Reliance Industries in China

Contents
S.NO.

Topic

Page
No.

1.

Introduction of Reliance Industries

2.

The Basis of Trade International Theory

3.

Understanding Tariffs, customs, & FT zones w.r.t.

China

4.

Reliance Products in China

11

5.

Reliance Industries Mode of entry into China

13

6.

Exchange rates: Managing transaction and

economic exposure

14

7.

Cultural factors

18

8.

Country ratings

20

9.

Conclusion

24

10.

References

24

Introduction of Reliance Industries

India and China have enjoyed a dynamic economic relationship which has gained
much traction over the last decade. Both countries represent large rapidly growing
developing economies and have emerged as drivers of global growth. The
opportunities in both nations are expanding at an astounding pace as development
intensifies and a new class of consumers and workers from both sides steps onto the
global economic platform.
Bilateral trade has multiplied manifold over the last decade and today, China is
Indias largest trading
partner. The two countries are developing their special
identities in each others economies and proceeding rapidly on participating in each
others growth and development process.
Indias presence in China has also increased over the years, especially in areas of its
core competency such as IT, manufacturing and R&D. However, for a synergistic
bilateral economic engagement, there is need for Indian companies to tap the
opportunities in the Chinese market more closely and to take advantage of its
environment.
China is now its third-largest trading partner in goods, and the biggest if you include
Hong Kong. For China's East Asian neighbours a dominant trade with China is a given,
but Indians are still trying to digest the development. Rising trade with China has
been good for India. It mainly imports Chinese capital goods, with firms benefiting
from cheap and decent gear.

Talking about the business, the giant Reliance Group has bought kit for power
stations and telecoms networkspartly paid for with competitive Chinese loans.

Reliance - India's Largest Business House The Reliance Group, founded by Dhirubhai
H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in
the energy and materials value chain. Group revenues add up to USD 20 billion. The
flagship company, Reliance Industries Limited, is a Fortune Global 500 company. The
Group's activities span exploration and production of oil and gas, petroleum refining
and marketing, petrochemicals (polyester, fibre intermediates, plastics and
chemicals) and textiles. Reliance enjoys global leadership in its businesses, being the
largest polyester yarn and fibre producer in the world and among the top five to ten
producers in the world in major petrochemical products. The Group exports products
worth USD 5 billion to more than 100 countries in the world. There are 25,000
employees on the rolls of Group Companies. Major Group Companies are Reliance
Industries Limited and Indian Petrochemicals Corporation Ltd
RIL's strategy includes:
Building and sustaining leadership position across its product categories in the
domestic markets;
Pursuing attractive export opportunities;
Implementing vertical integration;
Improving its technology;
Achieving economies of scale;
Focusing on prudent financial management; and
Investing in high growth opportunities.
Going further with doing business in china, Reliance Industries Limited in 2003,
targeted China's huge polymer market and then made inroads into this sector, which
is dominated by countries like South Korea, Japan, Malaysia, Thailand and the United
States, a company official said in Shanghai.
Realizing the potential of the huge Chinese market, RIL opened a full-fledged
representative office in Shanghai, China's largest city as well as the commercial hub.
Noting that China consumes 33 per cent of the global polymer output. RIL, which has
surplus capacity for polypropylene at its Jamnagar petrochemical complex, targeted
the China's growing market.
In 2008, Reliance Industries for the first time teamed up with China's CNPC to win a
gas block in Peru in an effort by the Mukesh Ambani-run company to expand its
presence in Latin America.

Reliance Power Ltd. secured $1.1 billion in financing from three Chinese banks for a
power project in central India, the first such endeavour financed by the Chinese in
India, people familiar with the matter said.
The loans were used to refinance part of the 145 billion rupees ($2.6 billion) the
company received in financing from banks in India to build a coal-fired power
project at Sasan in the central state of Madhya Pradesh, the people said.
In 2012, Anil Ambani-led Reliance Group signed an agreement with China's retail
player Wanda Group to set up a joint venture for building integrated township
projects in India.
The two will initially develop 135 acres owned by Reliance Communications
Ltd (RCom) in Navi Mumbai and 80 acres with Reliance Infrastructure (RInra) in
Hyderabad. RCom and RInfra are part of Reliance Group. Wanda group is the
leading real estate developer in the world, and has built over 130 million square feet
property in 66 integrated projects across 50 cities in China.

