China’s population of more than 1.3 billion presents a huge potential market for trade and investment. Of the many ethnic groups in China, the Han people account for about 92 per cent of the total population,
with Mandarin as China’s official language.
The nation’s economy, currently the second-largest in the world behind the United States, has grown at an average annual rate of about 10 per cent over the last 30 years. In 2011, its Gross Domestic Product (GDP) reached nearly RMB47.2 trillion (about US$7.3 trillion), up 9.2 per cent year-on-year. This growth rate compared with only a 1.7 per cent expansion in the US economy for that year.
The nation’s ‘open-door policy’ since 1978, which promoted foreign trade and investment, has been a key driver of its strong economic growth. Further supporting such growth was China’s entry into the World Trade Organization in 2001.
While exports remain an important growth driver, China is shifting more of its focus towards domestic consumption to reduce economic dependence on external markets and encourage domestic economic activity.
Meanwhile, China’s leaders face growing pressure to reduce the widening gap between the wealthy elite and the poor majority. The government has promised to raise minimum wages by 13 per cent a year through 2015.
In December 2011, the government announced that it would cut the tax base of micro- and small-sized enterprises by 50 per cent, while the tax rate would remain at 20 per cent. This policy, which runs from 1 January 2012 to 31 December 2015, seeks to facilitate the growth of such businesses, especially significantly cash-strapped ones.
China recorded a 9.7 per cent year-on-year jump in foreign direct investment to US$116 billion in 2011. Also during that year, foreign-invested enterprises accounted for 52.4 per cent of China’s exports and 49.6 per cent of its imports.
China’s capital, Beijing, is among the nation’s most developed cities, with the service sector accounting for a significant portion of its GDP. Beijing is one of four municipalities under the direct control of the central government; the other three are Shanghai, Chongqing and Tianjin.
In 2011, Beijing’s GDP rose 8.1 per cent from 2010 to reach RMB1.6 trillion, according to local authorities. The city recorded RMB591 billion of fixed asset investment, up 13.3 per cent year-on-year.
Investment, foreign trade and consumption remain the three major drivers of the capital’s economy. As of 2011, Beijing was home to 41 Fortune Global 500 companies, the second-highest number within a city in the world after Tokyo.
As the largest commercial and financial centre in mainland China, Shanghai is the regional headquarters of many large international firms. The city ranked eighth in the March 2012 edition of the Global Financial Centres Index, which is published by the Z/Yen Group and tracks the competitiveness of financial centres worldwide.
In 2011, Shanghai’s GDP expanded 8.2 per cent year-on-year to RMB1.92 trillion. During that same year, the city reduced its reliance on fixed-asset investment, heavy and chemical industries, real estate, as well as labour-intensive processing industries.
Shanghai is also a major destination for foreign direct investment, which hit a record US$12.6 billion in 2011, up 13.3 per cent year-on-year. Over that period, a total of 4,329 foreign-funded projects were approved in the city, representing an annual increase of 10.8 per cent.
Shanghai Stock Exchange is one of two main stock exchanges in mainland China; the other is Shenzhen Stock Exchange. As of end-2011, Shanghai Stock Exchange ranked sixth in the world in terms of largest domestic equity market capitalisations, with a value of about US$2.36 trillion. Its value of share trading in the electronic order book, at about US$3.66 trillion, came in fourth in 2011.
Guangzhou is the capital of southern China’s Guangdong province and the third-largest city in China. It is also the main manufacturing hub of the Pearl River Delta, one of mainland China’s leading commercial and manufacturing regions.
In 2011, Guangzhou’s GDP rose 11 per cent from the previous year to RMB1.23 trillion.
Located in the centre of the Pearl River Delta, Guangzhou Development District is one of the first national economic and technological development zones. It comprises four national economic function areas − Guangzhou Economic and Technological Development Zone, Guangzhou Hi-tech Development Zone, Guangzhou Free Trade Zone and Guangzhou Export Processing Zone.
