BBG3103 : ITERATIOAL STUDIES

By Zahayu Jamaludin (770209-01-5360)

1
OPEN UNIVERSITY
MALAYSIA

FACULTY OF BUSIESS AD MAAGEMET


BBG3103

ITERATIOAL BUSIESS



Opportunities and risks faced by International Business Firm when
entering or investing in a foreign country
Case study : The Peoples Republic of China




Name : ZAHAYU BINTI JAMALUDIN

Metric number : 770209015360001

NRIC : 770209-01-5360

Telephone number : 013-2600611

E-mail address : ellyssa9@oum.edu.my




Tutors name: LEE KIM LIAN

Learning Centre: Serdang Raya, Selangor


May 2011 Semester

BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

2

1.0 Introduction

Since the People's Republic of China was established in 1949, China's economy has been
relatively rapid growing. Especially since the reform and open door policy was carried out in
1978, China's economy continued to thrive and healthy at the speed of over 9% annually. In
2003, China's Gross Domestic Product of 140 billion U.S. dollars, the total economy behind
the United States, Japan, Germany, Britain and France, ranked sixth in the world. Until late
2003, China's per capita GDP has more than 1000 U.S. dollars.

Current, the investment and consumption in China is very good. In 2003, investments
throughout China's fixed assets of 550 billion Yuan Renminbi. Total retail sales of consumer
goods recorded almost the whole of society Yuan Renminbi 460 billion. Total foreign trade
amounted to more than 85 billion U.S. dollars, more than Britain and Ferancis and just
behind the United States, Germany and Japan, ranked fourth in the world. As of late 2005,
China's foreign currency reserves had exceeded 40 billion U.S. dollars, just behind Japan and
ranked second in the world

Through implementation of reform and open door policy and modernization development for
over 20 years, China has basically completed the transformation of economic planning to a
market economy of socialism; a socialism market economy system was established and
perfected step by step. Consequently, the rules and laws of China also executed directly, the
standard open door day at the market becoming increasingly large and the investment climate
continued to improve, reform the financial system grew steadily, all it has provided
guarantees to secure the economic development of China.

As at today, Chinas economy is in a very good condition. Chinas economy remains a strong
economic growth with low inflation. It is estimated that the annual growth rate of Chinas
economy may remain as high as 9% and the inflation rate remain moderate Along with the
deepening of process of economic reform and opening up from year to year.

BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

3
2.0 Environmental Scanning Analysis on China

Refer to BusinessDictionary.com, an environmental scan is the vigilant monitoring and
evaluation of a firms external and internal environments for detecting early signs of
opportunities and threats that may influence current and future plans
(BusinessDictionary.com, 2011).
In strategic planning, an environmental scan can help an organization increase understanding
of the internal and external environmental factors that are required to reach the long-term
goals of the company. Also, to examine the competitive advantages and strategies used by
these organizations, as well as sustaining value in an increasingly competitive market
through creative strategic business plans. Another area being explored is the measurement
guidelines used to substantiate the strategic effectiveness for these organizations and the
effectiveness of these measurement guidelines.

2.1 Internal and External Environments
The whole process can be seen as beneficial knowledge for managers wishing to increase the
long-term efficiency and develop strategic plans for the business. An organizations
environment can be broken into two separate divisions. First, the internal environment which
is generally compiled of the factors or elements directly involved within the company. This
would basically include the managers, employees, stakeholders, and especially the corporate
culture of an organization. The external environment includes factors that are out of the
organizations control. Some of these factors include political, economical, sociological,
technological, ecological, and legal factors.

2.2 Environmental Scanning
Environmental scanning is related to population, demography and economy. The
communitys population is impacted by what is happening regionally, provincially,
nationally and globally. To truly understand community population you will have to build a
population picture for your community. This picture consists of:
BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

4
a) Global population trends
b) National population trends and immigration policy
c) Provincial populations trends and immigration policy
d) Local and regional population trends

An internal environmental scan can help distinguish the companys internal assets and
requirements.

3.0 Strength and weakness on Chinas foreign exchange system.
When people talk about convertibility, they normally think that China is one of the few
countries still with strict capital control. But if we go into this issue in more detail, we will
find that at present Chinas capital account is partially convertible. When evaluating the
extension of Chinas capital account opening-up, some international organizations, conclude
that the China has become convertible to a substantial extent for capital account transactions.
In conclusion, China is already on its way to capital account convertibility.

3.1 First of all, Foreign Direct Investment (FDI) flows are encouraged. The only measure
applied is authenticity test. The priority area for FDI has enlarged from manufacturing
sector to high technology and infrastructures. At present, China fulfils its commitment
to access to World Trade Organisation (WTO), foreign investments are also allowed in
financial services, insurance, securities and other specialist service areas. In the future,
China support the foreign investors to take part in the restructuring and reform of state-
owned enterprises and commercial banks by way of merger and acquisition.

