Chinese Economy Strengths and Weaknesses

¶ … Chinese Economy

Strengths and Weaknesses of the Chinese Economy

The intent of this paper is to present the strengths and weaknesses of the Chinese economy. This specific global economy continues to outpace all other economies in terms of global economic growth, regularly posting above average GNP and GDP growth.

Strengths including the nation's manufacturing base, the rapidly growing adoption of software to streamline and make more efficient the manufacturing process, and the role of Guanxi, or trust-based trading relationships. Weaknesses include a political climate in China for outside business that is fraught with risk, a wide variation in Intellectual Property law interpretations, and the fact that cultural barriers to the continued globalization of the economy continue to be significant.

Global Manufacturing Expertise

As China has become the global leader in manufacturing, this area of the economy is achieving impressive growth quarter-over-quarter and year-over-year. After more than 20 years of development, Chinese influence has already altered the manufacturing world, and China will keep on playing an increasingly important role in the global supply chain. A changing China also reflects the transformation of its internal economic structure -- from the plan of the central government to the market-oriented economy. During this time, one of the most important revolutions in China is the co-existence of different forms of companies.

There are four types of companies in China: State-Owned Enterprises (SOE); Joint Venture (JV); Wholly Foreign Owned Enterprise (WFOE); and Private Company. Before the opening of China to international trade, almost every company was a State-Owned Enterprise (SOE). From giants in the Oil and Gas industry employing hundreds of thousands of employees to retail outlets with four employees, everything was under government control. There were a handful of private firms at that time, primarily small, family-run businesses. The introduction of a new type of company to China was driven by foreign direct investment. In the early 1980s, the first batch of western manufacturers entered China through a partnership with local Chinese companies, setting up a Joint Venture (JV). The Chinese offered a place to set up the factory while investors brought in capital for the facilities and advanced technologies for manufacturing. At that time, Chinese companies had to hold at least a 51% share of the JV, but top managers were always from the west. As the fruits of JVs were recognized by the government, the tight regulations on them gradually loosened.

Times have changed. Foreign companies are now allowed to own a majority of JVs in many industries. They can also set up operations in China by themselves, which has led to another type of company: the Wholly Foreign Owned Enterprise (WFOE). WFOEs allow full control by foreign investors, which means no third party can share the profits from China. With more global manufacturers using China as a base to serve their global customers, WFOEs can enable them to maximize their profits: the more shares a company owns in a JV, the more power it has. Because investors subsequently pursue more shares, numerous JVs have been turned into WFOEs. Though the Chinese economy is stimulated by foreign investment, this builds an environment where private Chinese companies can grow. However, because of fierce external competition, limited internal resources, and less favorable policies, few private firms can grow and survive for long, resulting in most private companies in the manufacturing community being small. There are very few heavyweight players in this category.

Other types of companies exist in China on a smaller basis, such as collectives or township-village enterprises. These semi-private companies are co-owned by the local government and workers. They are not officially in the private category, but they are essentially operated like private companies.

The differences among these four types of companies in China put them into two groups: WFOEs and JVs positioned to the front line of globalizing China, while SOEs and private companies try to stand firm to protect their territory, with some aggressively extending their operations overseas.

According to industry sources there is a total of 196,222 manufacturers in China, which includes all SOEs and non-SOEs with revenue more than 5M RMB, with 1 USD = 8.1 RMB as of October 14, 2005. (Note: All quantitative data in this report is from the National Bureau of Statistics of China (National Bureau of Statistics China, Manufacturing Statistics). The increasing number of multinationals and private companies already surpasses the total number of SOEs in the Chinese manufacturing community. However, because most private companies are still relatively small, SOEs still command the majority of the manufacturing industry in China when measured by revenue. By the end of 2003, only 1,984 of companies had more than 300M RMB in revenue and more than 2,000 employees. This helps explain why so many industries in China are fragmented.

Clearly, most companies are still in labor-intensive, low-value-adding industries like Textile and Apparel and Discrete Manufacturing (National Bureau of Statistics China). WFOEs and JVs are more or less structured in a western style, while most Chinese companies prefer to walk their own way. However, the effects of globalization have led inevitably to a mix of old and new, modern and traditional, east and west.

356 of the top 500 companies in China (by revenue) are SOEs, indicating the weight of SOEs in the overall Chinese economy. A good starting point for understanding SOEs in China is the company structure. Most large SOEs have been listed in the Chinese stock market since the early 1990s. However, the main share of these companies is still in the hands of central or local governments, which means the shareholders meeting and supervisory committee are more or less influenced by them. But times have changed: Presidents of these organizations have more power than those who held the same position 15 years ago. They have direct control of the business strategies; this means they are more liable for the successes or failures of their companies than ever before.