INTERNATIONAL FINANCIAL MANAGEMENT

Report on
APPARELS IN CHINA

Submitted To: Submitted By:

Dr.L.Ramani Rabia Monga
Associate Professor PGDM-IB
BIMTECH 18IB343
Why China?

In the two past decades, the market has been growing at a fast pace. The dramatic expansions of the
manufacturing capabilities and rising consumer consumptions in China have transformed China’s society
and economy. China is one of the world’s major producers for industrial and consumer products. Far
outpacing other economies in the world, China is the world’s fastest growing market for the
consumptions of goods and services. The Chinese economy maintains a high speed growth which has
been stimulated by the consecutive increases of industrial output, imports & exports, consumer
consumption and capital investment for over two decades. Rapid consolidation between medium and
large players is anticipated since the Chinese government has been encouraging industry consolidation
with an effort to regulate the industry and to improve competitiveness in the world market.

PESTEL analysis of China

The aim of this article is to explore some of the political, economic, social, technological,
environmental, and legal factors affecting China.

Political factors affecting China

China is one of the most powerful countries in the world. It is a permanent member of the
Security Council of the United Nations. It is also the 4th largest country in the world by land
area. Beijing is the capital of China.

As you may know that the Communist Party of China is the founding and ruling political party of
the People’s Republic of China. Although China enjoys a stable political environment, the lack of
political freedom is an area of concern. Many analysts question the lack of openness of China’s
political system.

However, it is worth noting that with a stable political environment, cheap labour and improved
infrastructure, China positions itself as a great destination for foreign direct investment (FDI).
Unsurprisingly, China attracted a record high US$139 billion of FDI in 2016, making it the third
largest FDI destination in the world.
Likewise, China is also a dominant overseas investor. Chinese foreign direct investment has
reached many countries over the years. The United States, the UK, Australia, Pakistan,
Bangladesh, Indonesia, the United Arab Emirates, Venezuela, Argentina, Angola, Chad and
Niger are some of the countries where Chinese investment has indeed been stunning.

Economic factors affecting China

Economic environment is the second element to address in the PESTEL analysis of China. As
mentioned above, China is the 2nd largest economy in the world by nominal GDP. However, it is
the world’s largest economy on a purchasing power basis. A lot of economic reforms started in
the late 1970s which helped China make rapid economic growth. The country has made a shift
from a centrally-planned to a market based economy and the GDP growth has averaged nearly
10 percent a year (The World Bank, 2018).

However, it is worth noting that economic development has also caused some challenges for
China. High inequality, rapid urbanisation, and environmental damages are some of the
challenges that the country needs to deal with in order to maintain its economic sustainability.

One of the reasons why many global companies manufacture their products in China is the
availability of cheap labour. Cheap labour is a great source of competitive advantage for China;
however, some analysts argue that the rapid economic growth has also led to a rapid increase
in wages in the country. China’s average wage level tripled between 2005 and 2016 and now it
is higher than in Argentina, Brazil, and Mexico. Does it mean ‘cheap labor in China is over’?
Well, the analysts are divided and there is no unanimous position concerning this question.

Social factors affecting China

China is the most populous country in the world with a total population of approximately 1.4
billion (BBC, 2018). This is a massive market for consumer products. As mentioned above,
average wage level has gone up over the years resulting in an increase in consumer spending. It
is also worth mentioning that many people in China, like the citizens of other emerging
economies, long for status symbols such as luxury cars, latest smart phones and designer
clothing to demonstrate their success. No doubt that increased consumer spending and status
symbols are great opportunities for both domestic and foreign companies.

The literacy rate in China is 96.4%. Like the impressive progress in literacy rate, the country has
also made stunning progress in poverty reduction. According to a report published by China’s
State Council Leading Group Office of Poverty Alleviation and Development, the country has
lifted over 68 million people out of poverty in the last five years. It should be mentioned that
China aims to eliminate absolute poverty by 2020 (Brand, 2017). However, there are some
social challenges facing China today. For example, ageing population is an area of concern. So,
how should the country meet the incredible demands for labour? Many analysts suggest that
China should increase the birth rate and invite more foreign workers.

