China: How It Has Changed Over the Last 40 Years

To fully understand China today and how companies operate in the Chinese market, it is first necessary to explain the economic path that China, formally known as the People's Republic of China, has gone through in recent years.

Since 1978, through the Open-Door Policy promoted by Supreme Leader Deng Xiaoping, China has experienced an opening towards free trade.

Thanks to a series of reforms that culminated in China's entry into the World Trade Organization (WTO) in 2001, it is now possible to speak of internationalization in the Chinese market.

In the 1990s, China ranks second after the United States for the size of foreign direct investment (FDI). The eastern power reaches first place in 2002 and currently remains in the first place.

Despite these successes, Chinese laws still prevent the creation of companies with foreign participation, since Sino-foreign companies are limited only to production, while local and foreign companies are subject to different taxes. On the other hand, only Chinese companies with an import/export right can operate in the foreign trade sector.

The entry into the WTO on December 11, 2001, represented the beginning of a new stage for China. This step sealed the country's opening to foreign trade in terms of imports and exports. This decision is based on the Chinese government's desire to align with global economic policies, liberalize both trade and investment, as well as better regulation of trade in a more transparent environment, and, finally, the possibility of developing competitive Chinese companies in a global system.

Currently, foreign products continue to be governed under rigid control and registration policy, however, it is in this economic scenario that the first companies enter the Chinese market.?

Political context

China is the most populous country in the world, with more than 1,433 million citizens and an area of almost 10 million square kilometers.

The People's Republic of China is officially a one-party socialist market economy state and since the Xinhai Revolution in 1912, which declared the end of the imperial era, China has always had forms of nationalism in its political systems. Today, the majority is represented by the communist party, which since 1949 has exercised legislative power through the National People's Congress of China.

The political scene is currently characterized by the trade war against the United States, started by Donald Trump, 45th president until January 20, 2021. The "currency war", thanks to which the Chinese currency, known as the renminbi or yuan, has recovered points against the US dollar, is currently a threat to foreign companies since they must face more production and distribution costs tall. With the election of the new American president, Joe Biden, the implementation of new strategies is expected, certainly characterized by a more relaxed and less aggressive policy.

In addition, the internal crisis in the Hong Kong Special Administrative Region has contributed, since 2019, to a strengthening of entry rules in Mainland China, promoting protectionism in domestic industry, and the intervention of both companies and foreign institutions.

Economic context

Today, China is considered a favorable and profitable economic market for several reasons, and above all because of the cheaper labor cost, which gives the country a considerable competitive advantage over its international competitors. This is one of the secrets by which China attracts a lot of foreign investment, especially from companies producing consumer goods.

In addition, China has become the country with the highest level of export in the world. Likewise, the Central Bank of China also has the reserve function of the foreign exchange rate and, in addition, tries to keep the inflation rate high so that consumption levels do not fall.

Today, China is the world's second-largest economy and the largest exporter. However, even though China has one of the fastest-growing GDPs in the world, its economic growth fell to 2.3%, against 5.8% in 2019, due to the impact of the COVID-19 pandemic. This is also due to a structural slowdown, caused by growing financial risk concerns amid an economic restructuring led by the communist government.

Despite structural changes, external demand and robust domestic consumption continue to drive growth, and new sectors such as e-commerce and online financial services are gaining momentum in an economy dominated by export-oriented sectors. According to forecasts, the GDP trend is expected to rebound to 8.4% in 2021 before slowing to 5.6% in 2022.

At the end of 2020, inflation reached 2.4% and should fall to 1.2% and 1.9% in 2021 and 2022. However, public debt is a cause for concern in China. Although the official figure for 2020 was 66.8%, the actual figure is believed to be much higher and is expected to increase in the coming years. According to recent studies, the total stock of corporate, family, and government debt in the nation now exceeds 303% of gross domestic product and represents approximately 15% of all world debt.

Despite government cuts, public debt is expected to increase in the future, reaching 69.6% in 2021 and 73.7% in 2022. Due to the COVID-19 pandemic, the government's budget balance reached a minimum historical record of -9.7% of GDP in 2020 compared to -5.9% the previous year, a trend that is expected to continue in 2021 and 2022, when it is estimated to reach -9% and -8.3%, respectively. On the other hand, China still has large foreign exchange reserves, estimated by Chinese official reserve assets at $ 3.15 billion in July 2020, which could serve as a buffer from external sovereign volatility, along with a current account surplus of an estimated $111.66 billion in 2021. Consumption has yet to recover from the impact of the COVID-19 outbreak, but luxury goods sales and box office revenues have reached new highs.

