China Case Study

download China Case Study

of 23

Transcript of China Case Study

  • 7/30/2019 China Case Study

    1/23

    China: Building Capitalism with SocialistCharacteristics

  • 7/30/2019 China Case Study

    2/23

    Agenda

    To analyze the different dimensions of Chinese culture.

    To analyze the Political risks and its impact on foreign firms.

    To analyze the prevalent risks in the Chinese economy.

    To analyze the stages of Chinas development using RostowsModel.

    To analyze the impact of Banking Reforms in China and itsimpact on the overall economy.

    To give a brief overview of the current Chinese economicmodel.

    To understand the rising inequalities in the Chinese societyand the causes for it.

    To put forward a broad outline of the strategy that Chinashould adopt in the final stage of reform.

  • 7/30/2019 China Case Study

    3/23

    Hofstedes Cultural Dimensions

    80

    40

    77

    20

    91

    48

    60 6256

    4046

    40

    118

    40

    61

    0

    20

    40

    60

    80

    100

    120

    140

    China USA India

    Power Distance

    Individualism-

    Collectivism

    Masculinity-Feminity

    Uncertainity avoidance

    Long Term Orientation

  • 7/30/2019 China Case Study

    4/23

    Hofstedes Cultural Dimensions Contd.

    Power Distance:At 80 China sits in the higher rankings of PDI. Thesubordinate-superior relationship tends to be polarized and there is nodefence against power abuse by superiors.

    Individualism-Collectivism: At a score of20 China is a highly collectivistculture where people act in the interests of the group and not

    necessarily of themselves. Masculinity / Femininity: At 66 China is a masculine society success

    oriented and driven. The need to ensure success can be exemplified bythe fact that many Chinese will sacrifice family and leisure priorities towork.

    Uncertainty avoidance: At 30 China has a low score on uncertainty

    avoidance. The Chinese are comfortable with ambiguity; the Chineselanguage is full of ambiguous meanings that can be difficult for Westernpeople to follow. Chinese are adaptable and entrepreneurial.

    Long Term Orientation: With a score of118 China is a highly long termoriented society in which persistence and perseverance are normal.

  • 7/30/2019 China Case Study

    5/23

    Human Nature Orientation(HNO)

    China- Negative HNO

    Stability is considered as the most priced commodity by the CCP.

    The Chinese govt. has always dealt with disgruntlements and

    rebellions with an iron hand.

    Tiananmen Square in 1989.

    No national elections.

    Absence of civil liberties.

    Intent on maintaining their unique brand of political control.

  • 7/30/2019 China Case Study

    6/23

    PDI/HNO Relationship

    HIGH PDI LOW PDI

    Positive

    HNO

    Negative

    HNO

    Laws challenged to a certain

    degree

    Pragmatic rules; most people

    respect and obey

    Formal, unrealistic rules.

    CHINASociety does not trust people

    to obey laws.

  • 7/30/2019 China Case Study

    7/23

    Political RiskAnalysis

    Typology of Political Risks in China

    Government Risks Instability Risks

    Firm Specific Risks Discriminatory

    Regulations

    Nepotism towardsSOEs and TVEs

    Firm specific

    boycotts

    Example : Google

    Country Level Risks Risk of mass

    nationalization

    (happened in 1949)

    Currency

    inconvertibility

    Cross border issues

    with India.

    Instabilities

    pertaining to the

    issue of Tibet.

  • 7/30/2019 China Case Study

    8/23

    Impact ofPolitical Risks

    Uncertain, politically influenced investment climate

    Poor legal protection for foreign firms

    The financial system is murky and favours state-owned entities,

    which, despite all the private-sector growth, still make up 40% of

    Chinas economic activity

    Threat of retaliatory protectionist policies deters foreign investors

    Foreign companies are also holding back due to the reputational

    risks they face in home countries due to their operations in China.

    E.g. Microsoft, Google.

    Companies are also closely monitoring the social instabilities inChina and deferring their investments for a much favorable climate

    or taking it somewhere else.

  • 7/30/2019 China Case Study

    9/23

    Economic Risks

    Type Prevalent in China

    Exchange Control Fixed currency exchange rate

    Yuan valued at 8.51 in 2005

    Recent revaluation in 2010

    Chinese exports are cheaper

    Local Content Laws Strict censorship

    Curtailing media freedom

    Price Control Currently the Chinese economy follows a market driven

    pricing system, thereby mitigating the inherent risks of

    state-fixed prices.

