Investing In The Chinese Economy: Business Environment And Setup Process

Overview of the Chinese Economy

Today, the Chinese economy is a top three-investment destination. As such, the country is a popular choice for global institutional investors regardless of the uncertainties in its market conditions. Over the years, the economy has been experiencing an influx in the level of its Foreign Direct Investment, something that has significantly led to an increase in its economic prosperity. In the early 2000s, China overtook the United Stated as the world’s biggest recipient of foreign capital (World Bank, 2018). Mainly, this is due to the fact that the economy was favored by conditions in the global capital markets. Also, the nation has a thriving business economy, a friendly business environment and capital market that attract a lot of foreign investors into the country. The economy is also an attractive destination for investment due to its competitiveness. Particularly, the economy has a well developed infrastructure system, workforce skills, resource availability, and a well developed business value chain. Furthermore, the country has been experiencing economic and political stability, something that represents predictability and opportunity for businesses. Additionally, the local Chinese business culture has helped the economy to evolve, mature and prosper over the past years, making it an attractive investment destination for foreign companies that wish to invest in the country. What is more, the country is open to regional and international trade, something that is of critical importance to businesses (IMF, 2017). Specifically, its export and import friendly policies play a major role in deciding whether to invest in the country or not. As a whole, the Chinese economy has a great business environment for both local and foreign organizations, and therefore very favorable for setting up a textile manufacturing firm by the Australian based company.

According to a survey done by the Standard Chartered Bank (2016) the Chinese economy is among the top three investment destinations in the world. Mainly, this is due to the fact that the country has been making efforts to open more segments to foreign investors and opening up to global markets. In addition, China has had a remarkable period of rapid economic growth shifting from a centrally planned economy to one that is market based. Therefore, the government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to one that is largely a socialist market economy. Therefore, this section is going to provide a critical analysis of the macroeconomic conditions in the country as regards to the general business environment, economic growth and business cycles, unemployment, average wage rate, human capital, inflation, real interest rates, government expenditure, taxation policies, domestic credit to the private sector, exchange rate regimes and fluctuations in the exchange rates, among others. This section will also discuss two monetary policies in China and the effects of the Global Financial Crisis to the country’s economy.

Benefits of Investing in the Chinese Economy

As a whole, the Chinese economy has a favorable business environment. Mainly, this can be attributed to the fact that the Chinese government has been working towards making it easier for foreign companies to invest and establish their operation in the country (China’s Business Environment, 2017). The opportunities in the country are endless and the market is exceptionally large. The country’s legal and judicial framework is fair and protects the rights of foreign investors. Additionally, the requirements for setting up a company in the country are easy and not complicated or sophisticated as in many other countries.

Starting a business

For a foreign company to set up a business and operate in China, the firm must analyze and determine what its options are. Mainly, this is because foreign investors can start and establish their business in the country in various ways. Specifically, the company can set up as a Wholly Foreign Owned Enterprise (WFOE), a Partnership Enterprise (PE), a Representative Office, or a Foreign Invested Partnership Enterprise (FIPE). A wholly Foreign owned enterprise is a limited liability company that is fully owned by the foreign investor. This company requires a registered capital and its liability is limited to its equity (Cohen, 2016). It can, therefore, generate income, pay taxes to the Chinese government. It can also expatriate its profits back to the investor’s home country. On the other hand, a Representative Office is a liaison office of its parent company. Thus, it does not need to have a registered capital when being set up in the country. However, when set up, its activities are limited to product or service promotion, market research for the parent company, and quality control in liaison with China (Cohen, 2016). Such a company is prohibited from generating any form of revenue in the country or entering into contacts with local businesses. The Foreign Invested Partnership Enterprise (FIPE) is a new concept in the country that entails foreign investors in collaboration with Chinese individuals starting up a business in the country. Just like a WFOE, this type of enterprise can also generate revenue, hire local and foreign employees and enter into contracts with local or foreign business. Therefore, before setting up a business in the country, the company must define the kind of venture they would like to set up first before registering the business.