In 2021, the most immediate challenge for the country is related to the economic, social, and public health impacts of the COVID-19 pandemic. In addition, China faces many challenges: an aging population and a contracting workforce, a lack of openness in its political system, and competitiveness problems in an economy that relies on high capital spending and expanding labor. credit. There continues to be a large gap between the standard of living in cities (60% of the Chinese population lives in urban areas) and the countryside, between the urban areas of the Chinese coast and the interior and west of the country, as well as between the urban middle classes and those that have not been able to benefit from the growth of recent decades. These inequalities are of increasing concern to both Chinese authorities and investors, hence Xi Jinping's commitment to complete rural poverty eradication by 2020.

According to data from Human Resources and Social Security, the low unemployment rate in recent years is largely due to the new digital economy and entrepreneurship. However, many analysts say that the government's figure is an unreliable indicator of national employment levels, as it only considers employment in urban areas and does not measure the millions of migrant workers arriving in the country each year. Despite the global context, the unemployment rate only increased slightly from 3.6% to 3.8% in 2020 and the rate is expected to return to pre-pandemic levels of 3.6% in 2021 and 2022.

Finally, around 43 million people still live on less than $1 a day, which is the poverty line set by the government (according to official statistics, five years ago, around 100 million people lived below that line).

?Social context

To make a social analysis of China we must consider multiple aspects that affect this country. The most important is the huge population (1.4 billion people) and its growth rate of around 0.6%, which the Chinese government tried to keep stable through its one-child policy for many decades.

This huge population is a powerful element for the Chinese economy because it provides a constant and low-cost workforce. Other elements that should be mentioned are the structure of the different ages that make up the population (around 71% of the population is between 15 and 64 years old) and the very high and growing literacy rate (96.4%).

This is a massive market for consumer products. As mentioned above, the quality of life and the average salary level have increased over the years, increasing consumer spending.

Like the impressive progress in the literacy rate, we have already mentioned that the country has also made astonishing progress in reducing poverty, lifting more than 100 million people out of extreme poverty in recent years.

While China has made great progress in eradicating extreme poverty, there are some social challenges it faces today. For example, the aging of the population is a cause for concern. Many analysts suggest that China should increase the birth rate and invite more foreign workers. Likewise, the wealth gap, poor health care, and rising cost of housing are some other challenges for years to come.

Technological context

In the last 20 years, China has been creating innovations in fields such as biotechnology and informatics, becoming one of the most important world leaders in technology and science.?This is due to the increasingly strict collaboration with the United States, to cooperate in areas such as renewable energy and health.?The study of outer space is also considered a priority and in 2021 China has become the second nation to successfully land on Mars.

Specifically, the technological power of China consists mainly in the great use of the Internet, since, at the end of 2020, around 989 million people had access to the Internet in China.?Despite representing more than a fifth of the four billion Internet users worldwide, compared to its total population, China's Internet penetration rate is lower than in other Asian countries.

Internet use in China is also characterized by a large regional discrepancy.?In rural regions, the rate of Internet access is much lower than at the national level.?On the other hand, the Chinese market became a nation that prioritizes mobile devices.?Since 2014, more Chinese have accessed the Internet through mobile devices than computers.?The number of mobile Internet users in China has steadily increased during the last previous one.

For this reason, China has also become a benchmark for the development of 5G technology, thanks to its leading technology companies such as China Mobile, Huawei, Xiaomi, Tencent, Baidu, and Alibaba.

Japan and the European Union also have cooperative relations on science and technology with China.

Ecological context

Along with China's rapid industrial development are serious negative impacts on the environment, including increased pollution and declining natural resources.

In 2007, China became the world's largest emitter of carbon dioxide and other gases that lead to the greenhouse effect, as seven of the ten most polluted cities in the world are in China.

In addition, there is contaminated water in almost all the rivers of the country and half of the population lacks clean water for daily life.

Today, like any government, China's leaders pay increasing attention to environmental problems in the country.?Realizing the importance of environmental protection, the State Environmental Protection Administration officially became, in 1998, a ministerial-level agency, under the name of the Ministry of Environmental Protection.