    Tax Control Divided tax system in 1994

    Streamlined the tax system and enabled it for the socialist

    market economy

    Labor problems 2006 China started facing shortage of unskilled labor

    Increasing labor costs has forced companies to look

    towards companies like Bangladesh or Philippines.

    Import Restrictions Fixed exchange rates makes it unfavorable for other

    countries to export to China

  • 7/30/2019 China Case Study

    10/23

    The Rostow Model asApplied to China

    Stage 1: Traditional Society

    Agriculture driven economy Ascent of Chinese Communist Party

    (CCP)

    Closed economy and protectionist

    policies of Mao Zedong and CCP

    No links to the market and no

    influence of market forces Great Leap Forward

    Massive communes of agricultural

    collectives

    Back yard steel production

    Stage 2: Pre-Conditions to Take-Off Slow down in agricultural production

    GNP declined by a third in 1960

    Tyranny of Red Guards

    The famine of1960

    Conflicts and fighting between

    factions of Red Guards

    Total Anarchy by 1976

  • 7/30/2019 China Case Study

    11/23

    The Rostow Model Contd.

    Stage 3: Take Off Maos death in 1976 and

    subsequent leadership change

    Deng Xiaoping coming into power

    Breaking up of the agricultural

    communes and replacing them

    with Household ResponsibilitySystem

    Family planning and One child

    policy

    Opening up of four SEZs

    New tax incentives, foreign

    exchange provisions to attractpotential investors

    Establishing the system of Dual

    Exchange Rates

    More direct control over factories

    and longer lease periods

  • 7/30/2019 China Case Study

    12/23

    The Rostow Model Contd.Stage 4: Drive to Maturity

    China is currently in the fourth stage of

    Rostows Model of Development.

    The fifth and final stage is the Mass

    Consumption Stage . Developed

    countries like the US, UK, etc are

    currently in this phase.

    Introduction of Contract Responsibility

    System More control to SOEs

    Establishment of TVEs

    Easy availability of credit

    Move to bring the country closer to a

    market based system of pricing.

    Tightening of import norms and creditavailability in the early 90s.

    Establishment of new stock exchanges

    Creating new institutions for an

    increasingly market oriented economy

    Introduction of Divided Tax System

    Adjustments in dual exchange rates

    Disinvestment of SOEs and TVEs

    More open attitude towards

    Privatization

    WTO membership

    Banking Reforms

    Setting up AMCs

    Reduction in NPLs

  • 7/30/2019 China Case Study

    13/23

    Banking Reforms

    Peoples Bank Of China (PBOC ) had absolute control over the

    monetary system and the four state owned banks.

    Incessant lending to troubled SOEs and TVEs.

    Steep increase in the number of Non Performing Loans(NPLs)

    In 2004,total NPLs amounted to 1.7 trillion RMB or 13% of total GDP

    The banking reforms adopted by the Chinese government can be

    classified into two phases.

  • 7/30/2019 China Case Study

    14/23

    Phase Reforms Impact

    Phase 1 Started in early 90s

    Open market operations

    Interest rate controls Eliminated quotas on banking credit

    Restructured internal management

    system

    Establishing the China Bank

    Regulatory Commission(CBRC)

    Recentralization of

    power in PBOC, pushing

    it closer to the market Failed to make an

    impact on NPLs

    Phase 2 Started in 1999 Govt. borrowed 1.4 trillion RMB

    from PBOC and state commercial

    banks

    Purchased NPL equivalents from

    state owned Banks

    Injected $60 Bn from Forex reservesinto the banks through a new

    institution named China SAFE(Huijin)

    Established four new Asset

    Management Companies(AMCs)

    Transformed the banksinto listed companies,

    ready for foreign

    investments

    Restructuring or

    disposing of debts

    Sharp fall in the numberof NPLs

    Creation of modern

    capital markets in China

    However there was little

    interest from foreign

    investors

  • 7/30/2019 China Case Study

    15/23

    Revaluing Yuan

    China dropped the Dual exchange rate system in the late 90s

    The main purpose of this was to provide the Chinese

    manufacturers with an advantage in the international markets.

    The fixed exchange rate or pegged exchange rate system

    essentially kept the value of Yuan lower than what the market

    would have chosen.

    Chinese goods remain lower in price for purchasers in other

    countries thus benefitting all Chinese exporters.

    However a spew of revaluations and adjustments after 2005should be considered as an effort by the Chinese in providing

    greater currency flexibility.

  • 7/30/2019 China Case Study

    16/23

    Socialist MarketEconomy

    After the failure of the Great Leap Forward (1958-1961), Deng Xiaopingwas willing to consider capitalist methods of economic growth so as to

    revitalise China's economy.

