A PESTEL analysis of Chinas current economy
With China economic growth rapidly, more and more business people like to invest on chinese market. Meanwhile, multinational investment is always a good condition for economics’ grow and prosperity as well. In order to attract foreign direct investment and run a successful business in China, it is important to analyzing the macro-environment, and identify the factors that could affect the organization’s economy, such as supply and demand and its costs.
A PEST analysis is one of strategic tools for analyzing the environmental influences including political, economic, social and technological factors on the business. (Porter, M., 1985) In this essay, it is going to explain about current china economy and analyze it with PEST tool, to see if there is a good business condition for running a business in China.
In addition, there are some recommendations for local or foreigner investors and business people, so that they can access chinese market and share information like high-technology, cultural and management skills with local business people, to create competition and stimulate chinese economy develop faster.
Main Aspects of PEST Analysis:
Political factors are related to law, regulatory, and government policy, which influence Economic factors, and government decisions.
After the economic reform in 1978, the economic is growing spectacularly in China. The reform comprises of motivating the development of private business, foreign trade liberalization, foreign direct investment, and industrial production investment as well as the employment profile. From 1979 to 1994, more than 42 percent chinese economic rate has been grown up. (Mohsin S. Khan, 1997)
In the labor law, government changes the structure of jobs and becomes less strict, which create opportunities for unemployment, such as for graduated students who have not found any jobs, and for some people with lower education, so that at least there is a place for them to work, then being accepted new skills training. Otherwise the higher rate of unemployment, the more social problems might cause, that also discourage investment. As data shows, china’s urban unemployment rate reached 4.2% in 2008, since the employment immigrate from rural to urban; and increase to 4.6% in 2009, because of the world financial crisis leading to export economy more than import. However, since 2008, the central government finances in the labor-intensive sector to provide more job availability. (Yingzi T, 2009)
For the consumer rights protection, after open up china door and the economy reform, people increase consumer’s awareness and protect their rights. (Shaoping G, 2008) If the consumer protection is improving, the multinational companies will get benefits from doing business in china: open market will be prosperity and the market for the middle level of consumers are expanding . (Suk-ching H,1997)
When it comes to foreign trade policy, the private sectors are moving forward fast after 1978 reforms. Foreign trade opening drives foreign direct investment increasing. In 2008, the foreign direct investment is up to 108 billion dollars in china. (Yadav M, 2010)
Furthermore, the well-being relationship between different countries is very important for economic development. For instant, if two countries’ government or organizations have argument causing a war, which will be unstable in economy and society. Then, people feel unsecured about government, jobs and their daily life. If their business have big loss or company closes down, leads to lose jobs. Therefore, they can not afford to purchase product and make company less profit or loss. It will be a wicked economic cycle.
However, no matter how develop the domestic economy is, it is better to keep the environmental survival ability for next generations. The environmental regulations could keep environmental friendly and maintain the balance between economy development and sustainable development.
Economic factors influence a business directly, because they affect capital availability, cost, supply and demand. If demand is high, and the capital cost is low, which attract more investment on the company and produce more product to make profitable. However, during economy recession period, there is still chances for some small potential corprations accessing business market and competing with others.
Recent years, China economic growth rapidly. Overall, it can be reflect from industrial sectors. Since from late 1978, China becomes market oriented economy. China gains tremendous in production of agriculture. Even though, there are more than half people rely on agriculture for living, the agriculture sector has less influence for gross domestic product. At the same time, labor input decreases in most of industries, due to labor productivity improvement and the migration from rural workers to urban areas. In the opposite, through the adjustment of secondary industry and teritiary industry, they become unreplceable roles to GDP. (Ke-sha G, 2001) It provides activities as knowledge, skills, as well as experience, entertainment to improve the quality of business. (Sasaki H, 2009) Due to its foreign trade liberazation and investment, the income has been dramatically rising after joining the WTO. Moreover, the demand for material and energy resource is also increasing. They import and process materials, then sell the final products.
In addition, the Bank of China as central bank in china. It uses monetary policy to increase or decrease interest rates and control the amount of money in the economy to achieve steady economic growth. Normally, government will not lend money to business company directly, it has to deposit money from bank of china first. Also, the central bank reduce lending to companies and individuals, according to the increasing amount of money they put with central bank. Moreover, the central bank also guide country bank to increase more reserves and its ratio, such as 16.5% for big bank, 14.5% for small bank, in case of any financial crisis or loan needs. At the same time, bank of china will control conflict and surplus, as well as increase tax for import product. Because if they increase tax, people would rather purchase and import product with those money, not saving them into bank. (Bradsher K, 2010)
Government expenditure is to purchase goods and service, allocate funds efficiently and invest on doing domestic infrastructure; for high technology innovation and education, as well as social security payments. Technically, increasing government spending can be met china’s economy development need. By 2002, the government spending has increased to 5.5% of GDP, which shows a good trend. (Moinar M, 2006)
During inflation period, the economy is lack of investment, and exports will suffer from inflation, as inflation increase the price of exports and encourage imports. Also, the most industrialized countries will be adjusted to increase their interest rates, which will be pay back through loans in the markets, which demonstrate that govrnement try hard to control foreign flow-in cash.