The Basis of Trade International Theory

Lets analyse China based on different International Trade theories:
1. Mercantilism
In the first ten months of 2013, Chinas import and export totalled US$ 3400 billion
with a year-on-year growth of 7.6%.Chinas export was US$ 1800 billion, and its
import was US$ 1600 billion, up by 7.8% and 7.3% respectively, with trade surplus of
US$ 1250 billion. So, in accordance with the theory, exports exceeded imports.
2. Adam Smith: Absolute Advantage
Manufacturing in China opens a world of possibility to create a wide range of
products and innovations. In addition, bringing product manufacturing to China
allows you to create a higher volume of product for reasonable cost. With a little
research and sourcing, you can build a partnership to manufacture your latest
product invention. If your competitors successfully outsource manufacturing in
China, they can offer prices to your customers that are 30 percent to 50 percent less
than they are currently paying. So, China in accordance with the theory, specializes in
rare-earth metals among other products in which it has an absolute advantage.

3. Porters Diamond Model

Cheap labour and the production of basic products to a low price have been vital to
establishing Chinas current competitive position. China faces following challenges
according to Porters model:
Access to qualified labour
China produces an incredible number of graduates every year. It seems, however,
that the knowledge the graduates possess is not sufficient aligned with the needs in
the industry.
A workforce with high mobility
Even though some mobility in the workforce may foster innovation (Lenzi 2009), too
much mobility between companies or industries may be an impediment to building
and sustaining knowledge bases. This high mobility is a result of competing
companies attracting the employees with only slightly higher wages.
Too much intervention from the government
The intervention from the government is rather extensive in the polymer industry in
China. Based on observations, it seems like the strategy of the government is to
avoid internal competition between companies, so that the players can concentrate
on competing on the global arena. In addition, the industry enjoys great subsidies
and other government controlled benefits as a result of being defined as a key
industry. By protecting the national player, they are not exposed to free competition,
leading to lower degrees of innovation. The Chinese government is under heavy
pressure from many institutions arguing that China needs to open their markets and

expose their domestic companies to more competition (e.g. EurActiv 2010; E24/NTB
2010).
Polymer demand in China
China's per capita consumption of plastics was 22 kg in 2005. Just five years later,
that figure had more than doubled, hitting 46 kg. The country's emergence as a
consumer of plastics, vs. primarily being an exporter of plastic-containing goods, will
comprise the next chapter in its rise to plastics pre-eminence. At 46 kg, per capita
plastics consumption in China is just one-third the level of developed countries,
where it can range from 120 to 200 kg, with some estimates of the U.S. rate at 170
kg. As the country consumes more plastics, the government's plan is for those
materials to be domestically produced.
Related & Supporting Industries in China
The huge global and domestic demand for China's polymer products has helped
multiply growth in China in the last decade to become the global hub for imports,
processing, exports and consumption of plastics. Trailing behind only USA, China has
moved on to become the world's second largest producer of plastic products. The
Chinese market has been growing at more than 10% in polymer for the last decade
compared to the global growth rate of 4-5%. Global manufacturers have moved or
are in the process of setting up manufacturing plants in China with mega investment
outlays in the country's petrochemical and polymer industries. Global chemical and
oil giants including Dow Chemical, DuPont, BASF, Bayer, Chevron Texaco, Shell,
Mitsubishi Chemicals and BP, have already invested or plan to invest in China. With
this, China's plastics industry seems poised for further growth. Consultancy firm
KPMG, in its report notes that annual investment in China is at US$30 bn, out of
which 50-60% is from foreign investors. China is estimated to account for nearly 40%
of the demand for chemicals by the end of 2006.
An ever-increasing demand domestically, as well as from industries like automotive,
packaging and consumer durables setting up their shop or sourcing plastic
components from China, will boost the industry's growth. KPMG in its report
observes that infrastructure, power, intellectual property concerns and supply chain
costs will continue to constrain the industry. The report predicts consolidation in the
industry leading to emergence of a much leaner and tougher chemicals industry. The
opportunities are bright for companies that can better integrate and optimize their
global supply chains with local knowledge of the markets to survive in this highly
competitive market.
Chinese companies, which started with simple low-cost plastic components, have
now moved onto produce high-end products using the latest technologies and
manufacturing processes. This indicates the pace at which the plastics industry in

China is evolving and getting integrated with the global economy. China is therefore
in a unique position to determine the business viability of major petrochemical and
polymer producers.

