• TheLINK on WeChat

    Look what you’ve been missing!

    569
  • CEIBS Alumni

    Join the largest, most influential b-school network in China: over 20,000 business leaders, and growing.

     

    569

China’s Business Climate Enhanced by New Government Initiatives

Volume 1, 2014

By Professors Juan Antonio Fernandez, Xu Bin and Zhou Dongsheng

China’s new leadership initiated several eye-catching policies in 2013, including a crackdown on corruption and the establishment of a free trade zone in Shanghai. These actions are viewed positively by both Chinese and foreign executives who participated in the “CEIBS Business in China Survey 2014” which polled 1,017 executives from companies doing business in China.

After a leadership change in March 2013, China’s new leaders wasted no time in leaving their mark on business policies. While the Chinese economy continued to slow down, the new government refrained from printing more money for a short-term rescue. Instead, it pushed ahead with more reforms to pave the way for long-term, sustainable growth. The actions taken by the new government, from a crackdown on corruption to the launch of the Shanghai Free Trade Zone, have brought positive reactions from China’s business community, according to the CEIBS Business in China Survey 2014.

The CEIBS Business in China Survey is an annual poll of business executives working in China for both Chinese-owned and foreign-owned companies. The 2014 survey was completed by 1,017 executives between November and December 2013, with 564 from Chinese companies and 453 from foreign companies. Among them were 466 CEOs, GMs, and company owners; 314 Vice Presidents, Deputy General Managers or Directors; while the rest represented all the remaining business functions: HR, Finance, Marketing, Sales, Operations and Research & Development. Of the respondents, 80% are from the Chinese mainland, 2% from Taiwan, Hong Kong or Macao, and 18% from 29 different countries. Most of them (92%) have more than 10 years of work experience, with 47% of them having more than 20 years of work experience. This broad and experienced sample added rich and valuable perspectives to the survey.

Business Confidence Stabilized towards a “New Normal”

The annual survey provides a confidence index based on the question, “How confident are you that your operations in China will be successful in the next year?” The scale is from 0 (no confidence at all) to 10 (maximum confidence). In the 2011 survey, the confidence index was 7.2 for foreign firms and 6.7 for Chinese firms. In the recent three surveys, the index has dropped to somewhere between 6.3 and 6.6, and it is 6.5 in the 2014 survey for both types of firms (see chart 1). This trend confirms the fact that the Chinese economy has experienced a slowdown in the last three years, and also the fact that all companies operating in China have accepted this status as the “new normal” and they feel cautiously optimistic about their businesses in China.

CEIBS Knowledge, Volume 1, 2014

The new government has refrained from using expansionary monetary policy to stimulate the economy. In the past, there was high anticipation of monetary expansion whenever the Chinese economy showed a sign of slowing down. Such short-term macroeconomic adjustments had become a serious concern, especially among Chinese firms. In the 2013 survey, when asked the question “What are your main concerns regarding the Chinese government and the legal environment”, 46% of Chinese company executives and 37% of foreign company executives chose “macroeconomic adjustment” as a main concern (see chart 2). In the 2014 survey, this choice has dropped significantly; only 38% of Chinese company executives still view it as a main concern. This evident change of viewpoint shows that the new government has successfully signalled its shift in policy orientation from short-term macroeconomic adjustments to long-term structural policies. Notice that the top concern has now become “unclear and changing regulation” for both Chinese and foreign companies (see chart 2), which calls for fundamental administrative reforms of the government.

Chart 2: What are your main concerns regarding the Chinese government and the legal environment?

CEIBS Knowledge, Volume 1, 2014

Corruption Perceived as High but Decreasing in 2013

When asked how serious corruption is in general, an overwhelming majority of executives view it to be very serious or moderately serious (chart 3). Among them, executives from private firms and foreign firms feel more strongly about the seriousness of corruption than those from state-owned firms.

CEIBS Knowledge, Volume 1, 2014

More than half of Chinese company executives admit that their companies have often, or sometimes, made attempts to provide personal benefits to relevant individuals. In contrast, 61% of the surveyed foreign company executives claim that their companies have never made any such attempts (see chart 4). However, when asked if they believe that their competitors have made attempts to provide personal benefits to relevant individuals, 72% of Chinese company executives and 64% of foreign company executives believe that their competitors have often, or sometimes, made such attempts (see chart 5).