Once the firm has determined the most suitable business model to set up, the next step is to provide documentation from its home country that proves that it is a duly formed and existing corporation. The investor must also provide documentation showing the firm’s financial adequacy in its home country. These documents include the Articles of incorporation, business license (both local and national), certificate of status, bank letter attesting to the account status of the firm, and a description of the investor’s business activities alongside materials such as the annual report, website details and brochures. All these documents are then required for submission having been translated into Chinese. After submission, what follows is the proof of ownership. After the proof of ownership has been determined, the company is then required to seek for the Chinese Government’s approval for the project. It is worth noting that approval by the relevant government authority is an integral part of the registration process. If the project fails the approval process, then the company cannot be registered (Business Registration, 2018). For a WFOE, the company must prepare various documents for approval by the relevant government authority. They include articles of association, feasibility study, leases, and proposed personnel salaries. All these documents must be prepared in Chinese. After submission of the documents, the firm is required to wait for approximately two to three months for governmental approval. The approval time often depends on the location of the project, its scope as well as its size. For complex projects, the approval process often involves extensive negotiations with regulatory authorities before approval.

Various Business Models for Foreign Investment

Dealing with construction permit

After government approval, the firm can proceed with setting up constructions for the business premises. However, before that, it must go through various processes as prerequisite for obtaining a construction permit from the authorities. Firstly, the firm must have selected the industrial zone and contacted to purchase the land which it seeks to develop the business. Secondly, the firm must have received a business license that establishes it as a Chinese operating company. By this time, the company should have already developed a feasibility study and a legal person identification (Mitchell, n.d.). Thirdly, the company must have identified, selected, bid and completed the project design work with an approved Design Institute and have various supporting documents. These documents include the a copy of the DI qualification letter, copy of the DIs business license and an approved and notarized copy of the DI contract and design fee receipt (Mitchell, n.d.).   Thirdly, the investing company should also present an environmental impact report to the relevant authorities. It is also required to have identified, selected and bid the project construction work with an approved construction company and possesses copies of the winning bid notification, a copy of the contract with the construction company, and a certified copy of the construction firm’s business license (Mitchell, n.d.). The firm is also required to provide a quality monitoring contract. This contract must be with a separate firm that will oversee the quality of the proposed construction. Alongside these documents the company must attach the project budget estimate (Mitchell, n.d.).  

After the above prerequisite documents have been prepared, the firm can go ahead and present the required documents for the construction permit to be issued (Mitchell, n.d.). These documents comprise of details of the project establishment, environmental protection report, site selection report, land survey and design proposal, land use permit, a construction drawing review, fire department review, labor and safety review, construction project planning permit, and a quality monitoring designation (Mitchell, n.d.). Once these documents have been submitted to the relevant construction authorities and reviewed, the foreign firm can obtain its construction permit and, can therefore, start the building process.  

Getting electricity

Getting electricity connection and setting it up is an easy process in China. The process entails filling in of the electrical permit application form (World Bank, n.d.). The form specifies that all connections made by the company shall be in accordance with the State Electrical Code and is subject to approval by the electrical inspector. Once the application has been approved, the company can proceed with installing the electrical connections within the premises.

Documentation Required for Registration

Obtaining credit

A foreign company is eligible for a loan from a Chinese financial institution provided that it fulfills various requirements. First, the firm must have obtained a business license from the Administration of Industry and Commerce, and have an active account with the Bank of China. It should also have fully paid its registered capital at the specified time and it is certified according to relevant regulations. What is more, the firm must have presented the resolution on and power of attorney for the borrowing by its board of directors (Borrowing in China, n.d.). Furthermore, its capital construction project should have been approved by the planning authorities by the time it applies for the loan. The company must also demonstrate an ability to repay the loan and provide reliable securities to offset the repayment of the interest amount as well as the principal. Having fulfilled all these requirements, the foreign company can apply for a loan with the Bank of China. The bank then reviews and examines the application, certificates and documents before extending the loan to the borrowing enterprise (Regulations of Bank of China, 1987).