Understanding Tariffs, customs, & FT zones w.r.t. China

China has been a member of WTO since 11 December 2001.
What is an HS code?
An HS (Harmonized Commodity Coding System) code, also known as a tariff code, is a
universally accepted classification system, with 6 to 10 digits, to allow countries to
identify goods, administer customs programs and collect trade data. An HS code is
the basis to determine tariffs, taxes and other regulatory measures on imports into
China. China uses a 10-digit system for both exports and imports.
What is a tariff schedule?
The General Administration of Customs of China publishes an annual tariff schedule
including HS codes, import tariff rates, import value-added tax (VAT) rates, import
consumption tax rates, export tariff rates and regulatory measures. The tariff
schedule remains stable as a whole, though there are minor adjustments on HS
codes and tax rates every year. Please contact the Trade Commissioner Service at the
Canadian Embassy to China if you are interested in the up-to-date tariff schedule.
How can exporters estimate total tariffs and taxes paid to China Customs?
Import tariffs and taxes are assessed on the transaction value of the goods, including
packing charges, freight, insurance premiums and other service charges incurred
prior to the unloading of the goods at destination.
Exporters can use the following formula to calculate tariffs and taxes (if applicable)
due to China Customs:
Import Tariff = Value of Goods x Tariff Rate
Import VAT = (Value of Goods + Import Tariff + Import Consumption Tax) x VAT
Rate
Import Consumption Tax = [(Value of Goods + Import Tariff) / (1 Consumption
Tax Rate)] x Consumption Tax Rate
However, China Customs has complete discretion to assess the value of the goods
and the tariffs and taxes to be levied.
Import Regulations in China

In the past, only a very restrictive number of Chinese companies with foreign trading
rights were approved to import products into China. Further to Chinas accession to
the WTO, companies seeking to engage in import trade only need to register with the
Ministry of Commerce (MOFCOM) or its authorized local offices according to the
Foreign Trade Law and the Measures on Filing and Registration of Foreign Trade
Operators in 2004.
All companies (Chinese and foreign) have the right to import most products but a
limited number of goods are reserved for importation through state trading
enterprises.
What to Import?
China classifies imports into three categories - prohibited, restricted and permitted
categories. Certain goods (e.g. wastes, toxics) are banned from being imported, while
select products in the restricted category are subject to strict restrictions by requiring
quotas or licenses.
Most goods fall into the permitted category. Importers are free to decide how much
and when to purchase. MOFCOM implements an Automatic Licensing system to
monitor the import of part of these goods (e.g. machinery, electrical products). A
detailed list of merchandise categories can be obtained from MOFCOM or through
the one of Canadas missions in China.
Import Tariffs
China charges tariffs on most imports, primarily ad valorem. These tariffs are
assessed on the transaction value of the goods, including packing charges, freight,
insurance premiums and other service charges incurred prior to the unloading of the
goods at the place of destination. Many tariffs have been lowered since Chinas
accession to the WTO. The average tariff dropped from 15.3% in 2000 to 9.8% in
2009. Value added tax (on almost all products) and consumption tax (on some
products) are also assessed at the point of importation. The normal VAT rate ranges
from 17% to 13% for certain items. Importers of certain consumer goods (e.g.
tobacco, liquor and cosmetics) must pay consumption tax at a rate varying between
1% and 40%.
Free Trade Zones
In China, there are 15 free trade zones (FTZ); these special zones provide exceptions
to the usual customs procedures and allow for preferential tariff and tax treatment.
All forms of trade conducted between companies in FTZs and areas in China outside
the zones are subject to the usual rules that would apply to imports into China.
Export Processing

Special provisions (e.g. refunds of VAT and duty) apply to goods imported under
export processing trade arrangements involving manufacturing contracts where all of
the manufactured goods are exported. All such arrangements must be approved by
MOFCOM or its local offices.
Import Licences
The importation of certain goods requires an import licence. Generally speaking,
applications for import licences are submitted to MOFCOM or its authorized local
offices. For some goods (e.g. machinery, electrical products), the licence is issued
automatically to all applicants and is only used to track imports more accurately. In
other cases, approval is not automatic. Such non-automatic import licences are used
to control the importation of dangerous goods and to implement tariff rate quotas
(i.e. two-stage tariffs, where the right to pay a lower tariff is granted to importers up
to a certain total quantity of goods).
Tariff Rate Quotas (TRQs)
TRQs (i.e. two-stage tariffs, where the right to pay a lower tariff is granted to
importers up to a certain total quantity of goods) are in place for wheat, corn, rice,
sugar, wool, cotton, certain fertilizers, and wool tops. Chinese companies seeking to
import at the lower TRQ tariff rate must apply to MOFCOM for an allocation between
October 15 and 30 each year (or for re-allocations of unused TRQ, between
September 1 and 15 each year).
Import Inspection/Certification
Complex inspection and certification requirements are in place, requiring certain
goods to be inspected on arrival and/or to be accompanied by formal certification
recognized by the Chinese government (e.g. CCC and RoHS for electrical goods or
pest-free certification for certain agricultural products). Goods that fail to pass the
required inspections and/or that are not accompanied by the required certification
may be confiscated. Certification requirements may include factory inspections in
Canada.
In some cases, China recognizes certification provided in Canada (e.g. by the
Canadian Standards Association or the Canadian Food Inspection Agency). In other
cases, testing needs to be conducted in China to obtain the necessary certification.
For some goods (primarily agricultural goods and electrical/electronic products), it
may also necessary to have the Canadian factory or processing facility certified by
the Chinese government (which may require site visits by Chinese inspectors paid for
by the Canadian company).

