China. Its Complexities and Challenges


  • The third economy in GDP terms.
  • The second economy in trade terms.
  • The first economy in terms of reception of foreign investment. Average 60 billion per year.
  • The fourth economy in terms of out-flow of foreign direct investment.
  • 6% of World GDP (45% in 2050)
  • Internal savings rate of 30%
  • The core of the Asian regional integration.
  • 100 million of middle class consumers (600 million in 2025)
  • Generational leaps in infrastructure
  • Generational leaps in IT growth (Over USD150B in R&D centers)
  • IT, High Tech Trends
  • Growing private sector
  • East Asia/Asean is moving towards a common market

China. Complexities

  • Intertwined political, economic and legal systems.
  • 56 ethnic groups, 32 provinces and more than 200 languages.
  • Geographic concentration of industrial clusters;
  • Economic development plans based on political planning and public financing;
  • Business management that may include social considerations beyond “efficiency”;
  • Financial system driven by social-political considerations;
  • Government interference on business decisions;
  • Asymmetries on economic incentives and tax benefits, per region, per sector;
  • High foreign direct investment;
  • Growing mixed economy, growing private sector;
  • Complex patterns for mixed companies;
  • Strong regulatory framework in strategic markets;
  • Complex, fragmented and changing legal system.
  • Complex arrangement of actors and alliances;
  • Complex arrangement of manufacturers, traders and agents.

Biggest Challenges

  • Understand. Success in the China = Success in the World Market
  • Understand. Take distance from western paradigms
  • Be able to recognize that “I may know nothing” or “What I know may not be useful this time”
  • Be willing to invest in a learning process, exploration, observations
  • Be willing to create “real relationships”, not only “business relationships”
  • Search for true “innovation”
  • Duly design, develop, test, refine, revise, plan and duly execute your entrance strategy
  • Focus on competitive advantages from increased profits, lower costs, access to new markets, increased exports and sales
  • Companies that do not have a China strategy, do not have a global strategy, and therefore do not have a local strategy either.
  • Waiting means risking the future of your companies and your communities
  • Look for the best available experience, judgment and contacts of China experts.

Foreign Direct Investment. In-Flows

  • An average 26% of all the FDI received by developing countries and 11% of FDI world flows. 71% manufacturing and 21% services (i.e. 2005-2006 FDI US$167.600 mill, UNCTAD 2004).

Chinese Foreign Investment. Out-Flows

  • One of the main foreign investors in the world. “China has taken the fourth position in the ranking of foreign investors, according to a poll among foreign investment agencies.., after the U.S.A., U.K. and France” (CEPAL 2005). 
  • Chinese authorities informed of approximately 9.000 Chinese companies investing out of China, in 170 countries.
  • Japan, U.K., U.S.A. Germany, Denmark, Sweden, Spain, France, Singapore, Korea, Canada, Australia, and several others have established institutions to attract foreign investment from China.
  • Catalogue for Foreign Investment Recommended Areas (Ministries of Commerce and Foreign Affairs). 67 countries. 
  • National policies to promote foreign investment (Guangdong y Shanghai);
    (a) tax incentives;
    (b) soft loans;
    (c) Import guarantees.
  • Approaching natural resources.
  • Increasing scarcity.
  • China, HK, Japan, Taiwan, Singapore, Korea and Malasia, are taking strategic positions.
  • The increasing prices of natural resources is generating;
    Elimination of intermediaries;
    Incentives to strategic alliances and M&A;
  • The places to be chosen shall be those with qualities to become platforms. (CEPAL 2005).

Types of Foreign Investment. Out-Flows

Type I. Greenland investment
(Haier, TCL, Gree).

Type II  M&A  (4 categories)
One. Natural Resources (China National Off Shore Oil Company Ltd, China Huaneng, CITIC, Yanguang Group, Jilin Kichkel, Sinopec, China Minmetals, Baosteel, Baoshan, etc).