Technological factors affecting China

As of March 2018, China has the world’s largest online population with 772 million users (BBC,
2018). There are some big tech giants in China e.g. Baidu, Alibaba and Tencent. In fact, these
companies and some others are so powerful that many big companies from other countries
have failed in China.

China has set a vision to be a global leader in science and technology. To achieve this, the
country launched ‘mass entrepreneurship and innovation’ programme in 2015. This programme
aims to spread entrepreneurship throughout China. It also aims to help the country to move
from a labour-intensive economy to an innovation-driven one. It is therefore not difficult to
imagine how great the opportunities are in China for both domestic and international
companies, particularly in science and technology sectors.

Environmental factors affecting China

China’s rapid economic development has impacted on its natural environment severely. Water
and air pollution, industrial waste, deforestation, climate change, and biodiversity loss are some
of the examples of environmental challenges facing China today. However, it should be
mentioned that the Chinese government has taken a number of initiatives to address the
environmental concerns. Examples of initiatives include but not limited to decentralization of
responsibility to local levels, and encouraging public participation in environmental protection.

Legal factors affecting China

Legal environment is the last element to discuss in the PESTEL analysis of China. There are a
number of laws that regulate business and employment practices in China. For example, labour
standards, employee remuneration and benefits, labour disputes, and other relevant issues are
regulated by The PRC Labour Law 1995, the PRC Labour Contract Law 2007, and various
administrative regulations (Chen, 2018). The Catalogue of Industries for Guiding Foreign
Investment regulates FDI in the country. The Catalogue divides FDI into four categories i.e.
encouraged, restricted, prohibited, and permitted.

Encouraged category includes 384 industries. Agricultural machinery manufacture, and fruit
and vegetable drink production are some of the industries in this category. Restricted category
includes 35 industries. Construction and operation of power grids, banks, and securities
companies are some of the industries in this category. Prohibited category includes 28
industries. Air traffic control, postal companies, and domestic express delivery of letters are
some of the industries in this category.

Ease of Doing Business in China

China is ranked 46 among 190 economies in the ease of doing business, according to the latest World
Bank annual ratings. The rank of China improved to 46 in 2018 from 78 in 2017. Ease of Doing Business
in China averaged 83 from 2008 until 2018, reaching an all time high of 99 in 2012 and a record low of
46 in 2018.
China carried out a record number of reforms during the past year to improve the business climate for
small and medium enterprises, earning the country a spot in this year’s top 10 global improvers, says the
World Bank Group’s Doing Business 2019: Training for Reform report. China implemented the largest
number of reforms in the East Asia and Pacific region. As a result, China advanced to a global ranking of
46 this year, up from 78 last year.

Highlights of the reforms from the past year are:

• Starting a Business was made easier through the introduction of online registration
systems and simplifying social security registrations.
 • Dealing with Construction Permits was made easier by streamlining the process of
obtaining building permits and certificates of completion, as well as registering new
buildings with the real estate registry. Building quality controls were also improved by
introducing stricter qualification requirements for professionals in the construction
industry and the improvement of public access to information.
• Getting Electricity was made easier by expanding network capacity and making the
connection process free of charge. The introduction of a new mobile application for
customers has also reduced the time to obtain an electricity connection to 34 days, from
143 days.
• Registering Property was made easier by streamlining administrative procedures and by
increasing the reliability and transparency of the land administration system.
• Protection of minority investors was strengthened by increasing shareholders' rights and
role in major corporate decisions, clarifying ownership and control structures and
requiring reimbursement of legal expenses incurred by shareholders.
• Paying Taxes was made easier by abolishing the business tax, allowing for joint filing and
payment of all stamp duties and by implementing several administrative reforms to
lower the compliance time. Beijing also made paying taxes less costly by reducing the
housing fund rate paid by the employer.
• The time and cost of Trading Across Borders was reduced by implementing a single
window, eliminating administrative charges, increasing transparency and encouraging
competition.

