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China Legal Growing Pains in a Land of Opportunity

(China: The Inscrutable Market)

International Business Individual Assignment Trimester II

Submitted to: Prof. C.P Joshi

Submitted by: Meenu Mittal (34) PGDM IB 2010-2012

which amounted for china s political risk. and 32. In 1958 the Second Five-Year Plan (1958-1962). the government sharply revised the immediate goals of the economy and devised a new set of economic policies to replace those of the Great Leap Forward. unlike the Great Leap Forward. Soviet planners helped their Chinese counterparts formulate the plan. was abandoned. restricted government budgets at all levels and put them under central control.5 percent were under joint public-private ownership. Successive dynasties developed a system of bureaucratic control that gave the agrarian-based Chinese an advantage over neighboring nomadic and hill cultures. for the control of China which eventually led to China's division into two Chinas: Republic of China (now commonly known as Taiwan. and guaranteed the value of the currency. The government prevented an even worse disaster by canceling nearly all orders for foreign technical imports and using the country's foreign exchange reserves to import over 5 million tons of grain a year beginning in 1960. and the Soviet-supported Communist CPC. tightened credit. During the 1961-65 readjustment and recovery period. the governing party of the Republic of China and the Communist Party of China (CPC). The civil war continued intermittently until the Second Sino-Japanese War interrupted it. In view of this civil war. 1940-1950: The Chinese Civil War was a civil war fought between the Kuomintang (KMT or Chinese Nationalist Party). and the agricultural sector gathered in a good harvest. the government unified the monetary system. economic stability was restored. Chinese civilization was further strengthened by the development of a Confucian state ideology and a common written language that bridged the gaps among the country's many local languages and dialects. was primarily a political upheaval and did not produce major changes in official economic policies or the basic economic model. which have significantly impacted business landscape in China for the MNE s? Answer) China is the oldest continuous major world civilization. Large numbers of Soviet engineers.500 years. the last three years of the war (1946 . technicians. and by 1966 production in both agriculture and industry surpassed the peak levels of the Great Leap Forward period. resulting in the two parties forming a Second United Front. with records dating back about 3. 1960-1970: Faced with economic collapse in the early 1960s.Q1) Outline the major changes in the international business environment over the last 7 decades from a MNE s perspective. By 1956 approximately 67. The war began in April 1927 and represented an ideological split between the Western-supported Nationalist KMT. as it was by the Mongols in the 13th century. In mainland China today. the conquerors sooner or later adopted the ways of the "higher" Chinese civilization and staffed the bureaucracy with Chinese. The frequent closures called in by ROC also added to the cost of doing business in China. The Soviet approach to economic development was manifested in the First FiveYear Plan (1953 57). In 1958 industrial output did in fact "leap" by 55 percent. and China's full-scale civil war resumed in 1946. and scientists assisted in developing and installing new heavy industrial facilities. marking the end of World War II. ROC) and People's Republic of China (Mainland China. To bring inflation under control by 1951. The Cultural Revolution. which was intended to continue the policies of the first plan. China did not attract any major foreign investment from MNE s in this period. PRC). .1949) is more commonly known as the War of Liberation. Whenever China was conquered by nomadic tribes.5 percent of all modern industrial enterprises were state owned. including many entire plants and pieces of equipment purchased from the Soviet Union. The result of the Great Leap Forward was a severe economic crisis. Japan's campaign was defeated in 1945. 1950-1960: The banking system was nationalized and centralized under the People's Bank of China.