Located in the south of Guangdong province, Shenzhen became China’s first Special Economic Zone (SEZ) and has been one of the most successful SEZs. As an SEZ, Shenzhen has special tax incentives for foreign investments and greater independence in international trade activities.
In 2011, the city recorded a 10 per cent year-on-year rise in GDP to RMB1.15 trillion. Its four pillar industries, which help to boost its economy, include finance, logistics, culture and high technology.
Shenzhen Stock Exchange recorded about US$2.84 trillion worth of share trading in the electronic order book in 2011 − the fifth-largest in the world.
Chongqing is an important industrial area in southwest China. Due to its inland location, its export sector is small, with local factories producing consumer goods such as processed food, chemicals, textiles and electronics. The city is also a major automobile, iron & steel and aluminium industry centre in China.
In 2011, Chongqing’s GDP recorded the fastest annual growth rate among Chinese cities of 16.4 per cent to reach about RMB1 trillion.
There is significant government support to transform Chongqing into the region’s economic, trade and financial centre. An increasing number of multinational companies has also set up operations in Chongqing, including electronics and automobile giants as well as foreign banks.
Tianjin is the largest coastal city in northern China and located at the centre of the Bohai Economic Rim. Its GDP grew 16.4 per cent year-on-year to RMB1.12 trillion in 2011.
The city has several development areas, with notable ones such as Tianjin Economic-Technological Development Area, Tianjin Free Trade Zone, and Tianjin Hi-Tech Industry Park.
One of the largest ports in the world, Tianjin is rich in oil and natural gas. Some of its pillar industries include aerospace, petrochemicals, equipment manufacturing, electronics, bio-technology and textiles.
12th Five-Year Plan (2011–2015)
Released in March 2011, China’s 12th Five-Year Plan (FYP) has a heightened focus on economic restructuring through ways such as shifting to higher value-added manufacturing, developing the service sector and encouraging domestic consumption. Besides economic restructuring, the new plan also seeks to achieve greater social equality and environmental protection.
In view of these goals, some sectors that are expected to benefit from governmental support include those involving environmentally-friendly technologies, information technology or financial services.
Under the FYP, China will promote the efficient use of foreign loans and the stable development of foreign investment within the country. The plan encourages foreign investment to focus on areas such as high-end manufacturing, high-technology, energy-saving and alternative or renewable energy. It also seeks to further improve foreign investment in areas such as banking, telecommunication and logistics.
Entering the China Market
Foreign businesses that enter the China market will face many opportunities and challenges, some of which are mentioned below.
- With a population that exceeds 1.3 billion, China is a huge potential market for foreign goods and services.
- China’s Tier 1 cities, such as Shanghai and Beijing, are the country’s most mature markets in terms of consumer behaviour, with large populations and relatively high income levels compared with cities in other areas. The quality of human resources is also generally better in such cities, though operational costs are higher and competition is greater.
- Set-up and operational costs may be lower in Tier 2 cities compared with Tier 1 cities. Increasing incomes and economic growth have also raised consumer spending power in Tier 2 cities, boosting demand for foreign-made products.
- While China is united in the geo-political sense, it is not a homogenous market. Different provinces may vary significantly in terms of economic growth, average income levels, consumer spending habits, literacy rates and education levels. Hence, foreign companies without previous experience in the area might find their performance negatively affected by inadequate understanding of the province’s local situation.
- Foreign investment remains prohibited or highly restricted in many industries, such as energy and telecommunications. Foreign businesses seeking guidance may refer to China's 'Catalogue Guiding Foreign Investment in Industry', which divides industries into three categories according to whether foreign investment is "encouraged", "restricted", or "prohibited" in the sector.
- There is a need to understand both provincial- and national-level laws that affect business. These include the growing number of industry-specific regulations, particularly for sectors with greater levels of regulation, such as food and healthcare.
- Very high staff turnover rates in China.