Business in Contemporary China

Roger Philips, Eugene Kim

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781317419266
• Topic: Business
• Subtopic: Business General
• Index: Business

Business in Contemporary China offers a compilation of the best and most relevant articles on Chinese business for use in the classroom or the boardroom. Covering political, economic, and environmental factors, as well as the impact of technological advancements on Asian business, the book provides a well-rounded picture of Chinese enterprise.

Philips and Kim select only the most recent relevant articles, arranged topically with an introduction to each chapter to contextualize and position the content. To further enhance its teaching value, each chapter also includes:

• A "perspectives" opener offering the opinion of a top academic on the topic at hand;
• Practical application exercises and review questions to test the reader's knowledge and understanding;
• Discussion questions to stimulate further analysis;
• Suggested topics for classroom debate; and
• Bibliographic suggestions for future research.

Covering both private and public sector topics, this will be a valuable resource for any student of international business, cross-cultural management, or strategy, especially for those interested in business in Asia or China.

1

THE “NEW NORMAL”

Introduction

Maintaining its position as the largest single-nation contributor to global economic growth, China receives an excessive and undue degree of criticism from its partners, competitors, and even its own citizens. In 2013, China became the world’s largest trading nation, with a trade surplus of over $230 billion. The following year, according to the Inter national Monetary Fund (IMF), China surpassed the US as the world’s most powerful economy, producing over $17.6 trillion in goods and services. The stellar growth of the Chinese economy over the past few decades, since Deng Xiao Ping ushered in a new economic order in China, is unprecedented in scale and speed. And yet the pundits still ask, “What have you done for me lately?”

When we speak of the “new normal” for China, we are asking an impossible question. Normalcy has defied definition in modern China since the first “free market experiment” or Special Economic Zone in Shenzhen, which transformed a small fishing village into a metropolitan, hyper-urban hub for business, culture, technology, and education—a region that was known as the factory of the world, and is now home to the top domestic and international companies of the world. Based on this model, the free economic zone was extended to all of China, and this policy shift opened the door to spectacular growth across the nation, lifting its population out of poverty into modernity. Each year seemed to outpace the prior, and change was not a contest, rather an assumption.

Nonetheless, economic growth at double digits cannot be sustainable indefinitely, and corrections and market adjustments are inevitable. According to NewsChina’s editors¹, China’s leadership must disassociate its political legitimacy from quantified objectives, open up space for mar ket forces to act on the economy, establish trust across its international relationships, and redefine fundamental structural assumptions that are no longer applicable in the “new normal”.

Disassociation and Recalibration

It has been argued that a steep decline in China’s GDP growth rate, even if it has maintained growth year-on-year, could potentially destabilize the country. Citizenry are often willing to accept, or at best overlook, their governments’ practices and politics as long as personal prosperity is assured and their future prospects remain optimistic. As Marx and Engels put it, society is governed by class conflict—this assumes the primacy of socioeconomic interest as a primary motivator for human impetus. Everyone is patriotic when their portfolios are growing, their grass is greener, and their families are well fed. China’s particular challenge is not that of growth, but sufficient growth. Analysts have long imposed a minimum of 8 percent annual growth in China’s economy as a requisite for political stability. Currently, GDP growth is at around 7 percent², and there are no mass demonstrations or calls for regime change, so these predictions were certainly off base. In addition, as a benchmark, in 2014 and 2015, the GDP annual growth rate for the US averaged around 2.5 percent.

Cheng Siwei, senior economist and former vice-chairman of China’s legislature, offers potential strategies for continued growth such as urbanization, land reform, rule of law, environmental protection, mediated investment, and limited regulatory policies towards real estate³. He does peg the next GDP growth rate expectation at 7–8 percent, but later indicates that “economic growth of 6 to 7 percent is enough.” This is entirely consistent with Cheng’s fundamental view that China’s economy is in flux and hard targets are not simply unfair, they are unhelpful.

The features of the new normal were outlined at China’s annual economic conference on December 9–11, 2014. These included consumer ism, innovation, urbanization, differentiation, environmental protection, diffuse bubbles, and continued controls⁴. Additionally, clarifications regarding the applications of these normalizations are likely to be deter mined by near future realities of the market economy. Premier Li Keqiang provided both honest admissions of persistent challenges to economic growth as well as potential solutions to those challenges at the World Economic Forum in September, 2015. Explanations for China’s stock market volatility and its sharp reversal of currency valuation—the RMB’s greatest loss of value in recent history— provided by Li were appreciated and timely⁵. However, economists and international leaders still remain to be convinced of the story of China’s “new normal”.

Market Forces

China’s Special Economic Zones of the 1980s have been replaced with Free Trade Zones (FTZs), with the first experiment launched in 2013 in Pudong New District, Shanghai⁶. These FTZs allow for a greater range of economic liberalization, including foreign currency exchange, customs and taxes, and incorporation by foreign corporations. With thousands of companies registered in the initial FTZ in Shanghai and additional zones opened up in Pudong, cities across China have clamored for the right to open up their own FTZs, following the historical precedent of the Special Economic Zones that opened China to global market forces. If the same goes for the FTZs, then China may experience significant leaps in economic liberalization in the near future.

