China

Originally published: Apr-25-2008

Official Name: People's Republic of China

Internet Domain: .cn
International Dialing Code: +86

Table of Contents

Location and Size

Located in Eastern Asia and an area of approximately 9.6 million square kilometers (3.7 million square miles), making China just slightly smaller than the United States. Countries bordering China include: Afghanistan, Bhutan, Burma, India, Kazakhstan, North Korea, Kyrgyzstan, Laos, Mongolia, Nepal, Pakistan, Russia, Tajikistan, and Vietnam.

Government

Socialist state governed by the Chinese Communist Party, with 23 provinces (China considers Taiwan to be its 23rd province); 5 autonomous regions, including Tibet; and 4 municipalities directly under the State Council. The capital is Beijing. China's current head of state is Hu Jintao, who is also the current General Secretary of the Chinese Communist Party.

• Executive: president, vice president, State Council and premier
• Legislative: unicameral National People’s Congress
• Judicial: Supreme People’s Court

Legal System

Based on a civil law system derived from Soviet and continental civil code legal principles. The legislature retains power to interpret statutes, and the constitution is ambiguous on judicial review of legislation. China has not accepted compulsory ICJ (International Court of Justice) jurisdiction. (What does this mean?)

Legal reform became a government priority in the 1990s and legislation designed to modernize and professionalize the nation's lawyers, judges, and prisons has been enacted. The 1994 Administrative Procedure Law allows citizens to sue officials for abuse of authority or malfeasance. In addition, the criminal law and the criminal procedures laws were amended to introduce significant reforms. The Constitution was amended in 2004 to include the protection of individual human rights and legally-obtained private property.

People

• Population: 1,321,851,888 (July 2007 est.)
• Population growth rate: 0.606% (July 2007 est.)
• Languages: seven major Chinese dialects and many subdialects. Mandarin (Putongua) is the official language and is spoken by more than 70% of the population.
• Literacy: 90.9%
• Ethnic Makeup: Han Chinese (91.9%); Zhuang, Manchu, Hui, Miao, Uygur, Yi, Mongolian, Tibetan, Buyi, Korean, and other (8.1%)
• Religions: Officially atheist; Taoism, Buddhism, Christianity, Islam

Economy

China is the world's most populous country, with a continuous culture stretching back nearly 4,000 years. China's economy during the last quarter century has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. China today is the fourth-largest economy in the world. It has sustained average economic growth of over 9.5% for the past 26 years.

Since 1979, China has reformed and opened its economy. The Chinese leadership has adopted a more pragmatic perspective on many political and socioeconomic problems, and has reduced the role of ideology in economic policy. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship. The result has been the largest reduction of poverty and one of the fastest increases in income levels ever seen. However, economic development has proceeded unevenly in China, with urban coastal areas experiencing more rapid economic development than in other parts of the country.

Currency: Yuan Renminbi (CNY)

• CNY per USD: 7.01081 (4/15/08)
• CNY per EUR: 11.05675 (4/15/08)

Leading Markets (2006): US 21%, Hong Kong 16%, Japan 9.5%, South Korea 4.6%, Germany 4.2%
 

Leading Exports-commodities: machinery, electrical products, data processing equipment, apparel, textile, steel, mobile phones

Leading Suppliers (2006): Japan 14.6%, South Korea 11.3%, Taiwan 10.9%, US 7.5%, Germany 4.8%

Leading Imports-commodities: machinery and equipment, oil and mineral fuels, plastics, LED screens, data processing equipment, optical and medical equipment, organic chemicals, steel, copper

Top Industries: mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft; telecommunications equipment, commercial space launch vehicles, satellites

Top Agricultural Products: rice, wheat, potatoes, corn, peanuts, tea, millet, barley, apples, cotton, oilseed; pork; fish

Economic Indicators

(e) estimate (f) forecast

Comparative Economic Indicators - 20067 estimate

*PPP=Purchasing Power Parity
**2006 est.

Credit and Collections

Overseas Press & Consultants (OP&C) Evaluation

• Collection Experience: Fair-Good
• Exchange Delays: 3 months
• Preferred Credit Terms: Unconfirmed letter of credit 
• Minimum Credit Terms: Sight draft

ABC-Amega’s collection experience in China

David Greenberg, Divisional VP International: While the Chinese have been involved in arbitration for many years now and that system has become acceptable by world standards, their civil process is still in its infancy by modern standards. The legal system is replete with corruption and local protectionism at the local lower municipal and provincial courts, with appeals to Beijing being frequently needed to gain reasonable results. It can take years for cases to wind through the civil courts as Judges are free to add one continuance to another, with no forced timetables built into their system. The cost of legal counsel in most instances is hourly for a court case; typically at the $350/hour range with a retainer of several thousand dollars.

