FACULTY OF BUSINESS OF SCHOOL

MEI 2018

BBNG3103

INTERNATIONAL BUSINESS

MATRICULATION NO : 910216-07-5451-003

IDENTITY CARD NO : 910216-07-5451

TELEPHONE NO : 013-4747587

E-MAIL : dockk21@gmail.com

LEARNING CENTRE : Pulau Pinang

1.0 INTRODUCTION.

China is reputed as the oldest continuous civilization in the world. China, an ancient,
mysterious and beautiful land, is always appealing to adventurous foreign visitors. As the third
largest country in the world occupying an area of 9,600,000 sq km, it spans 62 degrees of
longitude and 49 degrees of latitude. A wide variety of terrain and climate shape its numerous
natural attractions. Abundant in a variety of resources, plants, animals, and minerals, the land
has nurtured countless generations of Chinese people.

China, with over 1.370537 billion people (including Hong Kong, Macau and Taiwan)
as of April, 2011, is without doubt the most populous country in the world. According to the
census at the end of 2010, the ratio of the sexes is about 51.27% male and 48.73% female. Some
49.68% of the population resides in the urban cities and towns while the rest is in rural areas.

China is classified as an upper middle-income country by the World Bank, and its rapid
growth over the decades has pulled hundreds of millions of its citizens out of poverty. About
10% of the population in the country lives on $1 USD a day, compared to 64% just 35 years
ago.

Although 56 different ethnic groups are officially recognized in China, 91.51% of

Chinese are Han Chinese. Only one other group – Zhuang – has a larger than 1% share of the
population. Other ethnic groups are growing at a higher rate than Han Chinese, but because of
the massive dominance of Han Chinese, this is not expected to dramatically alter China’s ethnic
composition.

Chinese culture and civilization has been influenced by many religious movements over
the past 1,000 years, and Taoism, Buddhism and Confucianism are considered the
country's "Three Teachings" based on their cultural and historical impact. China has also seen
an interesting syncing of these three religions in the form of a folk religion that is common
throughout the country
 China has large areas of mountainous land, about two-thirds of the country. The ranges
mainly run from east to west and from northeast to southwest. Among these mountains, some
reach to the sky, and others are lower with charming scenery. Out of the mountains throughout
the world at the altitude of over 7,000 meters, over 50 stand in China. To the east in China,
lower mountains like Mt. Taishan, Mt. Huashan, and Mt. Emeishan, also display their unique
beauty.

Malaysia's Top Glove, the world's largest rubber glove manufacturer, is looking for
merger and acquisition (M&A) or joint venture (JV) opportunities to grow its market share in
China.
The company, which accounts for 13 percent of Malaysia's total rubber product exports to
China, aims to acquire existing glove factories, in which the group can put in additional
machinery, in order to compete more efficiently, Lim Wee Chai, Top Glove's executive
chairman told Xinhua in an interview, adding the company is also open for M&A (mergers and
acquisitions) or JV (joint venture) possibilities in distribution companies in China.

2.0 Political Risk

Political risk is the risk an investment's returns could suffer as a result of political changes or
instability in a country. Instability affecting investment returns could stem from a change in
government, legislative bodies, other foreign policy makers or military control. Political risk
is also known as "geopolitical risk," and becomes more of a factor as the time horizon of an
investment gets longer.

A unique form of political risk occurs in China, and this is the constant battle between the
country’s central government and the provincial and local governments over applicable law,
and observance or non-observance of it. This makes it difficult for companies operating in
China to know exactly what the rules are.

2.1 TRADE AND CURRENCY DISPUTES

Friction with the Malaysia, the European Union and other major economies over trade
imbalances and the level of the yuan has the potential to expand into sharper confrontation that
could unsettle investors and capital markets. With China’s exports rising again and foreign
exchange reserves expanding, Beijing faces international pressure to let the yuan appreciate.
Chinese officials worry that economic recovery remains fragile and say they will not make any
big moves on the exchange rate.