Recently, China's environmental legislation has been strengthened and some progress has also been made to contain environmental deterioration.?China, along with other Asian and Pacific countries, proposes to implement common strategies to reduce pollution and global climate change.?Thanks to these campaigns, the air quality in some cities has recently improved.

In addition, it has also been actively involved in the climate change talks, having signed the Basel Convention on the Transport and Treatment of Hazardous Waste and the Montreal Protocol on the Protection of the Ozone Layer.

In this sense, water scarcity and climate change affect the way companies operate.?They need to face mandatory changes both in their production lines and in the new standards established for their products to respect government reforms in favor of the environment.

Legal context

China is a country that has changed a lot over the last thirty years. Despite its political unity, China is characterized by highly differentiated labor laws, which can vary depending on the geographical area, the level of education, and the type of employment. For example, labor standards, employee compensation and benefits, labor disputes, and other relevant matters are regulated by the "China Labor Law" of 1995, the "China Labor Contract Law" of 2007, and various administrative regulations.

Specifically, foreign direct investment in the country is highly restricted and regulated by the laws of the country, and the products that can currently be produced in China belong to 384 categories and each product is subject to a different process of control and registration by the administration. China.

Another aspect to consider is the legal restrictions of social networks. Comp we already know, in the West the most widespread social networks are Facebook, Instagram, WhatsApp, and YouTube. However, all these platforms are hardly considerable in PR China, and it is necessary to understand why. It has already been mentioned that the Chinese government, represented by the Communist Party, exercises strong control over China's economy and trade affairs. This led to strict policies, which ended in form of censorship. Specifically, through a series of increasingly strict laws, the Chinese government planned in 1998 the “Great Firewall of China”, literally a Great Firewall, which was launched in 2003. From that point on, any content and information present on the internet is filtered and analyzed by the Bureau of Public Information and Network Security Supervision.

In May 2017, President Xi Jinping tightened the restriction on web control. The new Cyber Security Law (CSL) allows the government to take possession of all digital data of people who live and work in China, including data from foreign clouds, leaving free access only to those pages whose server is located on the Chinese territory. Officially, the president's political movement has the sole objective of benefiting the people and the Country, protecting them from the dissemination of information that can abuse individuals.

From a marketing perspective, the government's censorship policy affects traditional communication channels, such as television or newspapers, and news channels, such as social networks, messaging applications, or even search engines.

Nowadays, all those who want to access content and services developed by web pages whose servers are located outside of PR China need to contract a VPN service ('virtual private network') before arriving in China or use a private network. Since the emanation of the new laws of 2017, it is increasingly difficult to use these services since censorship is increasingly "smart" and strict. For this reason, the Internet connection through a VPN is slower and more unstable depending on the location of the server.

At present, despite major technological changes, the trade and technological war between the United States and China represents the greatest threat to all those fashion companies wishing to enter the Chinese market.

This crisis has turned into a real battle after the Chinese government took retaliatory measures against the latest tariff increase promoted by the Trump administration. The Beijing government announced the increase of its tariffs on the total value of 60 billion dollars in goods exported from the United States from 5% to 25%, effective June 1, 2019. Among the wide variety of products affected, there are also clothing, accessories, clothing, and footwear.

This duel between the world's two largest economic powers contributes to an uncertain economic outlook for all industries, in both countries, and perhaps globally. For luxury and fashion companies, whose business cycles, from manufacturing to retail, are increasingly dependent on China, the unfolding and ending of this crisis could be catastrophic.

According to certain forecasts, trade disputes and decisions made by the Trump administration threaten the profitability of the luxury and fashion sector in the medium and long term, negatively affecting the entry of new companies into the Chinese market:

First, American-sourced luxury brands have suffered significant losses. Specifically, it might appear that the United States is winning, as China has historically exported more goods to the US than vice versa.

However, many of China's exports are consumer goods or commodities used by other American manufacturers and it could be much more difficult for American exporters to replace China and its buyers since it has 20% of the world's population and much of its total wealth.

Finally, it is likely that over time, due to the introduction of tariffs on raw materials, US brands will lose their price advantage over their European rivals in the Chinese market due to the trade war.?Many US brands face pressure to increase retail prices to offset the impact on their profitability.?When it comes to prices, European companies, such as luxury brands, are heading in the opposite direction.?Led by Louis Vuitton, Gucci, Hermès, and Prada, the brands are aggressively lowering retail prices in mainland China in response to Chinese regulation.

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