Protection of minority investors

It is worth pointing out that the Chinese government has laid out policies that aim at protecting foreign and minority investors in the country. As such, the country seeks to accord foreign investors with treatment similar to and not less favorable than that accorded to domestic nationals and companies. In addition, the government has initiated and enhanced legal protection for foreign investors operating in the country. For instance, the government enacted the New Trademark Law to strengthen the protection for well known trademarks for foreign companies and local firms, thereby protecting their rights (Enhanced Legal Protection, 2015).  Such regulations make foreign investors to feel protected and that their investments are safe within the country.

Paying taxes

The taxation of foreign companies in China is somewhat straightforward. The standard corporate tax rate in China is 25 percent. However, special rates may be applied for smaller companies. A foreign company is liable to pay taxes only on income produces by the firm within China, and the income connected with an establishment within the country. Thus, a foreign owned company that is based in China is liable for a tax on the entire income produced in the country (Taxation of Foreign, 2016). Additionally, the company is liable to pay the Enterprise Income Tax (EIT). Before 2017, all foreign companies were supposed to pay a withholding tax on dividends of 10 percent. Additionally, a 10 percent withholding tax was charged for royalties and dividends. However, in late 2017, the government announced a tax break for foreign companies in order to attract and retain more foreign capital in the country (Goldkorn, 2017).

Step-by-Step Process to Obtain a Construction Permit

Enforcing contracts

As noted earlier, a Wholly Foreign Owned Enterprise (WFOE) can enter into contracts and enforce them just like any other local company in China. In the same way, The Foreign Invested Partnership Enterprise (FIPE) can also enter into contracts with local and foreign enterprises and enforce them within the country.

Trading across borders

It is imperative to note that China has initiated various policies that encourage international trade between the firms in the country and the rest of the world. As a result, trading between borders for foreign owned companies is possible, as the country’s policies favor exports of goods and services from the country because it leads to an expansion in the country’s economic growth.

Resolving insolvency in china

Once a business has been declared insolvent in China, there are clear procedures that have been set forward to help in resolving the issue. First, the debtor company is advised to repay its creditors. Insolvency expenses and creditors of common interest are to be paid as a matter of first priority followed by the secured creditors (Yin and Lee, 2017).  The law also provides that trade creditors can take back any goods in transit after the court has approved the bankruptcy application (Yin and Lee, 2017). The main rescue procedures in China under the bankruptcy law are reorganization (World Bank, 2018). The main objective of this procedure is to help the insolvent company to rectify its operational management and adjust its debt relationship in order to offset the financial distress and recover its ability to operate. In the event that the rescue procedure fails, the law provides that the liquidation process should be instituted (Yin and Lee, 2017).  Noteworthy, this is the main insolvency procedure in China. It aims at properly valuing and distributing the residual value of the debtor’s assets to its creditors (Yin and Lee, 2017).

It is imperative to note that the economy of China has been experiencing a strong and robust economic growth. The country has enjoyed approximately 30 years of explosive growth, making it’s the largest in the world. This year, the economy expanded by 6.8 percent in the first quarter, thereby matching estimates previously made (China’s Economic Growth, 2018). It is also worth noting that the previous two quarters had also experienced a 6.8 percent growth rate (China GDP Annual, 2018.). Mainly, one can attribute this growth to the string increase in consumption, increase in property investment and a rise in the level of exports from the country. Since the year 1989 until this year, the country has had an average GDP annual growth rate of 9.63 percent (China GDP Annual, 2018.).  Over this period, the highest growth rate was 15.40 recorded in the first quarter of 1993 (China GDP Annual, 2018.).  On the other hand, the lowest growth was experienced in the last quarter of 1990 at 3.80 percent.