 Labelling/Packaging Requirements
China has a range of labelling and packaging requirements in place that are
particularly important for consumer goods. In some cases, goods that do not meet
these requirements will be refused entry to China.
Reliance Products in China
RILs china businesses straddle across various sectors like polymers, polyesters,
chemical intermediates, textiles, organized retail and SEZs.
Reliance Polymers: Reliance Polymers is one of the world's largest producers of
polymers with a current capacity of 4.4 MMT per annum. It operates world-scale
plants for Polypropylene (PP), Polyethylene (PE) and Polyvinyl Chloride (PVC), using
state-of-the-art technology, setting global benchmarks in product quality and
services. A wide range of grades in each category provides avenues for diverse
applications across agriculture, automotive, building and construction, healthcare,
infrastructure, lifestyle and packaging. Superior technological strengths, a strong
focus on R&D, the latest IT-enabled services which provide for efficient supply chain
management and end-to-end solutions offered across the value chain bear testimony
to its commitment towards customer satisfaction.
Repol Polypropylene: If it can be imagined, Reliance Polymers can help convert it into
a business success. That's ideation. Repol Polypropylene (PP), with its versatility,
does just that providing new cost-effective applications, across various sectors,
through innovation, customization and material substitution. As one of the top 5
manufacturers of Polypropylene in the world, Reliance Polymers offers a wide range
of Repol Homopolymer, Random and Impact Copolymer grades. With a capacity of
around 2.7 MMT per annum, the scope for new applications is infinite.
Repol PP grade available for various appliances:

Reliance Industries China value chain activities

1. Enables Growth
Sector-specific, process-focused developmental approach from
Molecule to Marketplace'
Product, application and market development
Structured Sector Management programmes
Trends transplantation
Market extension in conjunction with nodal agencies, machinery
manufacturers and leading processors
2. Supports development
Technical support
Quality Assurance
Post-trial vendor development
Advisory services

 Collaborative research with scientific institutions

Partnerships with government bodies and institutions for developing
new standards and specifications
Capability and capacity development
3. Enriches Relationship
Knowledge transfer
Sharing of intellectual capital and technical resources
Customer meets
Manpower training
4. Ensures Sustainability
Development of sustainable, cost-effective and environment-friendly
solutions
Easing the pressure on natural resources
Focus on renewable resources
Balancing economic growth with improved quality of life

Reliance Industries Mode of entry into China

The rapid economic growth of China makes it a fast expanding market in the world,
which attracts increasing number of multinational corporations (MNCs) to invest.
How to enter this huge and newly liberalized market and what entry mode should be
taken, are key questions which need to be answered before any investment takes
place. Entry modes of MNCs in the particular Chinese institutional and business
environments within the transaction cost analytical framework. It provides not only
theoretical discussion but also an empirical investigation of MNCs entry modes in
China.
Entry modes are defined as the forms of capital participation in international
enterprises. They are modes in which MNCs enter the intended host country through
investment. In terms of property rights, entry mode is the ownership structure of a
foreign subsidiary. There are two basic entry modes: wholly-owned subsidiary and
joint venture. The joint venture (JV) mode can be broken into several sub-modes
based on the percentage ownership of the equity: majority JV, balanced JV and
minority JV. These two entry modes can be realized by MNCs through acquisition of
an existing enterprise or setting up a new enterprise in the host country.
Three primary factors affecting MNCs entry modes within the transaction cost
framework. These factors include sociocultural distance between MNCs home

countries and the host country, technological nature of investment projects, and the
institutional and business environments and policies of the host country.
1. Sociocultural distance: Sociocultural distance refers to the difference in social
culture between the home and host countries. It is often argued within the
transaction cost framework that the greater the sociocultural distance, the
lower the degree of equity participation that a MNC should aim for.
2. Research and development intensity: Proprietary knowledge is an important
type of specialized asset. It is a core component of firms ownership
advantages and influences effectively MNCs international production and
entry modes.
3. The host countries conditions, risks and policies: In international operations,
external uncertainty is a critical factor. External uncertainty is the volatility
(unpredictability) of the firms environment. It is typically labelled country
risk. This can take various forms, e.g. political instability, the lack of a welldefined legal system, economic fluctuations, price and foreign exchange
controls and nationalization threat. In a highly unpredictable environment,
MNCs tend to limit their equity involvement by avoiding full ownership in
order to diversify the business risks.
In the Chinese case, MNCs may take the following three modes to enter into
the domestic market: equity joint venture (EJV), contractual joint venture
(CJV) and wholly foreign-owned enterprise (WFOE). These three types of
enterprises are collectively defined in China as foreign-invested enterprises
(FIEs). The three types of FIEs are different in legal form, capital and risk
involvement, and management structure.
MNCs entry modes from various perspectives, including investors country group
(sociocultural backgrounds), industry of different technological nature and contents,
and policy treatments and economic environments in different regions.
1.