In He, Meng, and Zhang’s article on the “New Fiscal Faces” of China, we are introduced to a new buzzword coined in 2014 by Chinese economists to describe the “new normal”‘s interventionism of China’s central government: micro-stimulus⁷. Inherent to this new term is a diminishing of government control, systematic investment, and top-down oversight, replaced by a more reflexive, less invasive approach to tinkering with the economic machine. There is accordingly a corresponding rise in the influence from international markets, where interest rates, pricing and capital flow are liberalized. Despite the success story of China’s real estate boom over the past three decades, economist Cheng Siwei argues that government investment and real estate interventions need to be moderated, allowing the market and individual choice to govern trends in housing prices. In the worst case scenario, the property market and the banking sector are at serious risk of catastrophic failure, with pessimists comparing this impending economic catastrophe to the 2008 stock market crash in the US. Microstimulus, therefore, aims to work alongside market forces, gently nudging the train of progress back on its high-speed tracks, tolerating temporary slowdowns and recognizing that gradual and tempered growth is the new expectation.

International Trust

Transparency and rule of law go hand-in-hand in establishing both domestic consumer confidence and foreign investment. With China’s entry into the World Trade Organization (WTO), commitments were made to the international community to establish and safeguard both. Regulatory transparency—access to information on government policy making and participation/input from constituents—is cited as among the top concerns for businesses operating in and with China⁸.

From traffic rules to copyright regulations, in China, the enforcement of laws is burdened by historicity and expedience. A 2,500-year-old Confucian tradition of memorization and replication of superior exemplars has frustrated teachers and entrepreneurs alike. Traffic rules are not laws, according to a recent college graduate in Shanghai. A senior partner at a Shanghai-based venture capital firm relates that trademark and copyright infringement is not the problem of young companies trying to overcome diverse barriers to entry; it is the failure of established corporate entities that make it all too easy for their products to be copied and rebranded. Based in Beijing, Xindongfang [New Oriental] is one of the world’s largest educational companies and listed on the NY Stock Exchange since 2006. It also gained world-wide publicity from its practice of hiring agents to take and memorize sections of recent Graduate Record Examinations (GREs)—and then passing those same questions on to young Chinese customers, many who went on to earn perfect scores^9,10. To gain the trust of corporations and consumers around the world, China’s companies must sacrifice pragmatics for the cost of building intellectual capacity and a record of integrity.

The threat of debt repudiation has not yet materialized in China, though there are indications that underlying deficits are soon to surface. According to Davis and McMahon¹¹, debt and guarantees of local governments jumped 67 percent to approximately $3 trillion from 2010 when the figure was closer to $1.7 trillion. Cracks in the walls, seen visibly on China’s quickly built, cheaply constructed buildings, are signs of structural weakness and damage. Cheng Siwei claims that “borrowing money to pay old debt is dangerous,” like plaster and paint to cover up potential fissures and gaps¹². Transparency has improved, yet Chinese lenders continue to surreptitiously “sell loans to Chinese trust companies, promising to repurchase the loans any time”¹³. As the public debt of local economies is buried in bureaucracy and as banks camouflage bad debt, these faulty loans will eventually become a burden to the central government¹⁴. Transparency does not eliminate bad loans, but it forces accountability on those who are participants in that gamble—it appears that the Chinese central government is poised to pursue this strategy to ensure steady and consistent economic growth.

Structural Assumptions

Internally, China attributes some of China’s slowdown to factors outside of its control (e.g., international markets) and containment of risk, and consequently growth appears to be a part of China’s “new normal”. Le Keqiang, China’s Premier, confirms that China is “operating in an increasingly unpredictable global environment, but with an improving domestic economy that is stable enough to face external challenges,”¹⁵ expressing confidence that regardless of the environmental conditions, China’s economic health remains optimistic. In the same article, Le Keqiang is cited as describing the shift from manufacturing to service industries as central to China’s current strategy which will be detailed in its 13th FYP.

Steven Barnett, IMF division chief, describes China’s “new normal” as slower but safer, a growth path that is sustainable compared with prior trends¹⁶. Though economist Paul Krugman, as an external observer, may describe China as a country about to “hit its Great Wall,” insiders such as Tsinghua University Professor Hu Angang affirm the “new normal” of “Slower but steadier” growth¹⁷. Hu cites recent structural changes implemented by the government that have led to 50 million new jobs in China’s cities, the increase of service sector contribution to GDP to over 48 percent, and 25 percent increase in GDP allocation to research and development in the years 2010–2014. The prediction is for long-term, sustainable growth through government investment and intervention, albeit of the micro-stimulus variety.

Personality-driven reform, which was ubiquitous in China’s past, has the risk of insolvency because of regular rotations of leadership at the city, county, and provincial levels¹⁸. This system prevents fi...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Foreword
• Book Introduction
• 1 The “New Normal”
• 2 Economic Trends
• 3 Political Environment
• 4 Social Factors
• 5 Technology Impacts
• 6 Environment and Land
• 7 Legal Considerations
• Index