Dennis Lojeck, Assistant VP International: It is imperative that any prospective creditor/trade partner of a Chinese entity make certain to create as specific, detailed, and all encompassing a contract with all relevant terms, conditions, etc. as possible.  The combination of a long history, a cultural tradition of oral contracts and agreements, and the reality that, while many principals and executives of Chinese corporations do speak English (or at least are literate in English in print) it is on an "English as a Second Language" level, can lead to many misunderstandings and disputes.  When you add in the onerous court conditions plus the trades that truly just "go bad", strong documentation is essential.

Dispute Resolution

Foreign firms have experienced inconsistent results with all of China’s dispute settlement mechanisms. China’s legal system rarely enforces foreign court judgments. Chinese officials typically urge firms to resolve disputes through informal conciliation.

If formal mediation is necessary, Chinese authorities still prefer that disputes be settled through arbitration. Many foreign companies hesitate to settle through arbitration because it is a very time-consuming and unreliable procedure. The authorities prefer arbitration by the China International Economic and Trade Arbitration Commission (CIETAC).

Some foreign parties have obtained favorable rulings from CIETAC, but difficulties in other cases have led other participants and panelists to question CIETAC's procedures and effectiveness. In CIETAC arbitration involving at least one purely foreign entity, a panel with a foreign arbitrator or offshore arbitration is possible. Contracts stipulating foreign arbitration should name the arbitration body. China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the “New York Convention.”

Risk Assessment

Coface Country Risk Rating: A3 -- Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.

Ducroire Delcredere Political Risk Rating: 1 – Low Risk
Ducroire Delcredere Commercial Risk Rating: C – High Risk

Business Climate

The Chinese Government’s emphasis on guiding foreign investment into manufacturing has led to market saturation in some industries, while leaving China’s services sectors underdeveloped.

Transparency of Regulatory System: Transparency improved with China's entrance into the World Trade Organization and many laws and regulations are being harmonized with the requirements of WTO. However, China's legal and regulatory system continues to be complex, contradictory, and lacking in consistent enforcement.

Intellectual Property Rights: The United States Trade Representative (USTR) has determined that China fails to enforce intellectual property rights effectively. Copyrights, inventions, brands, and trade secrets are routinely stolen. As a result, China is on USTR’s priority watch list of countries that tolerate intellectual piracy. Failure to protect intellectual property stems from lenient rules, mild penalties (often no more than confiscation of the counterfeit products or nominal fines), and a lack of sufficient and consistent enforcement, which together do not yet deter the crime. Chinese entities increasingly assert what they view as their own intellectual property rights. Fully 90% of patent, trademark and copyright administrative or civil litigation in China involves only Chinese rights holders. As a consequence, China’s Trademark Office is now the most active in the world and China receives more design patent applications than any other country. For an up-to-date look at this issue in China, see 850,000 lawsuits in the making in the Economist.

Conversion and Transfer Policies: China has gradually loosened foreign exchange regulations facing foreign-invested firms. While China permits foreign investors liberal access to foreign exchange for current account transactions, like repatriating profits, capital account (financial investment) transactions are tightly restricted. Investors can also purchase foreign-currency denominated Chinese bonds, in lieu of dollar payment. Authorities have begun to liberalize the exchange rate regime and operation of exchange rate markets. The yuan renminbi now floats within a very narrow 0.3 percent band against a basket of currencies from the country's major trading partners.

Corruption: Corruption is perceived to be a considerable problem in China even by the Chinese leadership, who acknowledge that corruption is a major threat to both China’s economic development and political stability and are pursuing a vigorous anti-corruption campaign. Anti-corruption efforts are hampered by the lack of independent investigative bodies and courts.

For more detailed information on these topics, visit the China Country Profile of the Business Anti-Corruption Portal, 2007 Investment Climate Statement – China, of the U.S. Department of State.