Electricity Connection in China

In the figure below, one notes that the GDP Annual Growth rate of China has been rising and falling in the period between 2015 and 2018. In the July quarter of 2015, it was recorded at 7 percent (China GDP Annual, 2018.).  However, the growth rate fell by 0.1 percent in the last quarter of the year and was recorded at 6.9 percent (China GDP Annual, 2018.).  In the year that followed, the annual growth rate fell further to 6.8 percent in the January quarter, before falling to 6.7 percent in the July and December quarter of the same year. By January 2017, the growth rate had risen to 6.8 percent (China GDP Annual, 2018.). In July 2017, the value rose further to 6.9 percent before falling again to 6.8 percent in December 2017. In January and March this year, the GDP annual growth rate was estimated at 6.8 percent (China GDP Annual, 2018.).

 

Source: (Trading economics, 2018).

By and large, the robust economic growth of the country can be attributed to its government’s massive spending. As such, the Chinese government owns strategically-important companies that dominate the country’s industries (Wildau, 2018). Due to the robust economic growth, the nation has been able to reduce the poverty levels in the country. Today, only 3.3 percent of the entire Chinese population lives below the poverty line (Amadeo, 2018). Therefore, this implies that as the Chinese people get richer, they are able to spend more money in consuming goods and services offered in the economy (Amadeo, 2018). In turn, this boosts the country’s aggregate demand and contributes significantly to the growth of its GDP. In addition to aggregate demand, the economy is the biggest producer of steel and aluminum (Pham, 2018). Thus, exports from these commodities raise the country’s GDP level, thereby contributing to its economic growth. Most importantly, the country’s gigantic population, capital intensity and production efficiency are the main contributors to its robust economic growth.

Apart from a stable and robust economic growth, the country also enjoys a relatively stable business cycle. Predominantly, this is due to the fact that the economy has adopted strict policies and anti-inflationary measures, thereby keeping the economic cycles in check. Generally, the business cycle in China can be divided into four main stages. That is, low growth and high inflation, low growth and low inflation, high growth and low inflation, and high growth and high inflation (Hung Kwan, 2012).

Foreign Loans from Chinese Financial Institutions

Figure 2: Chinese Business Cycle after the Lehman brothers collapse.

Source: (Research Institute of Economy, Trade and Industry, 2012).

It is worth noting that the country experienced a plunge in the business cycle after the Lehman Brothers Collapse in September 2008. During this period, the economy of China went through a stage of low growth and high inflation in the September and December quarter of 2008 (Hung Kwan, 2012). Afterwards in the first two quarters of 2009, it experienced a period of low inflation and low growth (Hung Kwan, 2012). In the last two quarters of the same year, the country experienced a period of high growth and low inflation (Hung Kwan, 2012). Towards 2010, the economy entered a business cycle stage characterized by high levels of growth as well as high rates of inflation in from the first to the third quarter (Hung Kwan, 2012). Currently, the country is expected to experience a decline in economic growth rate following the investment restrictions imposed by the government to reduce excess production capacity is selected industries. Additionally, the adjustments in the housing market and the slowing down of infrastructure investments in accordance with the ‘political business cycle’ and monetary policies are likely to drive the business cycle downwards (Hung Kwan, 2018).  Furthermore, the economic activity in the country is shifting from the manufacturing sector to the service industry. As a result, a string recovery in investment in the country seems farfetched. What is more, the continued adjustments in the housing market is most likely going to impose a downward pressure in the country’s economic growth, thereby causing a decline in the business cycle (Hung Kwan, 2018).  However, this downturn in the business cycle is expected to be short-lived as the government of China has adopted control measures aimed at strengthening the economic performance of the economy, thereby leading to stabilization.