Progress made in the areas of Starting a Business and Getting Electricity are particularly
impressive. Since last year, three procedures were removed and consequently it now takes 9
days to start a business, on par with most OECD high income countries. In addition, Beijing is
now one of only two cities in the world where the process of starting a business is completely
free. China is now ranked 28 in the area of Starting a Business.
Getting an electricity connection is also entirely free in China. Japan and the United Arab
Emirates (UAE) are the only two other countries in the world to share this distinction. As a
result, China has earned a global rank of 14 in the area of Getting Electricity.

Remarkable progress has also been made on almost all components of Trading Across Borders.
For instance, the cost to import (border compliance) has been reduced to $326, from $745. As a
result of this and other improvements, China has advanced over 30 places to a global rank of 65
in the Trading Across Borders area.

China also remains one of the best economies in the world to resolve a commercial dispute. It
takes 496 days and costs 16 percent of the value of the claim; far better than the OECD high
income average of 582 days and 21 percent. Globally, China is ranked 6 in this area.

Despite the progress made since last year, China can do better in the area of Dealing with
Construction Permits, with a global rank of 121. A business needs to complete 20 procedures in
order to obtain all permits and authorization to build a warehouse in China, compared with an
average of 15 procedures in the East Asia and Pacific region. Nonetheless, with the latest
progress made on the building quality control index, China already performs close to the
standard established by OECD high income economies with a score of 11 out of 15.

Why Apparel industry?

China is home to the largest textile production industry in the world. It is also home to the largest textile
export industry in the world. The Chinese textile industry is therefore a key player in the national
economy, the international markets, and the global economy as a whole.

The Apparel Manufacturing industry has performed well over the past five years. Revenue for the
Apparel Manufacturing industry is expected to grow at an annualized 5.5% over the five years through
2019, to total $390.2 billion. This trend includes expected growth of 4.4% in the current year. The
industry currently has 19,940 enterprises operating in the industry in 2019, employing 4.6 million
workers with an estimated payroll of $44.4 billion.
China’s 1.3 billion population constitutes a huge market for garments, and one that is growing year by
year. It’s a huge market, considering the size of China [and] the vast differences in terms of the
disposable income and affordability, [people] need affordable apparel.

According to figures released by Euromonitor, China’s adult garment market was worth around
RMB1,571.7 billion in 2018, an increase of 7.8% year-on-year. Market value is expected to reach
RMB1,725.8 billion by 2020.

Women’s garment market: Euromonitor data reveals that the Chinese women’s garment market was
worth around RMB999.1 billion in 2018, an increase of 7.6% over the previous year. Of this, women’s
underwear showed the fastest growth, with a 9.5% increase, followed by swimwear (9.4%) and pyjamas
(9.2%). Market value is expected to reach RMB1,196.1 billion by 2022. The demand from mainland
women for clothing with personal style is on the rise, with designer labels gaining increasing popularity.

Men’s garment market: The consumer market for men’s garments is undergoing a growth period.
According to Euromonitor data, the men’s garment market in China was worth RMB572.6 billion in 2018,
an annual increase of 6.5%. Of this, men’s upmarket jeans showed the fastest growth with an increase
of 9%. Market value is expected to reach RMB670.9 billion by 2022. As men are becoming more
particular about their appearance than before, they are seeking on-trend clothing, which has in turn
boosted demand for high quality garments. In recent years, trendy sports casual wear is gaining
popularity in the men’s garment market.

Children’s garment market: According to China’s National Bureau of Statistics, in 2018 there were about
250 million children under the age of 15 in China. Moreover, 15.23 million babies were born. This
underscores the likely colossal size of the children’s garment market in the next few years. According to
Euromonitor data, the mainland children’s garment market was worth RMB209.1 billion in 2018, a year-
on-year increase of 16.2%. Of this, baby garments showed the fastest growth with a 20.1% increase.
According to a market survey conducted by the Hong Kong Trade Development Council (HKTDC) on
China’s infant and children’s clothing market in 2017, respondents generally indicated a preference for
shopping at physical shops in spite of the growing online market. The reason they gave was that at
physical shops they could personally feel the quality and thickness of garments and avoid the problem of
colour discrepancy, which may occur in online shopping. Product materials and safety designs were their
primary considerations.
Casual wear market: As the economy grows, mainland consumers’ demand for casual wear is on the rise
and casual wear categories are also changing and evolving continuously. Casual wear targeted at the
mass market is getting more fashion oriented, fashion casual wear is getting more style oriented, sports
casual wear is becoming more thematic, business casual wear is becoming more youth oriented,
outdoor casual wear is getting more everyday-life oriented, and denim casual wear is getting more
personalised.