and generating strong rates of growth in all sectors except heavy industry. In 1996. and economic expansion was fueled by the introduction of more than 2. After the fall of the Gang of Four.5%. which was intentionally restrained. China became the second largest economy in the world after the US.000 SEZs and the influx of foreign capital that the SEZs facilitated. increasing incomes substantially. China claimed success in its three year effort to make the majority of large state owned enterprises (SOEs) profitable. One of the most significant was a proposal to provide protection for private property rights. Post recession.Present: October 2003. and other consumer goods. 1970. approximately 98 percent of all farm households were under the responsibility system. The growth rate was thus tempered. The interlude of uncertainty finally ended when the Gang of Four was arrested in October. These years showed the maximum increase in FDI. China's . in 1984 was 21 percent. and had quadrupled since 1978." during which key imbalances in the economy were to be corrected and a foundation was to be laid for a well-planned modernization drive. 1999 2000: China's economy regained momentum in the early 1990s. and other matters of concern to foreign businesses were also passed in an effort to attract international capital to spur China's development. the economy quickly recovered from the stagnation of the Cultural Revolution. and in 1986 it reached 35 percent .1980: During the early and mid-1970s. Gross domestic product in 2000 grew officially at 8. The Fifth Plenum in October 2005 approved the 11th Five-Year Economic Program (2006 2010) aimed at building a "harmonious society . state enterprises would continue to dominate many key industries in what was now termed a "socialist market economy". The year 2000 showed a modest reversal of this trend. Between 1976 and 1978. the Chinese economy continued to grow at a rapid pace. The foreign trade in 1980 was 15 percent. the radical group later known as the Gang of Four attempted to dominate the power center through their network of supporters and. increasing the incentive for enterprises to maximize profits and substantially adding to their autonomy. During 1993. Government policies were more favorable for MNE s and China had become an attractive destination for MNE s. In 2000. output and prices were accelerating. raising the availability of food. and reevaluated investment projects. stressed material incentives for workers. investment outside the state budget was soaring. one month after Mao's death. most important. Fearing hyperinflation. By the end of 1984.25 billion people but a GDP of just $3. The government approved additional long-term reforms. percentage wise. 2000. the new policies strengthened the authority of managers and economic decision makers at the expense of party officials. In 1999. at about 9.Laws on contracts. The first few years of the reform program were designated the "period of readjustment. housing.800 per capita (PPP). accompanied by low inflation. The practice of remitting taxes on profits and retaining the balance became universal by 1985. the world sees China as one of the engine that will pull the world out of recession. and the inflation rate dropped from over 17% in 1995 to 8% in early 1996.0% that year.Nonetheless. patents. and it profoundly affected the modern sector of the economy. its influence was felt throughout urban society. raised interest rates. Chinese legislators unveiled several proposed amendments to the state constitution. through their control of the media. the authorities called in speculative loans. with its 1. 1980-1990: The period of readjustment produced promising results. China grew by approximately 10% through out. and called for expansion of the research and education systems.

1949. Party General Secretary Deng Xiaoping. took over direction of the party and adopted pragmatic economic policies at odds with Mao's revolutionary vision. and China's people exhausted themselves producing what turned out to be shoddy. In the early 1950s. restoring the economy. By 1949. and other pragmatists in the spring of 1966. Deng.S. and other mass organizations. on October 1. Mao broke with the Soviet model and announced a new economic program. The KMT authorities on Taiwan still call themselves the "Republic of China. The dispute escalated.R. Q2) Explain the key changes in the China s political environment decade by decade commencing 1940 s. The bitter struggle between the KMT (Kuomintang or "Chinese Nationalist People's Party"). The new government assumed control of a people exhausted by two generations of war and social conflict. The CCP's authority reached into almost every aspect of Chinese life. Party control was assured by large. In 1960. State President Liu Shaoqi and his protégé. and "backyard factories" dotted the Chinese landscape. a government apparatus responsive to party direction. The already strained Sino-Soviet relationship deteriorated sharply in 1959.).In Beijing. Within a year. and the placement of party members into leadership positions in labor. unsalable goods." The People's Republic of China. Mao Zedong (Mao Tse-tung)." aimed at rapidly raising industrial and agricultural production. even though the two parties nominally formed a united front to oppose the Japanese invaders in 1937.total trade in 2006 surpassed $1. The Cultural Revolution-In the early 1960s. Which are the major milestones in China s transition to a market based economy? Early 20th Century in China . where he proclaimed Taipei to be China's "provisional capital" and vowed to reconquer the Chinese mainland.C. agricultural production fell behind.The Chinese Communist Party (CCP) forces embarked on a "Long March" across some of China's most desolate terrain to the northwestern province of Shaanxi. The results were disastrous. and the Soviets withdrew all of their personnel from China in August 1960. During the "Long March. women's. politically loyal security and military forces. the "Great Leap Forward. the Soviets and the Chinese began to have disputes openly in international forums. Dissatisfied with China's new direction and his own reduced authority. the combination of poor planning during the Great Leap Forward and bad weather resulted in one of the deadliest famines in human history. and the CCP continued openly or clandestinely through the 14-year long Japanese invasion (1931-45)." the communists reorganized under a new leader. From 1960 to 1961. The "Great Leap Forward" and the Sino-Soviet Split. Giant cooperatives (communes) were formed. where they established a guerrilla base at Yan'an. making China the world's third-largest trading nation after the U. China undertook a massive economic and social reconstruction program. This decade saw China at its mightiest. Party Chairman Mao launched a massive political attack on Liu. Mao Zedong proclaimed the founding of the People's Republic of China (P. and an economy ravaged by high inflation and disrupted transportation links." was . starvation appeared even in fertile agricultural areas. the CCP occupied most of the country. The war between the two parties resumed after the Japanese defeat in 1945. Normal market mechanisms were disrupted. The new movement. and rebuilding many wardamaged industrial plants. Chiang Kai-shek fled with the remnants of his KMT government and military forces to Taiwan.76 trillion. and Germany. when the Soviets started to restrict the flow of scientific and technological information to China. The new leaders gained popular support by curbing inflation.In 1958. the "Great Proletarian Cultural Revolution.