Another important indicator of the Chinese economy is the rate of unemployment. In the country, the unemployment rate represents the number of people actively looking for a job as a percentage of the total number of people in the labor force. It is worth pointing out that China has one of the largest labor markets in the world today. As a whole, the economy has been experiencing moderate rates of unemployment. The average rate of unemployment in the country between 1999 and 2007 is estimated at 4.09 percent. Over this period, the highest level of unemployment was experienced in December 2009, at 4.30 percent. On the other hand, the lowest level of unemployment in the country over the period is 3 percent recorded in June 2000 (China Unemployment, 2018).  At the moment, the rate of unemployment in the country is estimated at 3.89 percent (China Unemployment Rate, 2018).

Figure 3: China’s unemployment rate

Source: (Trading Economics, 2018).

From the figure above, one notes that the unemployment rate in China has been dropping significantly since 2015. In July 2015, the joblessness rate in the country was 4.04 percent. This rate increased slightly by 0.01 percent in December of the same year, and remained the same at 4.05 percent in January 2016 (China Unemployment Rate, 2018). Afterwards the rate of joblessness fell slightly in March to 4.04 percent before rising again to 4.05 percent in July 2016. By December 2016, the rate had fallen by 0.01 percent to 4.04 percent (China Unemployment Rate, 2018).  Since then, the rate if unemployment in the country has been falling continuously. Specifically, the rate of joblessness in the country in January 2017 was recorded as 4.02 percent then fell to 3.97 percent in March before falling further to 3.95 percent in July (China Unemployment Rate, 2018). The rate remained constant at 3.95 percent in September of the same year. This year, the rate of unemployment was recorded as 3.90 percent in January and fell further to 3.89 percent in March (China Unemployment Rate, 2018). Given the low rates of unemployment in the country, one may argue that the Chinese economy offers great prospects for an investing firm as it provides a background of stability as well as an experienced and equipped labor force.  

It is worth noting that the Chinese economy has a relatively high wage rate regime. Today, the country has one of the highest wage rates in the world. It is, however, important to note that different parts of China have different wage rates. In 2016, the average hourly rate for factory workers was $3.60 (Rapoza, 2018). Notably, this rate is five times bigger than the hourly rate in India. Also compared to other labor markets of the world, the country has far exceeded the wage rates in all other economies. As noted earlier, different regions of the country pay different levels of wage rates. For instance, the median monthly wage rate in Shanghai in 2017 was $1,135, Beijing was $983 and Shenzhen was $938. Notably, these rates are higher than those of members of the European Union like Croatia. Croatia median monthly salary was estimated at $887. Likewise, the wage rate in Shanghai China is higher than that of Lithuania ($956) and Latvia ($1,005).  The wage rate in the county is also higher than those of Thailand, Mexico, Indonesia and Philippines as shown in the diagram below.

Figure 4: China wage rates compared to those of other countries

Source: (Trading Economics, 2018).

 

Figure 5: China Minimum Monthly Wages

Source: (Trading Economics, 2018).

Overall, the country’s minimum wages have been rising significantly over the past 10 years. Today, the minimum monthly wage across the country is set at 2420 CNY per month. Notably, this is an increase from the 2300 CNY per month minimum wage in 2017. In 2008, the minimum monthly wage in the country was 840 CNY (China Minimum Monthly, n.d.).  In the year that followed, the figure rose to 960 CNY before rising again to 1,120 CNY in 2010 (China Minimum Monthly, n.d.).  Afterwards, in 2011, the value increased to 1,280 CNY and then 1,450 CNY then 1,620 CNY in the year 2012 and 2013 respectively (China Minimum Monthly, n.d.). The rising trend continued further into the 2014, with the minimum annual monthly wage being estimated at 1,820 CNY. The wage rate further rose to 2,020 CNY in 2015 and then 2,190 in 2016, before siring again to 2,300 in 2017. At the moment, the minimum monthly wage rate in the country is 2,420 CNY (China Minimum Monthly, n.d.).

Figure 6: China average yearly wages

Source: (Trading Economics, 2018).

