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N.L Dalmia Institute of ManagementStudies and Research

Macroeconomics

PESTEL Analysis of China

rou! Mem"ers#

 

Ni$hil Pa%ar &'()*

  Munta+ir Ra,$ot%ala &'-'*  aran Shah &'-(*

  Mohit Shah &'--*

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China is among the most attractive locations in the world. It has also grown to become one of the

strongest powers. This rise boosted international business. The legal system too has been

improved. Foreign investors seek business in China mainly because of 3 things. They are:

• Sie of the market

• The very low cost of labour 

• China!s growth potential together 

China has become increasingly integrated with other parts of the world. It opened itself to an

array of cross"border economic activities and is it not easy to manage international business in

China.

#$ST$% analysis is an essential management tool which assesses the macro"environmental

factors. It is generally conducted for businesses and pro&ects. The analysis helps decision"making

and other management processes. It studies many elements under the following factors:

• #olitical Factors

• $conomic Factors

• Social Factors

• Technological Factors

• $nvironmental Factors

• %egal Factors

The main challenges for businesses in China are:

• 'ttaining strategic ob&ectives of cost reduction

• %ocal differentiation

• The strengthening of core competencies in certain areas and business activities

(ou are perhaps aware that China is a formal member of )T*. )hile China!s entry into theworld market benefits its national economy+ it also boosts global economic growth.

 

Political /actors

#olitical factors which impact China are:

• ,overnment regulations

-oth formal and informal rules+ which firms must abide by+ impact the country. any people

claim that the political force is the most unsettled force. *ver the past few years+ the government

focused on the development of e"commerce.

• %egal issues

The legal framework for e"commerce is still in its early stage. China has little e/perience for

drafting e"commerce legislation for topics like intellectual property rights protection and ta/.

There aren!t any regulations supporting the privacy+ recognition of digital signatures+ consumer

rights and validation of electronic contracts yet.

Economic /actors

*ver the past five years+ China!s economy e/perienced significant ,0# growth rate. 1eports

suggest that if China continues to e/cel at this rate+ it ill surpass 2S ,0# soon. Some factors

which might help are:

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• Sigh rate of savings

• 'bundant and skilled labor 

• ore e/port business

• #otential urban growth

'ny economic development could have a ma&or impact on the S$s and their actions. China!s,0# rate suggests that each citien is adding more and more value to the society. This is in turn

increasing consumers! purchasing power. The labour cost in China is also e/tremely low. This is

why leading companies like 'pple are inclined to hire workers from the country.

The growth rate is impressive+ but it can slow down. Some of the worrying trends in China are:

• igh inflation rate

• igh property prices

The #eople!s -ank of China has increased interest rates. The reserve re4uirement for commercial

 banks is also nine times higher now. oreover+ the central bank is urging banks to lend less and

impose limits on home purchases.

Social /actors

The social and cultural aspect of China plays an important role as the demographics constantly

change. For e/ample+ population growth and age distribution fluctuate. These can alter social

trends and cultural values. Family sie and social behaviour often impact how decisions are

taken. *ther social factors are consumer lifestyles+ education+ religion+ and emigration. China is a

collectivistic culture+ based on ,eert ofstede!s value dimensions.

The literacy rate in China is over 567. China emphasies on education and ma&ority of the nation

are literate.

There are 896 million Internet users in the country. 's there is internet access+ Chinese people

often shop online. Taobao is the largest local e"commerce website+ and many people buy a lot of

their things from the site. -oston Consulting ,roup predicts that the volume will increase in near

future.

$"commerce has changed how local consumers shop. owever+ there is still a group who wish to

avoid the perceived risk associated with online shopping. They prefer physical shopping and like

the face to face contact.

Technological /actors

Some common technological factors studied in #$ST$% are:

•  ew products being developed

•  ew purchasing mechanisms such as the intranet and e/tranet

•  ew production technology

•

 ew distribution mechanisms like Internet•  ew methods of working like mobile telecommunications

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' ma&or technological problem in China is that the development of the -9C industry does not

have a safe and stable online payment system. 's Chinese buyers are on high 2ncertainty

'voidance level and %ong"Term *rientation+ the problem is strengthened.

)hat is more+ based on the perspective of *rtolani ;966<= there has been only > percent credit

card penetration in China suggesting that the most widely used payment method had low

acceptance in China and the payment system to support online credit card transaction is also

facing low usage. 'nd the lack of safe online credit card payment system is one of the key

reasons for this low usage and penetration.