Rising disquiet about Chinese trade policy in the Malaysia could be magnified by
Malaysia Congressional elections later this year. Malaysia is also likely to make more anti-
dumping complaints against goods made in China in 2010.

Most analysts believe China and other major economies have too much to lose to risk a
major escalation of these disputes. But markets are sensitive to any sign, however ill-
founded, that the strains are reducing China’s appetite for Malaysia Treasuries.

The rhetoric on trade from Malaysia and Beijing. Both sides want to avoid any serious
economic dispute but also protect domestic industry and maintain popular support at home.
Watch for signs that positions are hardening, that the Malaysia Congress is increasing pressure
that could shift policy, or that tit-for-tat trade measures could expand
2.2 Unequal Development

China’s economic rise has been notable for two reasons in particular; its speed and its
effects on inequality. The scale and speed of economic growth has been astounding,
with average economic growth from 1978 being just under 10%, and levels of poverty
decreasing on a scale previously unheard of; but this breakneck speed of economic growth has
come at a cost, with inequality levels increasing rapidly and public anger over this
situation becoming increasingly widespread .

China’s growth has also been marked by the rise of a new class of powerful and influential
business leaders, often with close ties to the communist party. This development is also present
elsewhere, with other countries such as the US and UK going through similar processes during
periods of rapid economic development in their history, but China is unique due to the
particularly strong links between the government and these new business elites.

For all the talk about China developing modern standards and norms of doing business, the
reality is often far more opaque with China’s legal foundation being predicated on party control
and power rather than the rule of law. The situation of property rights shows how the CCP’s
interests prevail over the rule of law.

2.2 SOCIAL STABILITY

China’s Communist Party has so far maintained general authority and control despite
some fears that that the global crisis could spark unrest among laid-off workers. Outbreaks of
discontent have remained brief and localized, and recent economic data point to robust growth
into 2010.

But with the Party and global markets treating social stability as a crucial issue, even
limited challenges to the Party’s control can produce outsize reactions. If the recent rapid
economic growth cannot be sustained, as a burst of government-backed credit shrinks,
joblessness and investor disquiet could rise as government spending wanes.

China’s recent rapid growth has been accompanied by heady rises in real estate prices
and signs of inflation, which could also add to disquiet among residents struggling to pay bills.
Ethnic tensions in Tibet and Xinjiang have distracted the central government and drawn
international concern, but have not seriously threatened national stability.

Emergence of any regional- or national-level protest movements. So far, protests in

China tended to be directed at local officials. Strict controls make it difficult for any organized
movements to form beyond the local level.

2.3 THE ENVIRONMENT

During the Copenhagen conference on climate change in late 2009, China’s position on
greenhouse gas emissions emerged as a key factor shaping the negotiations. Some Western
politicians said Beijing was combative and inflexible in the final, tense days of the conference,
undermining hopes for a stronger deal.

China and other big developing countries say rich nations were at fault for not offering
bigger greenhouse gas emissions cuts of their own and not giving enough help to poor nations.
Talks on a binding international climate change pact continue in 2010, putting China’s
positions on emissions and environmental governance under international scrutiny.

China’s rapid growth causes many environmental problems, and citizens are concerned
about health problems caused by pollution.

China’s position on emissions and fighting climate change. Beijing is unlikely to offer
steeper reductions on greenhouse gas emissions growth than those it announced last year.
Carbon market investors will look for flexibility on other contentious issues, like international
verification and funding for poor countries.
3.0 Economic risk

Economic risk can be described as the likelihood that an investment will be affected by
macroeconomic conditions such as government regulation, exchange rates, or political stability,
most commonly one in a foreign country. In other words, while financing a project, the risk that
the output of the project will not produce adequate revenues for covering operating costs and
repaying the debt obligations. Economic risk is, however, a nebulous term with various
definitions. In a nutshell, economic risk refers to the risk that a venture will be economically
unsustainable, due to various reasons vitiating from an alteration in economic trends to
fraudulent activities which ruin a project’s outcome. Before starting with the projects, it is
important to consider economic risk for determining the likelihood of potential risks being
outweighed by the benefits.