a protégé of Mao. called Red Guards. staged protests against the slow pace of reform.unprecedented in communist history. Mao's Cultural Revolution was officially proclaimed a catastrophe. Gradually. was replaced as premier in 1980 by reformist Sichuan party Chief Zhao Ziyang and as party General Secretary in 1981 by the even more reformist Communist Youth League chairman Hu Yaobang. The authorities forcibly suppressed the demonstration. and attracting foreign direct investment into China. student demonstrators. In late 1980. the leadership adopted economic reform policies aimed at expanding rural income and incentives. In December 1986. Although students and intellectuals urged greater reforms. and the Chinese political situation stabilized along complex factional lines. China was set on a course of political and social anarchy that lasted the better part of a decade. seeking out leaders who would not bend to the radical wind. encouraging experiments in enterprise autonomy. The ideological struggle between more pragmatic. died of cancer. arrested Jiang Qing and other members of the "Gang of Four. In the early stages of the Cultural Revolution. veteran party officials and the radicals re-emerged with a vengeance in late 1975. many officials criticized and dismissed during 1966-69 were reinstated. The Post-Mao Era. On April 5. some local People's Liberation Army (PLA) commanders and other officials maneuvered to outwardly back Mao and the radicals while actually taking steps to rein in local radical activity. some party elders increasingly questioned the pace and the ultimate goals of the reform program." After extensive deliberations. culminating in the passage of several new legal codes by the National People's Congress in June 1979. radical youth organizations. In reaction to this turmoil. In the aftermath of the Lin Biao incident. and Vice Premier. Deng was blamed for the disorder and stripped of all official positions. reducing central planning. Red Guard and other radical activity subsided. attacked party and state organizations at all levels. with strong political overtones of support for Deng. Chief among these was Deng Xiaoping. For the first time. A month after Mao's death Hua backed by the PLA.Mao's death in September 1976 removed a towering figure from Chinese politics and set off a scramble for succession. when Party Vice Chairman and Defense Minister Lin Biao reportedly tried to stage a coup against Mao. In January 1976. PLA Chief of Staff. although he retained his party membership. a section of the Chinese communist leadership sought to rally popular opposition against another leadership group. taking advantage of the loosening political atmosphere. and three close Cultural Revolution associates (later dubbed the "Gang of Four") launched a media campaign against Deng. confirming party elders' fear that the current reform program was leading to social instability. Hua Guofeng. Former Minister of Pubic Security Hua Guofeng was quickly confirmed as Party Chairman and Premier. Mao's wife. Jiang Qing. The plenum also decided to accelerate the pace of legal reform. Lin Biao allegedly later died in a plane crash in Mongolia. Beijing citizens staged a spontaneous demonstration in Tiananmen Square in Zhou's memory. Hu . Premier Zhou Enlai. The leadership conflict came to a head in September 1971. who reemerged in 1973 and was confirmed in 1975 in the concurrent posts of Politburo Standing Committee member. a popular political figure. the Chinese Communist Party leadership reinstated Deng Xiaoping to all of his previous posts at the 11th Party Congress in August 1977. At the pivotal December 1978 Third Plenum (of the 11th Party Congress Central Committee).

