China Economic and Business

Environment Analysis
Demographics
China has a population of approximately 1,375 million people as of 2016. The population growth
rate decreased dramatically during the last decades from its peak of 2.79% in 1966 to 0.51% in 2015.
This extreme changes can be related to the One-child policy in China, which was for the first time
introduced in 1980 as a measurement to control the population growth. This policy did not allow
Chinese citizens to have more than one child, but had many exceptions which allowed most of the
Chinese people to have more than one child. According to analysis only 37% of all Chinese people
were in some way affected by this policy. A new law became active in 2016 that allowed Chinese
people to have two children. With reference to Chinas population structure, it has to be noted that
China partly as a cause of their policy now faces similar problems most highly industrialized countries
have to face such as retirement income problems. Before the One-Child Policy in 1953, the biggest
part of the population was below the age of 30 years, whereas today most Chinese people are in
between 20 and 55 years old. China has one of the highest population densities in the world with
137people/km2. A clear tendency of moving from rural areas to the bigger cities which offer more
jobs for younger people and seem to be more attractive exists. With only around 41% of the total
population living in urban areas in 2004, nowadays more than 54% of the population live in urban
areas.

Wealth distribution
China is one of the countries with the highest wealth inequality distribution in the world. With a Gini
coefficient of 46.2 indicating the income distribution inequality from 100 with total income inequality
to zero for no income inequality, one third of Chinas people own only one percent of the total
wealth while one third of the total wealth is held by the richest one percent of the population.
However, it seems like there is a trend of seemingly more equal wealth distribution in China. Over
the course of the last 15 years, the capita income of China has been steadily increasing at a very high
rate of approximately 15.15% from 954.55 in 2000 to 7924.65 in 2015. According to the World bank
classification China falls in the category of upper-middle income economies based on its GNI, which
lies in between $4,036 and $12,475
Major export and trading partners
Oceani South
China is the biggest exporter of goods and services Africa, a, 55.2 Americ
99.9 a, 101
worldwide. With 2.34T$ of goods and services exported in
North
2014 and around $1.53T$ of imports, China has a trade
Americ
surplus of $838B. a, 557

In what concerns trade and export, the major partners, which

Asia, Europe
account for approximately 45% of total exports are the 1030 , 526
United States, Hong Kong, Japan, Germany and South Korea.
A variety of European and Asian countries do have strong
trade relationships with China, whereas it is quite notable
that Africa, Oceania and South America all together barely make a percentage of 11% of the total
export amount.

Business Environment
With its admittance to the WTO in 2001 and the mobilization of Foreign Direct Investment (FDI),
China becomes a more and more interesting investment target. Entry barriers and administrative
difficulties have been gradually decreasing to attract more investment in the country. The average
tariff rate dropped from 15.3% in 2001 to 9.4% in 2013. With around 2.5% of GDP related to FDI and
foreign companies being responsible for more than the half of Chinas exports, FDI represents an
important growth factor for Chinas economy. More than 460 companies of the Fortune 500
companies are in some way invested in China. Currently China is part of 13 free trade agreements
and has ongoing negotiations in at least 10 other agreements. China sometimes actively abuses its
power to profit from its superior position. A well-known example is the restriction of rare earth
exports, China undertook several years ago to push the prices and control the market. Active
manipulation of currency prices is another issue which firms operating in China often have to face
and find solutions for. Factors like lower quality of products produced, legal difficulties, rising
awareness for national branding, faster transactions and the slowing down of the economic growth
in China cause that many companies start shifting their production back to their country of origin
instead of producing in China.

Inflation and Currency

The currency of China is the yuan, which is locally known under the name Renminbi (RMB). Money
of the people is the official meaning of the Renminbi. It is a crucial element of Chinas economic
success to control the value of the currency and keep it in an acceptable range. This is why the
central bank of China, called Peoples Bank of China (PBoC), is constantly changing the supply of yuan
in the economy and holds US treasury bonds to control the exchange rate of the currency around a
stable 2 percent reference rate. As a side effect, China became the largest owner of US treasury
bonds. It is highly dependent on the economic development of the US. In 2015 the Yuan as been
added to the International Monetary Fund (IMF) foreign exchange reserve, which is one step in the
direction of establishing the yuan as the world currency as a replacement of the dollar. The US
currency and the Yuan are strongly interconnected. In what concerns the inflation rate, China has
stabilized its inflation at a level of two to three percent in the last few years. Historically, inflation
rates have been at an extremely high level of around 25% in 1990 and stabilized continually over the
last decades.