Economic Risk in China

Business people need to consider the legal, economic and business risks involved when
investing in China. Risk indices in China, such as tax inspection difficulties, anti-dumping
retaliation and severe power shortages, have all clearly increased in recent years.

3.1 violation of relevant regulatory laws

Due to the excessive discretionary authority of the customs administrative systems in

China, it is frequently reported that businesspeople were arrested because of their unintentional
violation of relevant regulatory laws. Moreover, under China's complicated and confusing tax
laws, it is easy for inspectors to single out people and find some small error. China can use tax
 inspections as a source to boost its national coffers. Therefore, the manifold forms of tax
inspection come as no surprise.
Since the launch of reform and opening measures, China's economy and consumers have
suffered considerable loss as a result of corruption. On average, such loss has amounted to
between 980 billion and 1.25 trillion renminbi annually.

Every year, over 2.35 million Chinese Communist Party members are disciplined for
cases involving corruption and other economic crimes. Beijing's failure in the battle against
corruption is due to its systemic and structural problem. Specifically, China's long-term
single party dictatorship system has concentrated power in a few hands and left the county
without the transparent supervising mechanisms common to democratic countries.
Consequently, China-bound enterprises are often forced to do business in China through the
back door, causing them to shoulder the unnecessary burden of business cost.

3.2 . Inflation

Inflation may be a universally bad sign for the bond market, but its impact on equities
is far less certain. Excess capital can provide companies with cheap loans, which can spur
economic growth and drive higher earnings. But out-of-control inflation can result in troubles
for the entire economy, including the end markets targeted by corporations.

Many economists argue that moderate inflation of between 1% and 3% produces strong
returns for equities, while periods with 6% of higher inflation have always produced negative
real returns for equities. Of course, there are others that argue that no level of inflation raises
the return on equity seen in public companies, as it's difficult to show a direct cause and effect.

For international investors, central banks that provide liquidity during times of crisis can
help boost equities by promoting economic recovery. But inflation that seems out-of-control
could result in lower returns in equities. Again, it's important for investors to watch CPI figures
(or unofficial private reports) and measure that against economist expectations.
 The cause of inflation in China's economy was expansionary monetary policies and
rising wages. The inflation in China was caused by "cost-push inflation. It means that the cost
of firms increase, in this case it is higher wages, and the firms are forced to raise prices in order
to cover the costs.

When inflation rates are high, groups such as pensioners, households, dependent on
social security benefits, stand lose to a great deal since they are often on fixed incomes. These
Chinese will now be able to purchase less than before (less purchasing power), and will start to
demand for higher wages. Only those with strong bargaining positions will be able to bid up for
higher wages. In addition, people will be able to buy less food items than before which is a
major issue because food is one of the basic necessities in human life, as in the article it has
shown the the prices of food increase 10% year-to-year.

Inflation causes an increase in interest rates and will therefore have a negative effect on
investment and output, both of which will adversely affect employment, as in the article we can
see that labour disputes have been doubled.Higher inflation means that the businesses in China
will have to change their prices to keep up to date on the price level.

Inflation affects the foreign trade and the exchange rate. Experiencing high rates of inflation,
China's domestic products will be less competitive internationally. As the domestic products'
prices increase the demand for these products will fall and therefore the demand for China's
currency will also fall, thus affecting the exchange rate.

3.3 financial crisis

the financial crisis hurt the economy of China, as well as its public and private businesses, the
country has been able to manage its economic structure once again, succeeding to achieve a
higher growth rate in recent years due to the efficient acceleration of trade policies. In essence,
the liquidity and currency pressure was the main cause of the Asian crisis, including China. This
stressed the role of the crisis management to play in solving such problems (Hoogvelt, 2001).
Therefore, the Malaysian manufacturing company would benefit from the highly developed and
professional crisis management that exists in China, especially within the economic
environment.