As regards to the yearly average wage rates, the country has been experiencing a continued increase in the annual average wage rates in the past ten years as well. Since the year 1952 to 2016, the average annual wage rate in the country is estimated at 9,744.49 CNY per annum (China Average Yearly, 2018). Since 2008, the average annual wage rate in the country has been rising consistently. As such, in 2008, the annual wage rate was 29,229 CNY. This value rose to 32,736 CNY in 2009 and then increased further again to 37,147 CNY in 2010 (China Average Yearly, 2018). In the year that followed, the annual wage rate in the country increased again to 42,452 CNY in 2011 before increasing further to 47,593 CNY in 2012. As at 2013, the annual average wage rate in China was 52,388 CNY and then increased further to 57,361 CNY in 2014 (China Average Yearly, 2018). The trend continued further into the next year, and the average annual wage in the country rose to 63,241 CNY per annum in 2015. In 2016, the wage rate was 67,569 per annum (China Average Yearly, 2018).

It is also worth noting that the standard workweek in China comprises of 40 hours. In case an employee works overtime, the firm is eligible for an overtime pay. The overtime pay should not be less than 150 percent of the normal pay rate during the normal working days (Employment and Wages, n.d.). For rest days and national holidays, the employee is required to pay the worker an overtime pay equal to 200 percent and   300 percent of the normal pay rate respectively (Employment and Wages, n.d.).  Owing to the fact that the average wage rates in China is significantly higher than those of other countries, an investing company must realize that it will have to spend more money in wage costs. Therefore, this is an important factor that the investing firm must take into consideration while making the decision of whether or not to invest in the Chinese economy. Regardless of the high wage costs that may arise with setting up the firm in China, the Chinese labor force is highly skilled, efficient and highly productive. Thus, the high wage costs will be offset by the high levels of efficiency and productivity of the country’s labor force. Therefore, despite the high wage costs, the Chinese economy is still a viable investment destination.

It is critical to note that the Chinese economy has a rich human capital. In this case, human capital refers to the economic value of an employee’s skill set built on the production input of each worker (Huang, 2009). Thus, the education, experience and abilities of an employee has an economic value for the employer and the economy as a whole. Over the past 3 decades, the country’s human capital increased significantly (Mai, n.d.).  . However, there is still a substantial gap between the country’s human capital with that of other developed economies. At the moment the country has a Global human capital ranking of 64, after countries like Japan, Singapore, Russia, South Korea, Philippines, Mongolia, Malaysia, Vietnam, Sri Lanka and Thailand (China’s Human Capital, 2016). It is worth noting that despite the fact that the Chinese Human Capital ranking is low at 64, it still higher than its peer countries with large populations like Indonesia and India (China’s Human Capital, 2016). To improve its position, China has fostered an expansion and increased access to all levels of education to the Chinese people (Mai, n.d.). In turn, this has reduced impediments to labor capabilities as workers are now equipped with the required skills and expertise for the job market.

The rate of inflation is also another major indicator of the economic condition of the Australian economy.  As such, the rate of inflation refers to the persistent increase in the price of goods and services within the Chinese economy. In April this year, the consumer price inflation dropped to 1.8 percent year-on-year from 2.1 percent in the previous month (China Inflation Rate, 2018).  Notably, this is the lowest level of inflation in the country since 2018 began. Mainly, this is attributed to the fact that there has been a sharp decline in the level of food inflation in the country. It is worth pointing out that the level of inflation in the country has been rising and falling intermittently over the past one year. As such, in June 2017, the inflation rate was 1.5 percent (China Inflation Rate, 2018). In July, this value dropped slightly to 1.4 percent before sharply rising to 1.8 percent in August. Afterwards, in September inflation rate dropped slightly to 1.6 percent and then shot up again to 1.9 percent in October (China Inflation Rate, 2018).   In the following month, the rate dropped again to 1.7 percent before rising to 1.8 percent in December 2017 (Statista, 2018). This year, in January the inflation rate was estimated at 1.5 percent.  In February, the inflation rate shot up sharply to 2.9 percent before falling to 2.1 percent and 1.8 percent in March and April respectively (China Inflation Rate, 2018).  