Custom-made clothing market: Growing numbers of mainland middle-class consumers are seeking
personalised custom-made clothing as their lifestyles improve. Some consumers with specific
requirements on garment quality are keen to use a more customisable service. According to a survey
conducted by HKTDC on mainland middle-class consumption, the largest proportion of respondents had
ordered custom-made clothing among different categories of bespoke products. Presently, the bespoke
tailoring market on the mainland is just starting to take off. As it represents relatively high-end
consumption, it can command higher price premiums.

The ascension of apparel and footwear in 2018 reflected the market’s healthy momentum, in line with
the steady pace of the economy. Childrenswear continues to accelerate, supported by the country’s 2-
child policy and the significant number of child-bearing married couples who were part of the baby
boom during the 1980s and 1990s.

Over the forecast period, apparel and is projected to maintain its steady sales growth, thanks to ongoing
market development and stable demand among local consumers with improved living standards. In
addition to the healthy economy, it is anticipated that the total market will consistently experience
premiumisation, in line with the present trend for upgrading since local consumers are caring more
about product quality and design pattern.
Exchange Rate Risk

The currency of China i.e. Yuan has appreciated which means that for repatriation of profits, when the
profit will be converted to Indian Rupees, the value of the profits would be less due to the appreciation
of Yuan. Appreciation of Yuan means that it has strengthened.

Taxation in China

China welcomes foreign investments and, although special permits may be needed in order to invest in
some areas, other businesses are encouraged. Foreign investors in China usually choose to open a
wholly foreign-owned enterprise (WFOE). The taxation of foreign companies is straightforward and,
with the right help, foreign investors can even obtain tax incentives for projects initiated in China.
Corporate Tax Rate

The standard corporate tax rate in China is 25%, but special rates can apply for small companies. Non-
resident companies in China are only subject to taxation on the income produced in China and the
income connected with an establishment in China. The establishment is not specifically defined and it
may also include independent agents in China. A foreign company that has an establishment in China
will be taxed on the entire income produced in China by the establishment and connected to it.

Withholding tax

Withholding income tax on payments to non-residents - a concessionary rate of 10% is currently

applicable to interest, rental, royalty and other passive income

Value-added tax

Value-added tax - applies to the sale of goods, except real estate properties, and the provision of labour
services in relation to the processing of goods and repair and replacement services within China. The
standard tax rate is 17% with certain necessities taxed at 13%.

The enterprise income tax can be exempt or reduced for the type of incomes registered in domains like
forestry, fishery, and agriculture. The same rule is available for the revenues generated by companies
with activities in the environmental sector, energy, public infrastructure or for expenditures registered
in the research and development sector in China. Start-up investment enterprises engaged in important
investments in China which are necessary to be sustained and stimulated by the state can be subject to
varied deductions in a certain proportion of the investment amount from the taxable total revenue.
Except for certain specifications stated by the Chinese tax laws or any other relevant financial
administrations, a resident company is entitled to pay the taxes at the place or city where it is
incorporated. One must bear in mind that if the registered business address is not in China, the company
will have to pay the taxes in the city or location where the management is found. Knowing the tax
regime for business in China will help foreign entrepreneurs decide on the proper business form, in
accordance with their investment plans and needs.
Market plan

In a foreign market like China, the idea is to implement a basic cloth line which includes shirts, jackets,
trousers, and shorts. The company will be majorly focusing on women and men casual wear which
includes jeans, tops, shirts, trousers etc.

The Target Market will be Males and Females of Age Group of 18-30 in China who are very much
interested in western fashion as their demand is increasing.

As far as the price is concerned of the apparels, for jeans the price would be in the range 300CNY-
350CNY. For shirts, the price range would be 250CNY-280CNY, for tops it would be 18CNY0-200CNY and
for trousers, it would be 200-245CNY.