. who in 1992 was designated by Deng Xiaoping as the "core" of the fourth generation leaders. a protégé of Deng and a leading advocate of reform. the central government eliminated remaining sources of organized opposition. They used armed force to clear demonstrators from the streets. 1989 Student Movement and Tiananmen Square-The death of Hu Yaobang on April 15. Protests also spread to many other cities. Premier Zhao Ziyang was made General Secretary and Li Peng. coupled with growing economic hardship caused by high inflation. Fourth Generation of Leaders.Yaobang. intellectuals. After June 4.Deng's health deteriorated in the years prior to his death in 1997. but most observers believe that casualties numbered in the hundreds. Premier Li Peng was constitutionally required to step down from that post. There are no official estimates of deaths in Beijing. was blamed for the protests and forced to resign as CCP General Secretary in January 1987. Zhu Rongji was selected to replace Li as Premier. and required political reeducation not only for students but also for large numbers of party cadre and government officials. called for an end to official corruption and for defense of freedoms guaranteed by the Chinese constitution. In March 1998. and Guangzhou. economic reform slowed until given new impetus by Deng Xiaoping's dramatic visit to southern China in early 1992. This "third generation" leadership governed collectively with President Jiang at the center. Third Generation of Leaders. Their protests. and other parts of a disaffected urban population. reform-minded leaders began their rise to top positions. military units were brought into Beijing. former Vice Premier and Minister of Electric Power and Water Conservancy. China has consistently placed overwhelming priority on the opening of its economy. the 16th Communist Party Congress elected Hu Jintao. was made Premier.In November 2002. A new Politburo and Politburo Standing Committee was also elected in November. even if "capitalist" measures were adopted. while foreign governments expressed horror at the brutal suppression of the demonstrators. Jiang was re-elected President during the 9th National People's Congress. Late on June 3 and early on the morning of June 4. Deng's renewed push for a market-oriented economy received official sanction at the 14th Party Congress later in the year as a number of younger. 1989. He was elected to the chairmanship of the National People's Congress. including Shanghai. which grew despite government efforts to contain them. During that time. Subsequent to the visit. the Communist Party Politburo publicly issued an endorsement of Deng's policies of economic openness. President Jiang Zemin and other members of his generation gradually assumed control of the day-to-day functions of government. Following the resurgence of conservatives in the aftermath of June 4. Deng and his supporters argued that managing the economy in a way that increased living standards should be China's primary policy objective. University students and other citizens camped out in Beijing's Tiananmen Square to mourn Hu's death and to protest against those who would slow reform. the new General Secretary. Chengdu. detained large numbers of protesters. provided the backdrop for a large-scale protest movement by students. 1989. Martial law was declared on May 20. Though not completely eschewing political reform.

6 3.  Conducting due diligence on the legal and financial background and reputation of key joint venture (JV) partners. with the law. Although many sectors of China's economy have become more market oriented.5 .  Lack of sanctity of contracts and contractual obligations not being carried out fully. hazy interpretation. provincial.  Emplace permanent staff in China so that they can understand the local environment and monitor the changes taking place there. General Secretary Hu Jintao was elected President at the 10th National People's Congress. The framework recommends to practitioners several measures to manage the legal risks. What was government s role in China becoming world s 2nd largest economy? What is the key challenges government of China will face during 2010 to 2015? Why? Growth Performance in the Five Year Plans Plan Period Sixth Plan (1980 84) Seventh Plan (1985 89) Annual Plan (1990 91) Eighth Plan (1992 Target 5. comment on China s economic development over the last 3 decades. Legal risks faced by MNE s in China include:  Difficulty in complying with the innumerable laws and regulations at the central. and local levels of the government.5 5. leading to disputes. lax enforcement. To achieve this. numerous restrictions and a massive bureaucracy still hinder full implementation of regulations and make the approval process unpredictable. the contact is to be continuously negotiated and reinterpreted.4 6. party.2 5 5. Q3) Explain the key aspects of China s legal environment and its implications for MNE s. industry practitioners should provide a substantial contingency sum. and philosophical disagreement. whether emperor.  Keeping up with new laws and regulations that are constantly being enacted. Chinese subscribes to philosophy of the rule of man and thus to a system that equates the decision of one man (or person). Jiang Zemin retained the chairmanship of the Central Military Commission. It is advisable to conduct pre-employment screening of all employees. acquisitions.  It is recommended that foreign professionals adopt the mindset that in China. and suppliers before entering a formal relationship. vendors.  Reluctance of Chinese business associates to enter into binding contracts.  Relationship-based strategies like establishing close relationships with the Chinese government officials and Chinese business associates and careful selection of Chinese business partners.6 Realization 5. senior managers. Q4) Using key macroeconomics parameters. including legislative gaps. China faces fundamental challenges.In March 2003. or local bureaucrat.