Economic Freedom: According to the 2008 Index of Economic Freedom, China’s economy is 52.8% free, making it the world’s 126th freest economy and 23rd out of 30 countries in the Asia-Pacific region. China scores at the world average in trade freedom, monetary freedom and labor freedom. As the country restricts many areas of its economy, it scores lower than average in investment freedom, financial freedom and property rights.

Business Customs and Protocol

In general, the Chinese are a collective society with a need for group affiliation, whether to their family, school, work group, or country. The concept of face, roughly translated as 'honor', 'good reputation' or 'respect', is extremely important in Chinese interactions. It is critical you avoid losing face or causing the loss of face at all times. There are four types of face:

1. Diu-mian-zi -- this is when one's actions or deeds have been exposed to people.
2. Gei-mian-zi -- involves the giving of face to others through showing respect.
3. Liu-mian-zi -- this is developed by avoiding mistakes and showing wisdom in action.
4. Jiang-mian-zi -- this is when face is increased through others, i.e. someone complementing you to an associate.

The Chinese don't like doing business with companies they don't know, so working through an intermediary is crucial. Rank is extremely important in business relationships and you must keep rank differences in mind when communicating. Gender bias is nonexistent in business.

Business Cards: Have one side of your business card translated into Chinese using simplified Chinese characters that are printed in gold ink since gold is an auspicious color. Your business card should include your title. If your company is the oldest or largest in your country, that fact should be on your card as well. Hold the card in both hands when offering it, Chinese side facing the recipient. Never write on someone’s card unless so directed.

Business Attire: Business attire is conservative. Men should wear dark colored, conservative business suits. Women should wear conservative business suits or dresses with a high neckline and flat shoes or shoes with very low heels. Bright colors should be avoided.

Names and Titles: Address the person by an honorific title and their surname. If they want to move to a first-name basis, they will advise you which name to use.

Greeting: Greetings are formal and the oldest person is always greeted first. Handshakes are the most common form of greeting with foreigners.

Conversation: Negative replies are considered impolite. When your Chinese counterparts politely or even enthusiastically say 'No problem’, they usually mean 'There are still problems.' You may be asked intrusive questions concerning your age, income, and marital status. If you don't want to reveal this information, remain polite and give an unspecific answer. Make an effort to learn and use at least a few words in Chinese; your initiative will be noticed and appreciated.

Gifts: Do not give flowers, as many Chinese associate these with funerals. Do not wrap gifts in white, blue or black paper. Policy in Chinese business culture forbids giving gifts, which is considered bribery, and is illegal. If you wish to give a gift to an individual, you must do it privately, in the context of friendship, not business. The Chinese will decline a gift three times before finally accepting, so as not to appear greedy. You will have to continue to insist.

Meetings and Negotiations: Arriving late is an insult and could negatively affect your relationship. Frowning while someone is speaking is interpreted as a sign of disagreement. Chinese are non-confrontational. Under no circumstances should you lose your temper or you will lose face and irrevocably damage your relationship. You'll find it beneficial to bring your own interpreter, if possible, to help you understand the subtleties of everything being said during meetings.

Unacceptable Public Conduct: It is considered disrespectful to stare into another person's eyes.

Sources for further information on doing business in China

 Doing Business in China, Julian Chen, formerly VP Global Marketing, ABC-Amega Inc.

Doing Business in China: A [2006] Country Commercial Guide of U.S. Department of State (2.48mb PDF)

Embassy of the People’s Republic of China in the United States of America

Embassy of the United States in Beijing, China

Exporting to China - Frequently Asked Questions, Export Portal of the U.S. Government

United States of America-China Chamber of Commerce

U.S. Commercial Service China, U.S. Department of Commerce

*****

This information is provided by ABC-Amega Inc. Providing international receivable management and debt collection services for exporters to more than 200 countries including China. For further information, contact info@abc-amega.com.

This report represents a compilation of information from a wide variety of reputable sources.

Economic Indicators: Variety of sources including the CIA World Factbook, COFACE Country Ratings, Economist Country Briefings, Federation of International Trade Associations (FITA) Country Profiles.

Risk Assessment information: Provided with permission by Coface Country Rating. Also Belgian credit insurance company Ducroire Delcredere

Information on credit terms and the probability of prompt payment are provided, with permission, from Overseas Press and Consultants (OP&C) as published in IOMA's Report on "Managing Credit, Receivables & Collections," December 2007.

Historical Exchange Rates: OANDA.com The Currency Site.