3.2 Secondly, portfolio investment liberalization has been conducted in a cautious manner
in order to stay away from associated shocks. Foreign investors are allowed to invest in
B-shares and foreign currency-denominated bonds issued domestically and H-shares
and N-shares issued on overseas markets except for RMB (currency for China)-
denominated equities and bonds on the domestic markets. According to the WTO
BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

5
commitments, there is possibility to set up Chinese and foreign joint venture securities
companies. However, their trading activities are limited to primary market
underwriting and fiduciary trading on the secondary market. In addition, priority
trading is not allowed.

3.3 Thirdly, external debts are strictly controlled and China is working towards centralized
administration on foreign debts. Short-term foreign debts are monitored by their
outstanding amounts whereas medium and long-tem foreign debts are controlled by the
pre-determined quota. The borrowers are also subject to qualification examination. In
principal, international borrowings of domestic enterprises are subject to permission
from the administrative agencies and have to be carried out through qualified financial
institutions. The exceptions are that foreign-invested enterprises have the discretion to
borrow internationally to make up the difference between their registered capital and
paid-in capital. The international borrowings of foreign banks and short-term trade
finance within three months have been included in the foreign debt statistics.

3.4 The China government does not like to emphasize equality when it began to develop its
economy, but it emphasizes the increase in personal income level and ability to make
purchases and to create new management systems to improve productivity. The
government also focused to international trade as one way to improve the economy,
thereby creating more than 2,000 Special Economic Zone (SEZ) where the law
governing investment have been relaxed to attract foreign investors. Economic
development of the country is said to be the fastest in the world, with growth reaching
8% each year according to government statistics. This makes it a major focus of the
world today with almost all countries, including Western countries criticize China,
wanted to establish trade relations with it. China is now the World Trade Organization
(WTO).

3.5 Mainland China gained a reputation as a low cost to carry out manufacturing activities,
and the absence of the guild is very attractive to managers of foreign companies. An
employee with no skills at a Chinese factory in the village at the lowest cost less than
BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

6
U.S. $ 1/hour, is less than U.S. $ / hour in the United States. Chinese workers are often
forced to work in hazardous areas and severe easily suppressed the employer because
there is no law and trade union that protects their rights.

3.6 Low cost of raw materials is another aspect of the Chinese economy. This is because
the competitive environment that causes excessive results, which also reduce the cost
of purchasing raw materials. There is also the existence of price controls and
guarantees the remaining resources of the old economic system based on the Soviet
Union. As the nation continues to privatize its companies and employees move to more
profitable sectors, deflationary effect will continue to add pressure on prices in the
economy.

3.7 Tax incentives are also given as financial assistance to the manufacturing sector in
China, whether for exports or goods for local markets. China tried to harmonize the tax
system and the duty it places on both foreign investors and local entrepreneurs. As a
result, tax cuts and special duties that benefit exporters in special economic zones and
coastal cities will be seen again. This difference is a big gap increasing anger the
United States, but not one of China's exports cheaper and better qualities than
American-made goods. United them to buy more than it makes and even the Chinese
want to buy American-made, they can not do so because the price of American goods
are too high.









BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

7
4.0 Suggestion on China to revaluation on Yuans rate compared to other major
currency.
China has maintained stability of its currency while increasing Yuans flexibility in
controllable and gradual steps. Stability of Chinese currency has also an important
contribution towards world financial stability. Yuan began gaining against other major
currencies after a set of exchange rate reforms were introduced in July 2005. After rising
nearly 20 percent against US Dollar, Chinese currency has hovered around 6.83 to US Dollar
for about a year and this makes Chinese Yuan Exchange Rate (CNY) one of most valuable
currency in the world. Also Chinese exports to US are cheaper as compared to US exports to
China because of its undervalued peg which in turn increases demand of CNY. There are few
suggestions on how China to revalue Yuans rate. But Chinas refusal to countenance a
higher currency is also hindering the process of rebalancing the Chinese economy in favor of
consumption.
4.1 The first suggestion is the transfer of wealth from the household sector to the corporate
and state sectors has to be reversed. To date, the most important ways that wealth has
been transferred away from the household sector, he says, have been the undervalued
exchange rate, the lagging wage growth, and artificially low interest rates.
4.2 Chinas exchange rate has actually risen by about 8% against the US dollar in real
terms since June last year. What matters, is not overall inflation, but inflation in the
tradable goods sector. And there has been relatively little inflation in the price of inputs
in the US and tradable goods sector. In addition, Chinese worker productivity has been
rising faster than US worker productivity. After adjusting for inflation and the
difference in productivity growth, its not at all clear that theres been much real
appreciation in the yuan against the dollar in the past year.
4.3 The Chinese central bank has increased interest rates four times since last October,
which has pushed lending rates up by about 1 percentage point. But, at the same time,
inflation has risen by at least 2% or 3%, which means that real interest rates have
fallen. This means that the savers, which are typically households are losing even more
BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