The environmental factors affect organizations. firstly, capital markets is determined by chinese government. government increase their expenditure, which could increase money supply for organization and make capital markets boom. Based on organization performance, the shareholders will decide to provide more equity funding or sell the shares.
The labour market indicates that the availability of certain skills and the labour costs at different regions or industries in China, which are under the power of the training and government policies, as well as the inflation, industries sectors’ needs, and trade unions.
At last but not the least, China focus on being environment-friendly society. As china daily said, china will have an international green industry expo in beijing in Nov of 2010, which will let others know more about domestic corporations and offer a new stage for them, also foreign companies are likely to explore chinese green market and develop a green economy in china, such as clean energy, emission reductions, low carbon technology and so on. (Xinhua, July 2010)
Income distribution is unequal within different areas and industries. For example, the average income has 2.26 times in east of china of the west of china. There are several reasons for it: the laid-off people who do not going to work, less desire for consuming due to the recession of economy, less social guarantee from chinese government, huge income gap between urban and rural. The more income distribution expanding, the more motivation for economic growth, also can be obstacle for economic growth. Unequal income distribution and poverty will be barriers for china’s growth. Thus, government need adjust the taxation system, reduce income difference in different field, improve the social security for to make people life more secure. (Jing X, 2007)
As to lifestyle changing, nowadays, there are more people choose working at home, it will be more connivence and easier for employment who want to keep balance between family and work. Also, with the number of single households increasing, company more like to assign this type of employees to work abroad or other regions where is far away from home. Because they have less responsibility for family and less homesick. They will more easier to devote all themselves into work and adapt new multicultural work environment. (Lu D, 2009)
For attitudes of work and leisure, people becomes more understanding and flexible. they are not only focus on work any more, more like to enjoy life after done with workload. In company, they will organize leisure activities for employees. On the one hand, they can improve the ability of communication and socialization; on the another hand, they can have health mind, health body.
Moreover, education is becoming more and more important for everyone. Therefore, chinese government encourage international schools join venture with chinese public schools to exchange culture and learning skills, also as business company, they will organization business presentation for employment, or assign them to study abroad, to introduce more advanced knowledge and valuable experience from people who are from different culture background.
People can not work well, without good living conditions. So that government pay more effort on housing amenities pollution with specific policies and regulations to control air/noisy pollution, creating an sustainable friendly living environment.
Government and industry focus on technological effort, so government spend large amount of money on research, to develop and explore high technology innovation, also to speed the technology transfer.
In china, the energy demand growth become slow down these years. china consumed less energy then the U.S. in 2009.Energy consumption growth fell to 5.2 percent in 2009 from 16.1 percent in 2004. Energy use per unit of gross domestic product dropped 15.6 percent in the four years started 2006. China wants to reduce its energy use per unit of GDP by 20 percent in the five years through 2010. to reduce reliance on energy, china plans to conserve energy and reduce emission. as the sample of more-polluting fossil fuels, the Chinese government spent $34.6 billion on clean-fuel projects last year, almost double the $18.6 billion invested by the U.S. (Xinhua , Aug 2010) High technology information development has a significant role in the china economy. As the internet and technology moving forward, it drive the success of the china economy. The trade barriers decrease, which produce more job opportunities in the field of information Technology. Moreover, the expenditure of high-technology consumers are covering all over the world, such as computer and networking hardware, software and services, that is over than $1.4 trillion in 2005. Also, that worldwide IT spending increase by 10 % over every year.
The technology information widely spreading make the whole world become closer and make life easier. they also can do business and do shopping at home, no need even go out, you just can find any information. with internet, business company like to have online teaching program for employment to upgrade their personal profile. they also choose internet for online meeting, consulting, to delivery the ideas to fellows, managers, customers, and business partners. (Porter, M. ,1985)
In a conclusion, as well known, china is the fastest developing country, which has many potential business opportunities. However, it is important to judge and make sure the investment environment before running a business in china. PEST strategy as showed above analyze the external business environment to give a general picture of the operated business environment. So that company can take advamtage of the appropriate opportunities and minimize the threats. If company can make correct strategic planning, it will offer a stable and solid environment for a company to grow into the future.
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