Two. Production Extension and Marketing. (Shanghai Haixing-Glenoit Corp-Specialty Fabrics, Shanghai GM-Daewo, TCL-Schneider, Alibaba-Yahoo China, Lenovo-IBM)

Tres. Reverse contracting.  (Wanxiang Group-UAI  securing the suplí of spare parts)

Cuarto. Technologies. (Shanghai Electric Group-Akiyama Japan, China Telecom-Excelcomindo, Huawei-British Telecom, ZTE-Ericsson, BOE Tecnology-TPB,  BenQ a Siemens, etc)

Type III. Strategic Integration           
(TCL con Thompson, 8 biotech Biotecnología; Huawei con Siemens-NEC-Matsushita-Infineon; China Mobil con MTV, China Telecom-NEC)

Type IV. R&D Investment  
(Huawei Technologies, BOE Technology-Nynix Semiconductors, China Telecom, Konka Electronics, Guangdong Glanz Group,  Haier, etc)

China Sovereign Wealth Funds ("SWF")

China Investment Corporation

  • Amount : 1.47 trillion yuan (£100 billion)
  • History :
  • One of the youngest of the major sovereign wealth funds.
  • CIC is in charge of investing China’s vast foreign exchange reserves and is thought to have about $200 billion at its disposal.
  • Major investment : Blackstone ($3 billion)
  • In late December 2007, it emerged that CIC would inject USD5 billion into Morgan Stanley in return for a 9.9 per cent stake. It will receive 9% interest instead of a dividend.


  • Amount: 929.2 billion yuan (Dec. 2006).
  • History:
  • It was founded in 1979.
  • The state-controlled bank floated in April for USD5.9 billion and, like its compatriots, has been branching out into the West.
  • Major investments : Late 2007 bought 6% stake in Bear Stearns for USD1 billion.
  • Specifically, it pumped USD1 billion into Bear Stearns, the struggling Wall Street investment bank, after the high-profile collapse of two hedge funds.

China Development Bank

  • Amount: 2,314 billion yuan (USD320) (Dec. 2006).
  • History :
    The China Development Bank was founded in 1994 under the strict jurisdiction of the country’s Government.
  • Major investments : Bought 3.1% in Barclays for £1.6 billion.
    Given the bank’s strong state links, it has been instrumental in financing the construction of China’s infrastructure, including the huge Three Gorges Dam project

Trends and Paradigms 2008-2009

  • Migration of traditional industries –machinery, tools, consumer products, pharmaceuticals, food, retail industry- into strategic zones of the China market
  • Contract manufacturing -processing- migration into “processing zones”
  • IT, High Tech R&D centers migration into “high-tech zones”. Patent filings skyrocketing
  • Supply chain transfer –design and innovation-. Before, company by company, and now entire supply chains invest together (auto, IT, telecom). Also co-production assembly for export worldwide.
  • Logistics transfer –third party logistics- . Management of stocks at FOB price and other factors.
  • Domestic service industry increasing capacity and quality –value chain-. This includes investment banking- mutual funds- finance – media – consultancy –technology and systems – human resources
  • Large growth. Small companies with exponential growth (Wen Wen cookies)
  • Two-tier JVs –business in and out of China- production and distribution
  • Reverse JVs –investment out-flow- (Yanjing/Taisun, etc)
  • Regional competitors become global cooperators (Haier/Sampo)
  • Private equity and funds clubs create financial pipelines from or through  Greater China to the World.
  • State Owned Enterprises changing approach towards private investment patterns. Global approach for China focused growth.
  • Increased human capital management –managerial and technical support entering the center of the projects-
  • Chinese companies becoming more competitive locally. Massive domestic consumption –industrial and household-
  • Chinese companies becoming more competitive globally. However, more and more being Global requires being Local. Relevance of the Chinese local market.
  • Chinese companies are forming strategic alliances that are and will change the balance in many industries, and these alliances will take place across industries and markets.
  • Regional integration (ASEAN) –value chain integration-. Export and manufacturing prowess will take larger market share from neighbors in their home and export markets.
  • China is integrating with the World, in a broad and large scale, across industries and markets.

Beyond Manufacturing

  • R&D expenditure has an average growth rate of 20%, R&D-to-GDP ratio grew from 0.8% to 1.23% (From 1998 to 2004).
  • The 11th 5-Year Program aims at raising R&D-to-GDP ratio to 2% by 2010 (Japan 3.1%, USA 2.7%, South Korea 3.0%, OECD average 2.2%).
  • Average 30% annual increase of domestic invention patent application (i.e. grew from 13,726 to 65,786, an AGR of 29.8% (1998-2004)