    However he remained committed to centralized control and the one-party

    state.

    It supplemented Chinas centrally planned economy and the high GDP

    growth rate has been attributed to it.

    Privately owned enterprises are a major component of this economic

    system, along with the central SOEs and TVEs.

    The fundamental distinction from the Western mixed-market economies

    is the underlying authoritarian political philosophy of absolute control.

  • 7/30/2019 China Case Study

    17/23

    Reforms under Socialism with Chinese

    Characteristics

    Decollectivizing agriculture

    Allowing private businesses and foreign investment in the late 1970s

    and early 1980s

    liberalisation of trade and prices

    dismantling the welfare state in the late 1990s

    Banking reforms in the late 90s and early 21st century

    Revaluation of Yuan

    Disinvestment of SOEs and TVEs

  • 7/30/2019 China Case Study

    18/23

    Private Sector

    Due to the poor performance of traditional state enterprises in themarket economy, China embarked on a massive restructuring program

    of privatisation.

    The private sector's share of the GDP rose from less than 1% in 1978 to

    70% by 2005

    Numerous sectors that were previously run by the state were privatisedduring the formation of China's current market economy.

    Under this scheme, the state retains ownership and control of large

    enterprises but the central government has little direct control over the

    operations of state-owned enterprises.

  • 7/30/2019 China Case Study

    19/23

    End of Reforms

    By 2005 the market-oriented reforms, including privatisation, was virtuallyhalted and partially reversed.

    In 2006, the Chinese government announced that the armaments, powergeneration and distribution, oil and petrochemicals, telecommunications,coal, aviation and shipping industries had to remain under "absolute statecontrol" and public ownership by law.

    The state retains indirect control in directing the non-state economy throughthe financial system, which lends according to state priorities.

    Liberalization continues to be rolled back in the state-sector by theconsolidation of state enterprises into large "national champions" with thegoal of consolidating efforts and creating internationally-competitive

    national industries.

    The state sector is concentrated in the 'commanding heights' of theeconomy with a growing private sector engaged primarily in commodity

    production and light industry.

  • 7/30/2019 China Case Study

    20/23

    Rising Inequalities

    Gini co-efficient for China has been hovering between 0.4 and 0.5.

    External liberalisation may have facilitated more rapid growth, it hasalso been a major factor behind increasing inequalities.

    As profitability of the SOEs declined in the reform era, the system wasmarked by chaos with local governments imposing other revenue raising

    measures. Since 1984,, agricultural growth has decelerated and lagged behind

    industrial and service sector growth rates.

    Agriculture sector has not received much state patronage in terms ofinvestment, nor has it seen proliferation of small enterprises on thescale of the industrial and service sectors.

    Restrictions on labour movements have been one important factor

    behind rural-urban inequalities in China. Govt. unwilling to eliminate Hukou system.

    Public resource mobilisation has shown an increasing in-equalisingtendency and a bias towards richer, coastal areas.

    CCPs reluctance to slow down growth for dealing with risinginequalities.

  • 7/30/2019 China Case Study

    21/23

    Dealing with Inequalities

    Abolition of agricultural taxes and all surcharges for peasants.

    Providing a basic standard-of-living allowance for low-income urban

    citizens

    Creating unemployment insurance for certain classes of employees.

    Create health and pension insurance programs

    Revitalizing the countrys aging system of social security.

  • 7/30/2019 China Case Study

    22/23

    Strategies for the FinalPhase of Market

    Reforms

    Continue moving towards the market.

    Device and implement massive programs for redistribution ofwealth.

    Increasing inequality can lead to civil unrest.

    Resort to the tried and tested strategy of controlled reforms. However the CCP has to give relaxations and move away from

    absolute control.

    Adopt more liberal trade policies.

    Consider private partnership in the AMCs.

    Encourage more foreign participation in the banking sector.

    Consider the possibility of a floating exchange rate.

    Less stringent norms regarding censorship, free press and contentcontrol.

    Make the provincial and central government more accountable.

  • 7/30/2019 China Case Study

    23/23

    Move to Democracy

    Highly improbable after the existence of a single party for 63 years.

    This has led to a apolitical urban youth population.

    However, the growing middle class attributes their prosperity to the

    current government and its policies.

    Hence there is no mass consensus among the citizens of the countryabout democracy.

    Sudden move to a new system can hamper the growth and

    aggravate the issues in hand.

    Furthering the concept of Socialist Democracy is a better

    alternative for Chinas current set up.