over other developed countries such as the U.S. (Benoit and Tu)

3. Monetary and Fiscal Policies

Chinese corporate income tax is comparatively quite low at a 25% rate and 15% for qualified
businesses which operate in industries encouraged by the Chinese government. Corporate tax
can be quite low, making China attractive for foreign direct investors but it requires complete
compliance to an authoritarian government.

Repatriation of profits is challenging.

4. International Trade Relations

Already touched upon in other parts of this report is China’s international trade relations.
Trade politics. High import duties. Many large brands struggle to enter the Chinese market.
China seems to work hard in maintaining diplomatic relationships on face value as mentioned in
the Political section of the PESTLE analysis, however, China’s goal is to “take centre stage in
the world,” as Xi announced in 2017 when saying that China has entered into a new era. In

5
2018 Xi even described China’s worsening relationship with the US as a “new Long March”
(Sullivan).

5. Conclusion and Recommendations

Fitch, Moody’s and S&P all affirm China’s A and A+ relationship with a stable outlook. It is
unlikely that China will fail economically in the near future or significantly lose its place as a
global power which makes it a stable location for FDI, however, the great concern for all foreign
direct investors is the authoritarian government to which one must comply if one is to be
profitable.

6
 Works Cited

BBC News. “Chen Qiushi: Chinese Journalist Missing since February ‘under

State Supervision.’” BBC News, 24 Sept. 2020,

www.bbc.com/news/world-asia-china-54277439.

Benoit, Philippe, and Kevin Tu. “Columbia | SIPA Center on Global Energy Policy

| Is China Still a Developing Country? And Why It Matters for Energy and

Climate.” Columbia,

www.energypolicy.columbia.edu/research/report/china-still-developing-country-an

d-why-it-matters-energy-and-climate. Accessed 9 Jan. 2022.

Buckley, Chris. “China Jails Rights Activist Outspoken on Tibet.” Reuters, 3 Apr.

2008, www.reuters.com/article/businessNews/idUSPEK10194620080403.

Center for Strategic and International Studies. “The New Challenge of

Communist Corporate Governance.” Center for Strategic and International

Studies, 15 Jan. 2021,

www.csis.org/analysis/new-challenge-communist-corporate-governance.

Channel News Asia. “US vs. China ‘Digital Iron Curtain.’” CNA, Channel News

Asia, 7 Nov. 2020,

www.channelnewsasia.com/watch/us-vs-china-digital-iron-curtain-1493706.

China Briefing. “US-China Relations in the Biden-Era: A Timeline.” China Briefing

News, 29 Dec. 2021,

www.china-briefing.com/news/us-china-relations-in-the-biden-era-a-timeline.

CNBC International. “Is China’s Growth Story Over? | CNBC Explains.” YouTube,

14 Sept. 2018, www.youtube.com/watch?v=aHSWQp_-xVA&feature=youtu.be.

7
Goldstein, Lorrie. “GOLDSTEIN: Why China Makes Trudeau’s Carbon Tax

Irrelevant.” Torontosun, 1 Aug. 2021,

torontosun.com/opinion/columnists/goldstein-why-china-makes-trudeaus-carbon-

tax-irrelevant.

Kobayashi, Shigeo, et al. “The ‘Three Reforms’ in China: Progress and Outlook.”

Japan Research Institute, Sakura Institute of Research, Inc., Sept. 1999,

www.jri.co.jp/english/periodical/rim/1999/RIMe199904threereforms.

Morrison, Wayne M. “China’s Economic Rise: History, Trends, Challenges, and

Implications for the United States.” CRS Reports, Congressional Research

Service, 25 June 2019, www.everycrsreport.com/reports/RL33534.html.

Somin, Ilya. “Remembering the Biggest Mass Murder in the History of the World.”

Washington Post, 3 Aug. 2016,

www.washingtonpost.com/news/volokh-conspiracy/wp/2016/08/03/giving-historys

-greatest-mass-murderer-his-due.

Sullivan, Jake Hal Brands. “China Has Two Paths To Global Domination.”

Carnegie Endowment for International Peace, 22 May 2020,

carnegieendowment.org/2020/05/22/china-has-two-paths-to-global-domination-p

ub-81908.

Tech in Asia. “Tech in Asia - Connecting Asia’s Startup Ecosystem.” Tech in Asia,

www.techinasia.com/netflix-china-nope. Accessed 5 Jan. 2022.

“Tiananmen Square Massacre (1989).” YouTube, 19 July 2019,

www.youtube.com/watch?v=tRnW1Xs7asM.

8
Transparency International. “Corruption Perceptions Index 2020 for China.”

Transparency.Org, www.transparency.org/en/cpi/2020/index/chn. Accessed 5

Jan. 2022.

World Shipping Council. “Top 50 Ports.” World Shipping Council,

www.worldshipping.org/top-50-ports. Accessed 5 Jan. 2022.

Worldbank. “Overview.” World Bank, 12 Oct. 2021,

www.worldbank.org/en/country/china/overview#1.