8
money on their savings, while borrowerstypically the state and corporate face even
lower borrowing costs. As a result, the transfer of wealth from households to the state
and corporate sector has increased.
4.4 However, rising wages are transferring wealth from the corporate and state sector back
to the household sector. As a result, its difficult to determine how much the economy
is actually rebalancing. It appears that household consumption is slowing, which
suggests that the imbalances are getting worse, with the negative effect of declining
real interest rates overshadowing the positive effect of rising wages.
4.5 The combination of rising wages and declining real interest rates favors the large
capital-intensive industries, at the expense of small and medium-sized companies,
which tend to be labor-intensive. These smaller companies are largely credited with
driving real, sustainable growth in China. State-owned enterprises and government
investment have generated growth largely by jacking up wasteful levels of
investment.
4.6 The Chinese economy is becoming even more capital-intensive is certainly not a good
development. The more important the capital-intensive sector is to the economy, and
the more addicted these companies become to cheap capital that can be flung into
wasteful projects, the harder it will be to rebalance the economy. All that increasing
wasted investment is likely to be made viable mainly by continued transfers from the
household sector, whether in the form of depressed deposit rates or in the form of direct
subsidies funded by taxes and fees.
4.7 In order to keep its currency (Yuan) pegged to the dollar, China practices the fixed
exchange rate system. A fixed, or pegged, rate is a rate the government (central bank)
sets and maintains as the official exchange rate. A set price will be determined against
a major world currency (usually the U.S. dollar, but also other major currencies such as
the euro, the yen or a basket of currencies). In order to maintain the local exchange
rate, the central bank buys and sells its own currency on the foreign exchange market in
return for the currency to which it is pegged.
BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

9

4.8 In order to maintain the rate, the central bank must keep a high level of foreign
reserves. This is a reserved amount of foreign currency held by the central bank that it
can use to release (or absorb) extra funds into (or out of) the market. This ensures an
appropriate money supply, appropriate fluctuations in the market (inflation/deflation),
and ultimately, the exchange rate. The central bank can also adjust the official
exchange rate when necessary.

4.9 In case of China, to maintain this fixed exchange rate, the central bank of China has
had to intervene in the foreign exchange market. It sells Yuan in exchange for dollar
denominated assets when the demand for the Yuan increases and it buys yuan with
dollar denominated assets when the demand for the Yuan decreases. In the past the
central bank has intervened very heavily in the markets to prevent the yuan from
appreciating. Since the end of 2001, dollar buying has been so great that the foreign
reserves held by the Chinese government have risen by $153 billion to over $360
billion.

5.0 Conclusion

China does not possess the conditions for full convertibility in the near future. On the way to
capital account convertibility, China needs to make necessary preparation. These
preparations mainly include: developing domestic foreign exchange market, perfecting
Chinas exchange rate regime, strengthening laws and regulations in place of administration
fiat and setting up a capital flow monitoring system. There are other important issues which
need to be handled, such as state-owned enterprises reform, financial institutions reform,
government budget strengthening and others. China has been targeting capital account
convertibility as a long-term goal, and set up a prudent policy that is implemented on a
graduated basis. China will follow the principles of prudence, controllability, and gradualism
in the progress towards the convertibility under capital account.

Words : 2,630
BBG3103 : ITERATIOAL STUDIES
By Zahayu Jamaludin (770209-01-5360)

10

References:


1. Alba, J.D. and Park, D., 2003. Purchasing power parity in developing countries: multi-
period evidence under the current float, World Development, 31(12), 2049-2060.
2. Business Dictionary.com (2011).
3. Xiaohe Zhang - The Economic Impact of the Chinese Yuan Revaluation (2006)
University of Newcastle
4. Roberts, Ivan and Rod Tyers (2001), Chinas Exchange Rate Policy: The Case For
Greater Flexibility, Working Papers in Economics and Economietrics No. 389
Australian National University, January 2001.
5. Tung Chen-yuan and Sam Baker, 2004. RMB revaluation will serve Chinas self-
interest. China Economic Review.
6. Lardy, Nicholas, R. 1992. Foreign Trade and Economic Reform in China, 1978-1990.
Cambridge University Press.