2.

Entry by country group: Sociocultural distance between investing countries

and the host country would promote MNCs to resort to joint ventures with
local firms in order to enter the host country market. It may also prevent
MNCs from large capital involvement in joint ventures, resulting in a lower
equity share. In the context of China, all foreign investors fall into three
country groups according to their sociocultural distance from the host
country. Group one is Hong Kong and Taiwan, group two is other East Asian
countries and group three includes all other countries.
Entry mode by industry: The technological nature and content of a product or
process are highly correlated with the ownership structure of foreign
subsidiaries. The higher the technological content, the higher the equity share
a MNC requires in its foreign affiliates, and also the higher a MNCs propensity
to set up wholly-owned subsidiaries. Therefore, for technologically

3.

1.
2.
3.
4.
5.
6.
7.
8.

sophisticated products or services, MNCs prefer full ownership or majority

ownership in order to control their subsidiaries efficiently and to protect their
proprietary rights.
Entry mode by region: In China, the economic conditions and policy
environment vary substantially among different regions (Sun, 1995). In the
Southeast coastal region, including Guangdong, Fujian and Hainan, a special
policy package was granted by the central government. As economic reforms
have progressed, the economy of this region has become highly liberalized
and shifted from the traditional centrally-planned system to a market
economy. Consequently, economic efficiency has been improved
considerably. In the past 18 years starting in 1979, this region has led the
economic growth of China. Furthermore, economic liberalization and special
favourable policies on foreign trade and investment significantly ameliorate
the investment environment of this region, and strengthen its attraction for
foreign investment. Reliance industries entered into China as wholly foreignowned enterprise (WFOE) for the following advantages:
The ability to uphold a company's global strategy free from interference by
Chinese partners (as may occur in the case of joint ventures).
A new, independent legal personality
Total management control within the limitations of the laws of the PRC.
The ability to both receive and remit RMB to the investor company overseas.
Increased protection of trademarks, patents and other intellectual property, in
accordance with international law.
Shareholder liability is limited to original investment.
Easier to terminate than an Equity Joint Venture.
Simpler establishment than a Joint Venture.
Exchange rates: Managing transaction and economic exposure

An Exchange Rate is the rate at which one nation's currency can be exchanged for
that of another. Exchange rates impact, and are impacted by, international trade, in a
free-market system that helps to maintain a balance of trade and balance of capital.
For example, a skewed change rate can make a company's exports cheaper than
their foreign counterparts, but for a country to achieve this artificially they must sell
their own currency by borrowing against the nation's wealth to purchase another
nation's currency. If exports or all capital are in high demand, a country's currency
will rise in value because of the demand for that currency to pay for exported goods,
services, and capital. Investors are impacted in two ways:
1. Businesses that rely on exports can find their products suddenly competitive or prohibitively expensive - in overseas markets as exchange rates fluctuate.
Similarly, companies that rely on imports can see the costs of these imports

rise and fall with the exchange rate. For companies impacted by changes in
U.S. Dollar exchange rates, see The Dollar.
2. Exchange rates directly affect the realized return on an investment portfolio
with overseas holdings. If you own stock in a foreign company and the local
currency goes up 10%, the value of your investment goes up 10% even if the
stock price doesn't change at all.
3. The exchange rate between two countries' currencies depends upon many
factors, including the Balance of Trade or Balance of Capital and the
prevailing real interest rate in country as well as inflation.
4. Imports and Exports are the main drivers of the balances of trade and capital.
If the country imports more than it exports, it has to be supplied with capital
from abroad.
5. Relative interest rates greatly impact the exchange rate between any two
countries. Typically as the central bank of a country makes a change in that
country's interest rates, investors and trader will see the value of that
country's currency - in relationship to other countries - change. An example of
this is as the US Federal Reserve lowered interest rates in the fall of 2007, the
value of the US dollar fell both in anticipation and in response. When the
public perception starts to change to the point of view that maybe "The Fed"
will stop lowering rates or even increases rates, typically you will see the US
Dollar stabilize or rise.
Importance of Exchange Rates
Exchange Rates are very important for any country as they determine the level of
imports and exports. If a domestic currency appreciates with respect to a foreign
currency, imported goods will be cheaper in the domestic market and local
companies would find that their foreign competitor's goods become more attractive
to customers. If the country has a strong currency then its goods become more
expensive in the international market, which results in lost competitiveness. This is
the reason that China, despite much pressure from the United States, is not letting
its Yuan appreciate. For an importer, such as Nonsolovino, the exchange rate is
important because the suppliers in Italy will require payment in euro. To pay these
suppliers the business needs to convert - or exchange - pounds for euro. The amount
of euro received for each 1 depends on the exchange rate.
An exchange rate is the amount of one currency that has to be given up to acquire
another currency. An exchange rate of 1 = 1.30 means that an individual or
business has to give up 1 to get 1.30 euro. Exchange rates change every day. When
the exchange rate changes this can affect different stakeholders in different ways
depending on the direction of the change. The terms strengthened and weakened
are used when exchange rates change and it is important to understand what is
meant when an exchange rate has strengthened or weakened. What causes the
exchange rate to change?