7% during the Tenth Plan.5% in the Ninth Plan period (1997 2001).2 Savings Rate 23.9 34.1 7. perhaps. Tenth Eleventh Plan Plan 32.29 9.52 7.Plan(2007Sector 96) 2001) 06) 11) Agriculture 4.Plan(2002.17 11.7% and this momentum has continued into 2007 08 which is the first year of the Eleventh Plan.96) Ninth Plan (1997 2001) Tenth Plan (2002 2006) 6.GDP at market prices.28 7.3 9.7 It shows that the economy grew at 6.2 28. but recovered sharply to achieve a growth rate of 7.29 4.9 5.00 Services 7.4 24.44 2.5 1. even a little higher.00-11. Sectoral Growth in Recent Plans Eighth Ninth Tenth Eleventh Plan(1992Plan(1997.00 Total 6.72 2.74 9 Investments and Savings Rate Investment Rate 24.3 4.China has achieved growth rates exceeding 9% for two to three decades.5 7.3 4 10.4 36.3 25.87 9. and is likely to record a growth of around 8.6 26. The last four years of the Tenth Plan recorded an average of about 8.54 5.4 29.9 4.5 7.00Industry 7.5% per year in the Eighth Plan period (1992 1996) and then decelerated to 5.5 9 Investment Rate (% of GDPmp) Domestic Savings Rate (% of GDPmp) Current Account Deficit (% of GDPmp) ICOR GDP Growth Rate (% per annum) GDPmp .8 1.5% or.8 Year Eighth Plan Ninth Plan 2002-03 2003-04 .7 30.1 23.

insurance and telecommunications were also opened up to foreign investment The key challenges government of China will face during 2010-2015:  Corruption. China s robust financial system.  A migration trend with the difficulties from increased urbanization as there is no insurance system to guarantee the migrants social security. and these are the regions which are the primary task for social development. This makes it easier to dictate the country s direction in times of economic need or crisis.  In the 1990s.5 35. without the backand-forth debates and indecision seen elsewhere.1 31.9 36. and an overall smooth transition into the market economy China is becoming.  The Communist Party has sought to portray a climate of progress. Restrictions on retail.  GDP growth in China has been impressive in the past years. high per-capita savings.  China has made great progress in poverty eradication. new epidemics.3 34.8 Government s role in China becoming world s second largest economy:  China can implement economic policy a lot easier and faster than other large economies like the US. it has been very easy to project whatever figures to the world it wanted.  The masses of non-performing (unpaid) loans the financial system has to absorb. And without bipartisan debate or dispute.  Unproductive state-owned enterprises . and export-led. in places where minorities live and where there are epidemics.7 34.  Environmental problems and natural disasters. or European economies can due to its central.Companies routinely battle bribes and attempts to steal property while struggling to establish clear titles to land and physical equipment. with wide social gaps in mountainous areas. Japan.8 31.2 35.  Intellectual Property MNE complains that China s industrial surge is being powered by the sophisticated theft of their intellectual property.2004-05 2005-06 2006-07 Tenth Plan Eleventh Plan targets 32. the financial sector was liberalized. and risks of market failures where the poor are vulnerable to international crises. manufacturing-based economy have contributed to its growth and long-term potential. Banking. After China joined the World Trade Organization (WTO). communist structure.9 32. wholesale and distribution were ended. financial services. some imbalances remain. stability.  The income gap is still widening between urban and rural and eastern and western regions.8 34. the service sector was considerably liberalized and foreign investment was allowed.