In case of financial crises, China is able to manipulate a process of restructuring for the financial
sector in the country which witnesses the crisis. Such restructuring process will surely lead to
stabilization of the financial system to be capable of facing any liquidity dilemma in the future.
Such approach would benefit any foreign firm that operates in China, such as the Malaysian
manufacturing company. Besides, it is not only the financial system that should be restructured,
but also there should be the corporate restructuring (Dabrowski, 2003). So, China, like many
other Asian countries, started to restructure its corporations to help solve the liquidity problems.
The process of corporate restructuring in Singapore has involved elimination of the “legal, tax
and regulatory obstacles” in order for the restructuring process of corporations to be efficient.
Hence, the successful restructuring approaches followed by the China government should
encourage foreign corporations, such as the Malaysian manufacturing company, to operate
safely in China.

3.4 Commercial/ Legal Disputes and Travel Bans

As the number of foreign enterprises investing in China and doing business with Chinese
partners has increased so has the number of commercial disputes.

There are various options available to settle a commercial dispute, principally litigation,
arbitration and mediation. The most appropriate option will always depend on the circumstances
of the case, and companies should seek the advice of a lawyer who specialises in the laws of
the People’s Republic of China.
 Before entering into a contract in China, companies should take appropriate legal advice,
both in the Malaysia and in China on including dispute resolution clauses and governing law
clauses in the contract to plan how, where and under what law, any disputes will be resolved.
Chinese law restricts both the choice of law and the types of resolution mechanisms that can be
used in China-related commercial contracts, so the contract needs to be drafted carefully.
Contracts entered into in the Malaysia are not generally enforceable by Chinese courts.

Many foreign companies seek to resolve disputes by arbitration rather than litigation.
Although it is possible for parties to reach agreement on arbitration after a dispute arises, in
most cases an arbitration clause is better included from the outset. Joint ventures operating
within China are considered to be domestic Chinese entities and disputes involving joint
ventures will mostly be considered to be domestic disputes to be arbitrated in China. We have
published advice on how we can help Malaysia with commercial disputes.

4.0 Export opportunities in china

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:

 Size of the market

 The very low cost of labor
 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. It is not easy to manage international business in
China.

4.1 Geographical

Geographical location plays a part in access to markets. All the great empires have
been based around trade routes, and these are almost always maritime. There are notable
exceptions, the medieval Mongol empire was based on the Silk Road from China to the west,
but Jeffrey Sachs sums it up well in his important book The End of Poverty: ‘Many of the
world’s poorest countries are severely hindered because they are landlocked; situated in high
mountain ranges; or lack navigable rivers, long coastlines, or good natural harbours.’

china has three of the world’s busiest ports, and so does the US. With ports you can
raise money through tolls and shipping services. If you have no access to the coast, not only do
you miss out on these services, you have to transport everything by land, which is much more
expensive. And what if your neighbours don’t like you? Ice-bound on its northern coastlines,
Russian has squabbled for centuries over access to a warm water port, the Crimean War being
the most serious. Countries like Afghanistan, Rwanda, Malawi, or Bolivia are all hindered by
access to ports. Other countries, like Ethiopia or Lesotho, are not only landlocked, but
mountainous as well, making trade even more expensive.

4.2 Openness to Regional and International Trade

Market openness serves several important roles in attracting business opportunities. Of

critical importance is a business' ability to sell its products and services to both local and foreign
markets. If Chinese-based enterprises have limited or no access to foreign customers -
particularly the United States, Western Europe, Malaysia and others - then the local market may
not be enough to warrant a significant investment in money and energy. Trade barriers such
as tariffs are typically viewed as disincentives by other nations. Malaysia product that is subject
to high tariffs in China will be less in demand in the Chinese market due to the artificially
inflated price. Such actions typically prompt retaliatory tariffs from the Malaysia on Chinese
products, or in certain extreme cases, an outright ban on certain goods and services.