Chinas Exchange rate policy

There are lots of debates about Chinas exchange rate in recent years. Politicians in
The United States and other developed countries often criticize China for its rigid
Exchange rate regime, their real focus, however, is probably not the exchange rate
policy per se but Chinas growing current account surpluses. Meanwhile, Chinas
government is very cautious about RMB exchange rate reforms, the policy makers
worry about the seemingly unbearable results of appreciation, including export
reduction, growth slowdown and employment contraction.
Global macroeconomics model simulation the adjustment of RMB exchange rate
could affect Chinas macroeconomics from various channels. The change of exchange
rate regime could rstly impact trade, the effect will be transmitted to the
adjustment of industry structure and labour market reallocation, driving the changes
in employment structure; meanwhile, the changes of exchange rate regime could
impact the stability of internal nancial system and price level through international
capital ows. The alternation in price level and employment will affect national
income distribution furthermore, and all these impacts may integrate and act on
economic growth. The elaboration of the general effects of exchange rate regime
adjustment could help us understand its various transmission channels; therefore,
the next part of this paper will testify the macroeconomic effects of RMB exchange
rate regime adjustment based on the general framework.
Key Challenges for chinas exchange rate management
China faces four key challenges in light of its undervalued exchange rate and the
accelerating build-up of foreign exchange reserves:
(1) Maintaining a gradual pace of currency reform while trying to use monetary
policy as an effective instrument of macroeconomic management;
(2) Reducing excessive reliance on external demand to sustain economic growth;
(3) Preventing the defines of the present currency regime from handicapping unduly
efforts to strengthen and transform the banks into truly commercial entities; and
(4) Containing the risk of protectionism abroad in response to Chinas very large
global current account surplus.
Flawed Arguments for a Stable Yuan
With pressure growing on China to allow the Yuan to appreciate, some familiar old
arguments are being trotted out to fend off pressure and delay currency appreciation
by Chinese officials and some analysts working on China. These faulty arguments
should be ignored, and the heat should remain on China for a needed change in
exchange rate policy.

The first old argument making a comeback is that a stable Yuan is not only good for
China, but is good for the rest of the world. The roots of this argument go back to the
Asian financial crisis of 1997-98. At that time, China was persuaded to keep its
exchange rate fixed against the U.S. dollar when its currency was facing downward
pressure to prevent setting off a round of competitive devaluations among the crisisstricken countries in the region. While at the time this was a very important policy
decision by the Chinese authorities, any competitive disadvantage that China may
have suffered was quickly more than offset in the period after the crisis by the rapid
growth in productivity in China relative to its competitors. Nevertheless, despite a
burgeoning trade surplus, China continued to defend a pegged exchange rate until
July 2005 (when the rate was revalued slightly and allowed to appreciate gradually
until August 2008, at which time the rate was effectively repegged to the U.S. dollar)
as being in the best interest of China and the rest of the world, just as it had been in
1997-98.
China's actions in 1997-98 are being invoked by officials in Beijing as justification for
China's decision during the current economic and financial crisis to maintain a stable
exchange rate against the U.S. dollar. It is argued that this policy helped to support
China's growth during the recession and that it is good for the rest of the world
because strong growth in China's economy makes a major contribution to recovery in
the world economy.
The authorities in [developed] countries are coming to see China's exchange rate policy as an
important distortion in the world economy that will hold back adjustment of global imbalances
and slow the recovery of other economies worldwide.
There is truth to this claim from a narrow statistical point of view. As the second or
third largest economy in the world, if China grows faster, then that would, of course,
raise the average rate of growth for the world economy. But that does not mean
China's growth is adding measurably to the growth of other countries. That impact
depends on how much growth in China's demand is contributing to stimulating
growth in other countries. The reality is that China with a large trade surplus sells
substantially more to the rest of the world than it purchases, and therefore, it
continues to subtract significantly from net world demand. Thus, the rest of the
world as a whole is not benefitting much from China's strong growth.

