BBNG3103 International Business Zahayu Jamaludin 770209015360

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 : [email protected]

Tutors name: LEE KIM LIAN

Learning Centre: Serdang Raya, Selangor

May 2011 Semester



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.



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:



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



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



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.



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



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.



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



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.

BBNG3103 International Business Zahayu Jamaludin 770209015360

Documents

Transcript of BBNG3103 International Business Zahayu Jamaludin 770209015360