The area targeted is North China region: The specialised garment markets in North China are mainly
clustered around Beijing, Tianjin, Hebei and Shandong. Currently, the Muxiyuan Commercial District in
Beijing is most representative of the specialised markets and is the largest garment distribution market
north of Yangtze River.

Garment sales channels in the mainland have developed from the department stores, specialty stores
and rural markets of the past to multiple sales channels, ranging from warehouse-style shopping
centres, supermarkets and chain stores, specialised garment markets, mail-order, TV and online sales.

Garment supermarkets and discount stores have become a new component of the garment retail
landscape. Garments sold in supermarkets are usually not the trendiest, but prices are more affordable
and quality is more assured. There are also some garment brands which want to capitalise on the
popularity of supermarkets to raise profile and boost sales. In discount stores, brands can maintain their
advantages while offering discounted prices as in wholesale markets.

Scale of operations

In its first three years of operation, the company will be producing in China and outsource
manufacturing to dedicated service providers. As we know that in the early stages of any start-
up company, it is crucial to find a product- market that fits. Once the product-market fit has
been established, we can then consider to scale up the business by adding new product lines,
 types of customers or new market segment.

For instance, we can set up a professional supply chain management to cut costs and deliver
flexibly and punctually at the same time. This is because, with good supply chain management it
will assist in building a better relationship with suppliers, warehouses, logistics firms and the
client. Additionally, with a diligent research and comparison of shipment options and building
relationships with key personnel within logistics providers' facilities, it will help the business to
stay competitive. As with all new start-ups, it is more feasible to begin in a small- scale nature as
it will be relatively easier to coordinate the inflow of fabric and outflow of product. Ground
transportation with a good logistics company will be utilized in most cases. In the case that
international shipments are needed, air transportation will also be an element of the logistics
organization.

To control costs, track inventory and manage stock levels at the later stages of business
operation, an inventory control system will be set in place. This will include the standard
barcode with its related equipment and software. Eventually, staff will conduct annual inventory
audits and hire outside auditors when necessary. All accounting and finances will be maintained
using state-of-the-art software.

Sourcing of Funds

Company can fund its business by taking debt from Banks, local investment firms, by raising equity in the
market or company’s own funds. Corporate Bank loans are not specific for all the companies as it
depends upon the amount of loan as well as the credit rating of the company. Bank Lending Rate in
China at 4.35 percent. Bank Lending Rate in India remained unchanged at 9.40 percent. Investors and
business angels are another method of finding outside backing. These people aren’t hard to locate; they
are always on the scout for a sound investment opportunity, and can be found wherever there is money
to be made.
Project Justification
The Chinese (consumer) market is large and growing. This means that entrepreneurs have possibilities
to scale their business. It is a very particular advantage that the Chinese market has; business has room
to grow more than in many other countries. China’s 1.3 billion population constitutes a huge market for
garments, and one that is growing year by year. Revenue for the Apparel Manufacturing industry is
expected to grow at an annualized 5.5% over the five years through 2019, to total $390.2 billion. This
trend includes expected growth of 4.4% in the current year. According to forecast made by the
Euromonitor, China will exceed the United States and become the world's largest apparel
market by 2019. With a stable political environment, cheap labour and improved infrastructure, China
positions itself as a great destination for foreign direct investment (FDI). It is the world’s largest
economy on a purchasing power basis. No doubt that increased consumer spending and status symbols
are great opportunities for both domestic and foreign companies.
References

http://china-trade-research.hktdc.com/business-news/article/China-Consumer-Market/China-s-
Garment-Market/ccm/en/1/1X000000/1X002L72.htm
https://www.xe.com/currencycharts/?from=CNY&to=INR&view=1M
https://www.doingbusiness.org/en/data/exploreeconomies/china#
https://www.internations.org/china-expats/guide/29458-social-security-taxation/taxation-in-china-
17872
https://www.researchandmarkets.com/research/63r7xz/china_apparel?w=4
https://www.textileinfomedia.com/textile-industry-in-china