Some countries (particularly those in Asia and commodity producers) may be

benefitting, and the decline in China's trade surplus in 2009 means it took less away
from net world demand than in previous years. Nevertheless, China's contribution to
the rest of the world's growth has not been much, and it will diminish in 2010 and
the years beyond as China's trade surplus is expected to start rising again.

CULTURAL FACTORS
China has the largest population of any country: 1,133,682,501 people were counted
during the census taken in 1990. This population had grown rapidly in recent times,
expanding by approximately 15 million each year, an increase equal to the total
population of Australia. Between 1964 and 1982 China added 313 million to its
population, more people than lived in the Soviet Union during that time. This rapid
growth has occurred because the death rate has dropped sharply. The birth-rate has
also fallen, but the total population is enormous, and there are many young people.
Thus, without extreme means of population control, the outlook is for continued
rapid increase. The problem of providing an acceptable quality of life for a society
this large - and growing ever larger - is a major concern in China. In an effort to
reduce the rate of population growth, the Chinese government since 1978 has
promoted the one-child family among the Han. Married couples are urged to have
only one child. Rewards such as better opportunities for one child are offered.
Family-planning advice and birth-control techniques are easily available and
commonly used.
Ethnic & Language Groups
The concept of being Chinese is not based on race. Rather, it is a cultural concept. To
speak and behave like a Chinese--in short, to accept the Chinese system of cultural
values--is to be Chinese. The Chinese refer to themselves as Han or sons of Han (as in
Han Dynasty, a period of great historical significance). Throughout history, small
ethnic groups that came into contact with the Han Chinese have adopted Chinese
culture and have been absorbed into the mainstream.
Cultural Values
Chinese culture is highly complex but scholars across the world agree that despite
the diversity of Chinese communities many shared characteristics persist. These
derive largely form the pervasive influence of Confucian philosophy of the Chinese
culture and they are at very core of Chinese identity. Indeed, since Confucian
thought has dominated the Chinese way of life for 2,000 years, it is unlikely to cease

its influence, even after two or three generations of participation in British society.
The most important values of Chinese culture include the:

importance of the family,

hierarchical structure of social life,
cultivation of morality and self-restraint,
And the emphasis on hard work and achievement.

Chinese culture and society can be defined as collectivist. In many ways the family
unit takes precedence over its individual members. Children must learn not to
answer back to their parents or other elders. It is assumed that the family as a whole
will thrive and prosper if harmony prevails at home. In other words the basic rules
of obedience, moderation and self-restraint amongst family members should be
observed. Expectations related to family life account for many of the difficulties
faced by Chinese immigrants. The second generation finds it hard to cope with the
demands of their parents. They want to fulfil their own potential - like opting out of
the catering business. And, stripped of their traditional position, deprived of respect,
abandoned and isolated, the first generation feels unable to shape their children's
way of life. Guilt on the children's part and shame on the parents' may result
(Background Note, 2009).
Cultural Dimensions
Hofstedes study revealed that:
womens values differ less among societies than men's values;
Mens values from one country to another contain a dimension from very
assertive and competitive and maximally different from women's values on
the one side, to modest and caring and similar to women's values on the
other. The assertive role is called 'masculine' and the modest, caring role is
called 'feminine'. The women in feminine countries have the same modest,
caring values as the men; in the masculine countries they are somewhat
assertive and competitive, but not as much as the men, so that these
countries show a gap between men's values and women's values.
Uncertainty Avoidance Index (UAI) denote a society's tolerance for uncertainty and
ambiguity. It indicates the extent to which a culture programs its members to feel
either uncomfortable or comfortable in unstructured situations. Unstructured
situations are novel, unknown, surprising, and different from usual. Uncertainty
avoiding cultures try to minimize the possibility of such situations by strict laws and
rules, safety and security measures, and on the philosophical and religious level by a

belief in absolute Truth. People in uncertainty avoiding countries are more

emotional, and motivated by inner nervous energy. The opposite type, uncertainty
accepting cultures, are more tolerant of opinions different from what they are used
to; they try to have as few rules as possible, and on the philosophical and religious
level they are relativist and allow many currents to flow side by side. People within
these cultures are more phlegmatic and contemplative, and not expected by their
environment to express emotions.

IMPLICATIONS
Conducting business in China can be difficult due to the many uncertainties and
differences in the economic, political, and cultural environment. The Chinese prefer
doing business with companies they know, so working through an intermediary is
crucial in China. Business relationships are built formally. It is important to be patient
as it takes a considerable amount of time to build business relationship which is also
bound with enormous government bureaucracy. The Chinese see foreigners as
representatives of their company rather than as individuals. Rank is extremely
important in business relationships and you must keep rank differences in mind
when communicating. The Chinese prefer face-to-face meetings rather than written
or telephone communication. Meals and social events are not the place for business
discussions but social etiquette is important to follow. There is a demarcation
between business and socializing in China, so it is important not to intertwine the
two.