En0ironmental factors

2ndoubtedly+ along with China?s rapid industrial development are the serious negative impacts on

environment these include increasing pollution and decreasing natural resources as well. In 966@+

China became the world?s largest emitter of carbon dio/ide and other gases leading to

greenhouse. )T* conducted a report on the 4uality of air in 9@9 cities worldwide+ pointed out

seven out of the ten cities that are the most polluted in the world were in China. In addition basedon China?s own evaluation+ two"thirds of the 869 cities which have been air polluted two"thirds of 

them moderately or severely so. 'ccording to environmental report+ there is water polluted in

almost all of the nation?s rivers to some degree and half of the population is lack of clean water

for daily life. -y some estimates+ there are appro/imately 366 million people have to use

contaminated water for drinking every day.

)ater scarcity also is considered as an issueA taking severe water scarcity in orthern China as an

e/ample that is actually a serious threat to sustained economic growth. Thus+ the government has

 been working on a pro&ect for delivering a large"scale of water from the (angte 1iver to

northern cities+ including -ei&ing and Tian&in. Some research estimate pollution costs hold the

Chinese economy from @7 to >67 of ,0# per year.

Currently+ like any ,overnment+ China?s leaders are increasingly paying attention to

environmental problems in the country. 1ealiing the importance of environmental protection+

The State $nvironmental #rotection 'dministration was officially upgraded to a ministry"level

agency+ the inistry of $nvironmental #rotection in >55B.

1ecently+ China?s environmental legislation has been strengthened and some progress in

stemming environmental deterioration has also been made. China took part the 'sia #acific

#artnership on Clean 0evelopment in 966<+ which unites industries and government to

implement common strategies together that reduce pollution and global climate change.

Campaign about pollution control was great invested that a factor contributing to a successful*lympic -ei&ing 966B+ though some of the benefits were &ust temporary in nature. Thanks to

these campaigns the 4uality of air in some cities has been improved recently.

It can be said that China is participating actively in climate change talks as well as other

multilateral environmental negotiations+ especially discussions about how developed countries

deal with serious environmental issues that help developing countries to a greater e/tent. China

has signed the -asel Convention about transporting and treating haardous wasteA the ontreal

#rotocol about the *one %ayer #rotection and other ma&or environmental agreements.

's long as China is huge country thus water scarcity is regarded as a big issue that also is the

 pro&ect?s disadvantage. -esides that+ climate change is considered as one of the ma&or systematic

risks for Soundtech Technology because climate change is affecting how companies operate and

the products they offer.

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Legal factors

La%s su!!ort foreign in0estors#

In order to encourage foreign companies to invest in China+ China ,overnment has gradually set

up a relative complete law system. In >5@5+ The %aw of the #eople?s 1epublic of China on

Chinese"Foreign $4uity oint Dentures was published. 96 years later+ the Chinese government has

 promulgated and issued a series of laws and statutes about the establishment+ operation+

termination and li4uidation of foreign"invested enterprises. The main laws and regulations

include the three basic laws EG The law on Chinese"Foreign $4uity oint Dentures+ The %aw on

Chinese"Foreign Contractual oint Dentures+ and The %aw on )holly Foreign"*wned

$nterprisesA detailed rules for the implementation of the three basic lawsA The Company %aw of

the #eople?s 1epublic of ChinaA The Income Ta/ %aw of the #eople?s 1epublic of China for

$nterprises with Foreign Investment and Foreign $nterprisesA Interim #rovisions for ,uiding

Foreign InvestmentA Industrial Catalogue for Foreign InvestmentA Interim #rovisions Concerningthe Investment within China of Foreign"invested $nterprises+ #rovisions 1egarding the erger

and Separation of Foreign"invested $nterprises+ and %i4uidation easures for $nterprises with

Foreign Investment. These provide legal bases from which to guarantee the independent

operation rights of foreign"funded enterprises and to protect the legitimate rights and interest of

 both domestic and overseas investors.

Currently+ the China?s government is considering its e/isting laws and statutes in accordance with

the model of the )T*. It has abolished certain obsolete laws and regulations+ and will gradually

revise the laws and regulations that are incompatible with the rules of the )T*.

China Ta1 Regime#

Ta/ law is one of the most important issues that SoundTech Technology needs to understand as

the ta/ regulations have a direct impact on ST?s business activities. China is known as one of the

most attractive incentives packages in 'sia. Ta/ incentives and other facilities for the

manufacturing sector are provided for in the #romotion of Investment.

The data below demonstrates the ta/ that a medium"sie company must pay or be withheld in a

given year+ as well as measures of the administrative burden in paying ta/es. These measures

include the number of payments an entrepreneur must makeA the number of hours spent

 preparing+ filing+ and payingA and the percentage of their profits they must pay in ta/es.

Conclusion

China is a flourishing market with the need for some small changes. Companies will benefit if

they can understand the e/ternal macro"environment in which they function and will operate in

the future. The rapid economic growth and stable political conditions make the e"commerce

industry lucrative to investors. There are risks like lack of trust. *ther risks include lack of stable

and secure online payment systems. 'lso+ there isn!t proper legal protection. 'll of these create

uncertainties and challenges to the market players.