Education and Labor

The Chinese education system is relatively complex with multiple different options of public and
private educational careers and huge differences in between the different systems. Usually, children
enter the system at the age of 3 years and work their way up till 12th grade when they have to write a
cumulative exam called Gaokao which determines whether they can enter college. In the last few
years China started focusing its education more on international contents with the adoption of
English as a priority language and recommended exchange programs. Although China has been able
to quadruple the number of college graduates in the last decade and everyone theoretically has
access to affordable public education almost exclusively expensive education offers chances of good
employment opportunities and students from rural areas in only minorities in colleges.
Currently, labor cost is only 4% cheaper than in the US which is due to the fact that productivity and
labor wages did increase disproportionately. With improved education standard such as the high
literacy rate of 95 percent for example and the more costly production of low quality goods, China is
gradually shifting its economic focus to more service related and technological economic activities.

Membership in Trade Blocks

China is constantly increasing its memberships in regional and bilateral trade agreements. After
China joined the WTO in 2001, which represents a milestone in the development of international
economic cooperation, it became part of multiple other trade agreements to fight against the
slowing down and even negative rate of their export growth. Around 12 regional trade agreements
have been made after the joining of the WTO and several others are currently still under negotiation
or in consideration for the future. Most likely the most important trade agreement that China has
made was becoming part of the ASEAN free trade area in 2002. Including the Asian tigers Thailand,
Indonesia, Philippines, Singapore, Malaysia, and Vietnam as well as several other smaller regional
players, this agreement helps China to deal with the problem of rising labor costs in an efficient way.
Enabled by the abolition of tariffs in the free trade area, China has the possibility to shift its
production in other Asian countries which have lower labor cost. This allows China to remain
competitive as it can still keep selling their products and services which partly are constructed in
other countries in order to save costs.

Legal System
To make sure that an economic cooperation with other countries can be successful they must have
similar understandings of patent rights. For this reason, China changed its patent rights several times
over the course of the last few decades. The last major change occurred during the negotiations with
the WTO in 2001 and was a vital element for China to become a member of the WTO. According to
the definition in the law, no entity or individual may, without the authorization of the patentee,
implement the patent( Patent Law, Article 11). Although the patent rights in China resemble those
of many other nations, the government often does not take action in controlling patent infringement
which makes the law relatively ineffective.
In what concerns the enforcement of contracts, foreign investors still have to face a lot of difficulties.
It is extremely important for them to make sure that they have a formal contract with a Chinese
enterprise. From a traditional perspective, Chinese enterprises did not want to sign contracts
because oral agreements were common but courts do not accept them. In addition, contracts must
be written in Chinese language. Even more, the contract must respect the Chinese law and the place
of litigation must be in the same district where the lawsuit is made. Only what these conditions are
met foreign firms have a chance of successfully filing a lawsuit against a Chinese firm.
References:
https://www.statista.com/statistics/278566/urban-and-rural-population-of-china/
https://www.statista.com/statistics/250400/inequality-of-income-distribution-in-china-based-on-
the-gini-index/
http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2015&
locations=CN&start=2000

https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-
lending-groups

http://atlas.media.mit.edu/en/profile/country/chn/

http://hong-kong-economy-research.hktdc.com/business-news/article/Small-Business-
Resources/Trade-Regulations-of-China/sbr/en/1/1X000000/1X006MY8.htm
https://www.usi.edu/media/3654697/Business-Environment-China.pdf
https://www.thebalance.com/how-does-china-influence-the-u-s-dollar-3970466
http://www.inflation.eu/inflation-rates/china/historic-inflation/cpi-inflation-china.aspx

http://www.china-briefing.com/news/2014/02/10/understanding-chinas-free-trade-
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http://voxeu.org/article/china-s-regional-and-bilateral-trade-agreements

http://www.chinalawblog.com/2015/08/contracts-in-china-enforce-it-or-go-home.html