Country Ratings

Long Term Rating

Foreign Currency
Rating
Date
(Outlook)
16-042013
Aa3 (Stable)
11-112010
Aa3 (Positive)
08-10(Under
2010
Review)

Local Currency
Date
16-042013
11-052011
22-092007

Rating
Aa3
Aa3
A1

08-112009
26-072007
30-052007
07-072006

Rating Moody's China

(Positive)
(Stable)
A2

Rating S&P
China
A3
Long Term Rating
Foreign Currency
Date

Short Term Rating

Local Currency

Rating (Outlook) Date

2010-12-16 AA- (Stable)

Foreign Currency

Rating Date

2010-12-16 AA-

Local Currency

Rating Date

2008-07-31 A-1+

Rating

2008-07-31 A-1+

Rating Fitch China

Long Term Rating
Foreign Currency
Rating
Date
(Outlook)
03-032014
A+ (Stable)
05-022014
A+ (Stable)
07-012014
A+ (Stable)
03-012014
A+ (Stable)
28-102013
A+ (Stable)
27-062013
A+ (Stable)
09-04A+ (Stable)

Short Term Rating

Local Currency
Date
03-032014
05-022014
07-012014
03-012014
28-102013
27-062013
09-04-

Foreign Currency
Rating
Rating Date
(Outlook)
03-03A+
2014
F1
05-02A+
2014
F1
07-01A+
2014
F1
03-01A+
2014
F1
28-10A+
2013
F1
27-06A+
2013
F1
A+
09-04F1

Local
Currency
Date Rating

2013

2013

2013

Political Stability in China

Political risk in China is relatively low compared with other emerging markets, but
legal and regulatory transparency is a key risk for foreign companies in the region.
The political risk situation in China is interesting because while there is stability with
the one-party system, there is also very little transparency in rules and other aspects
of doing business, which make it challenging for a foreign investor.
Country Risk: China
In China, any of the following common business practices could put you at risk:
Guanxi and Giving Face. If you have done business in China, you will probably
have heard of "guanxi" -- or relationship building -- as the key to getting things
done. Guanxi is also built on the exchange of favours. For example, Chinese
government officials often expect to receive a "contribution" for using their
powers to "provide convenience" -- such as supplying utilities, granting
licenses or approving bank loans.
Fapiaos for Sale? Tax evasion in China is pandemic. Recent estimates put the
amount as high as one trillion Yuan (USD 157 billion) per year, and one
common tax-evading practice is the use of falsified receipts. The government
endorses the use of a fapiao, which is an official receipt that can serve as final
proof-of-purchase of goods and services. However, in an effort to reduce
taxes paid, some individuals purchase fapiaos from different vendors at a
fraction of their face value, obscuring their true cost of purchasing goods and
services.
Weak Internal Controls. Traditionally, Chinese people treat their superiors
with enormous respect and are very reluctant to speak up and challenge
them. Combined with the commonplace lack of separation of management's
personal wealth from a company's assets, this behaviour can create an
environment for management to "do as they please." Anything from the
creation of multiple sets of books and related party transactions to
undetected (or unquestioned) illegal payments that are "off the books" could
happen.
Use of Third-Party Agents. The use of third-party agents can pose the single
most serious risk for organizations operating in China. Managers, directors
and company boards cannot simply concern themselves with the actions of
their own employees while ignoring the actions of retained third parties.

CONCLUSION
China has a growing market infused with rapid industrial development and economic
growth. As the worlds third largest trading nation after the United States and
Germany, China will continue to be an important business partner of the United
States. US business people and organizations must understand the differences in the
economic, political, and cultural environment of the country as these can be difficult
to manage and may hinder business development. Especially important is to learn
about cultural and political differences and their impact on business practices and
business conduct.
References
Background Notes: China, US Department of State, and Retrieved June 19, 2009 from
http://www.state.gov/r/pa/ei/bgn/18902.htm
China Foreign Exchange Reserves, US State Administration, Retrieved December 19,
2009, from http://www.chinability.com/Reserves.htm
China Inflation Rate, Trading Economics, Retrieved January 19, 2010, from
http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx
China Political Risk Management, China Monitor, Retrieved March 18, 2009, from
http://www.chinariskmanagement.com/Political.html
http://www.rediff.com/money/2003/nov/20ril1.htm
http://gosourcing.industrysourcing.com/en/supplier/reliance-industries-limitedshanghai-representative-office-0
https://www.icis.com/v2/companies/9146131/reliance-industries/financial.html
http://www.ril.com/