CEIBS Knowledge, Volume 1, 2014

Although corruption remains high, the 2014 survey reveals a significant decrease in corruption as perceived by the executives. With regard to the question “In your view, how is corruption in your industry compared to last year?”, 32% of Chinese company executives and 17% of foreign company executives considered corruption in their industries to be less in 2013 than in 2012; an additional 3% of Chinese company executives and 2% of foreign company executives considered corruption in their industries to be much less in 2013 than in 2012 (see chart 6). In the meantime, chart 6 reveals that there are still 10% of Chinese company executives and 4% of foreign company executives who perceived corruption in their industries to be more in 2013 than in 2012, and an additional 2% of Chinese company executives who perceived corruption in their industries to be much more in 2013 than in 2012. Putting all the data together, it is clear that the number of executives who perceived less corruption in 2013 compared to the previous year is significantly larger than the number of executives who perceived more corruption in 2013 compared to the previous year. One would naturally attribute this improved perception to the anti-corruption campaign of the new government.

CEIBS Knowledge, Volume 1, 2014

Shanghai Free Trade Zone: High Interest but still Lacking Information

Shanghai Pilot Free Trade Zone (FTZ) was officially launched on September 29, 2013. When answering the survey in November/December of 2013, with regard to the question “Have you heard about the Shanghai Free Trade Zone?”, all Chinese company executives and 96% of foreign company executives said that they had heard about it. The Zone has generated high interest, especially among Chinese companies; 59% of state-owned firms and 50% of private-owned Chinese firms in our survey expressed an interest in the Shanghai FTZ. However, many executives, especially those from foreign companies, felt that there was not enough information on which their companies could judge if the Zone would be of interest to their companies (see chart 7).

CEIBS Knowledge, Volume 1, 2014

The top area of interest in the Zone, chosen by 64% of Chinese company executives and 61% of foreign company executives who answered the survey, is: “possible tax/tariff benefits” (see chart 8). This indicates the conventional thinking about special economic zones in China which have always been associated with tax benefits. However, according to government documents, the Shanghai FTZ is not designed as a place for tax benefits, but as a test ground for reform policies. One major reform policy was said to be liberalization of financial transactions. According to the survey, 60% of Chinese company executives and 49% of foreign company executives expressed their interest in possible benefits from freer financial transactions in the Zone (see chart 8).

CEIBS Knowledge, Volume 1, 2014

Expectations of the Shanghai FTZ are high, as confirmed by the survey data: 31% of Chinese company executives and 21% of foreign company executives have high expectations and consider it a model of China’s future economy. In addition, 55% of Chinese company executives and 56% of foreign company executives have moderate expectations and are waiting to see how far the policies in the Zone will go (see chart 9). In terms of what they would like to see the most in the Zone, the top three choices are efficiency of government services, financial market liberalization, and lower taxes. Chinese private company executives also felt strongly about getting equal treatment for all types of companies (chart 10).

CEIBS Knowledge, Volume 1, 2014

Conquering China’s New Business Climate

In many ways, 2013 represents a new start for China. The new leadership took office and initiated a number of new policies. In November 2013, China’s Communist Party held an important meeting in which the reform agenda for the next ten years and beyond was announced. As we discovered from the survey, companies in China have been adjusting to the new business climate. Despite the slowdown of the Chinese economy, China remains a profitable location for investment. When asked about their investment plan for 2014, 71% of Chinese companies and 65% of foreign companies said they will increase investment in 2014 (see chart 11). The crucial decision for companies in China does not seem to be whether to expand, but how to find ways to expand effectively in China’s new business environment.

CEIBS Knowledge, Volume 1, 2014

Juan Antonio Fernandez is Professor of Management at CEIBS, Xu Bin is Professor of Economics and Finance, while Zhou Dongsheng is Professor of Marketing. The authors would like to acknowledge the support of a CEIBS research grant, and excellent research assistance from Maria Puyuelo and Jenny Li.