Export-friendly policies, then, can play a major role in deciding whether to invest in
China, especially for enterprises that have a large portion of their anticipated market
shares located outside of the local market. In efforts to create a more business-friendly
environment, regional and international free trade agreements are typically initiated by market-
progressive governments as reasonable mechanisms for inducing economic activity and growth.

4.3 China has large a large demand for imported goods

Nowadays, China is turning, not only from exports to imports, but also the categories of the
imported products are widening. China importers are broadening, specialized and
professionalized. The demand for western goods in China is constantly growing and evolving.
Over all, China has been a large importer of elector-mechanical products, and China is one of
the largest consumers of commodities in the world, with a huge demand for crude oil, iron ore,
copper, aluminum and soybeans. But now, the category of China import is changing and
enlarging, there is also a growing demand for foreign consumer products – good examples are
wine, beer, chocolate, milk and coffee. In addition, products with “heritage” appeal, such as
luxury goods from Europe and classic automobiles are enormously popular. Finally, where local
brands are not trusted due to quality concerns, Chinese are willing to pay a hefty premium for
foreign substitutes. This is especially true with things like baby milk powder, toothpaste, and
just about any items that are ingested.

4.4 Economic Factors

Over the past five years, China’s economy experienced significant GDP growth rate. Reports
suggest that if China continues to excel at this rate, it ill surpass US GDP soon. Some factors
which might help are:
  Sigh rate of savings
 Abundant and skilled labor
 More export business
 Potential urban growth
Any economic development could have a major impact on the SMEs and their actions. China’s
GDP rate suggests that each citizen is adding more and more values to the society. This is in
turn increasing consumers’ purchasing power. The labor cost in China is extremely low. This
is why leading companies like Apple 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:

 High inflation rate

 High property prices
The People’s Bank of China has increased interest rates. The reserve requirement for
commercial banks is also nine times higher now. Moreover, the central bank is urging banks to
lend less and impose limits on home purchases.

4.5 Social Factors

The social and cultural aspect of China plays an important role as the demographics constantly
change. For example, population growth and age distribution fluctuate. These can alter social
trends and cultural values. Family size and social behaviors often impact how decisions are
taken. Other social factors are consumer lifestyles, education, religion, and emigration. China
is a collectivistic culture, based on Geert Hofstede’s value dimensions.

The literacy rate in China is over 90%. China emphasizes on education and majority of the
nation are literate.

There are 420 million Internet users in the country. As there is internet access, Chinese people
often shop online. Taobao is the largest local e-commerce website, and many people spend a
lot of their things from the site. Boston Consulting Group predicts that the volume will increase
in near future. E-commerce has changed how local consumers see shopping. However, 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.

5.0 Conclusion

Political risks are a growing issue in China, both for inward investment into the country
by international companies, as well as with regard to the increased presence of Chinese
companies and investors in international markets.

It is unclear as to how the anti-corruption campaign will develop from this point, and
whether it will continue to focus on the business community, as it has for the last two years, but
it has clearly exposed the cracks in the foundation of the political-business nexus that has been
such a large part of China’s growth. Ultimately, greater scrutiny and awareness of these
dynamics will be key, going forward, for those looking to do business with China, and the
scrutiny placed on Chinese companies by regulators is almost certainly likely to increase in the
short-to-medium term.

Economic risk is one of the reasons for international investing carrying higher risk as
compared to domestic investing. Bondholders and shareholders generally put up with the risk
undertaken by international companies. Investors dealing in sale and purchase foreign
government bonds are also exposed. Economic risk can be, however, reduced by opting for
international mutual funds for they proffer instantaneous diversification, time and again
investing in various countries, currencies, instruments, or international industries

China has a growing market infused with rapid industrial development and economic
growth. As the world’s third largest trading nation after the United States and Germany, China
will continue to be an important business partner of the Malaysia. Malaysia 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.