Figure 7: China Inflation Rate

Source: (Trading Economics, 2018).

It is imperative to note that although a high rate of inflation is bad for the economy, a little inflation is good for the economy. Mainly, this is due to the fact that slight levels of inflation result in a stimulation of economic activities in the country. Therefore, the inflation rates of between 1.4 to 2 percent experienced in the economy of China is okay as it has helped stimulate and facilitate growth of the country’s GDP. In this respect, the low rates of inflation in the country are favorable and therefore, the firm should consider investing in the country as it stable.

The real interest rate refers to the lending interest rate that is adjusted for inflation as measured by the GDP deflator. According to the World Bank, the real interest rate of China was estimated at 3.09 percent in 2016. Since 2006, the level real interest rate in the country has been rising and falling seasonally. In 2006, the real interest rate in the country was recorded at 2.11 percent. In the following year, the value dropped significantly to -0.31 percent before falling again to -2.33 percent in 2008 (China Real Interest, 2018). In 2009, the rate increased sharply to 5.45 percent before falling again drastically to -1.06 percent in 2010. In 2011, the country’s real interest rate was estimated at -1.47. In the year that followed, this value increased sharply to 3.52 percent before rising further to 3.69 percent in 2013. By 2014, the real interest rate had reached 4.73 percent but later dropped to 4.25 percent in 2015. In 2016, the real interest rate of China was estimated at 3.09 percent (China Real Interest, 2017).Currently, the country’s real interest rate is estimated at 3.1 percent (World Bank, 2018).

Figure 8: China’s Real Interest rate

It is imperative to note that government expenditure plays an important role in the economy. Thus, it is an important indicator for an investor to consider while assessing the economic conditions of the Chinese economy. Over the past ten years, the spending of the Chinese government has been increasing continuously. Between the year 2016 and 2017, the level of government expenditure increased from 187,841 CNY HML to 203,330 CNY HML (China Government Spending, 2018).

Figure 9: China Government Spending

Source: (Trading Economics, 2018).

The availability of credit facilities for private sector firms is an important factor to consider before setting up a firm in a foreign county. Mainly, this is because most firms depend of external funding to grow and expand their business operations both locally and broad. As a whole, domestic credit to private sector refers to the financial resources offered to the private sector such as through loans, purchases of non-equity loans, among others. In 2016, the domestic credit to private sector for China was estimated at 156.7 percent (China-Domestic Credit, 2018). It is noteworthy that this provision to the private sector has been increasing steadily over the past ten years as shown in the diagram below. As a result, the Australian firm seeking to invest in the country will have ample access to credit such as loans in the Chinese economy.

Figure 10: Domestic Credit to private sector

Source: (Trading Economics,  2018).

It is critical to note that China is one of the very few economies that were able to escape the world financial crisis. As a result, the country experienced only a mild slowdown in economic activities without having to experience the strong effects of a recession (Adas and Tussupova, 2016). According to experts, the global financial crisis that hit the United States had no major impact on the Chinese economy. Also, it is noteworthy that the Chinese economy was less affected by the financial meltdown than other countries of the world (Li, Willett and Zhang, 2012). During the financial crisis, the Chinese economy experienced a high growth rate unlike most economies. However, the growth rate was substantially lowered by the crisis.  Still, Chona recorded the highest level of economic growth across the world, recording 9.6 percent in 2008 and 9.2 percent in 2009. Regardless, the subprime financial crisis in the US unleashed some serious effects such as the collapse of the financial market as well as the collapse of financial institutions. But, China proved to be largely immune to these effects of wealth and capital flow. One of the sectors that was mostly affected was the foreign direct investment, which decreased significantly but rebounded later after the crisis. After the financial crisis, the Chinese economy struggled with a couple of challenges such as non-performing bank loans and inflationary pressures and price bubbles in the real estate market. All in all, the Chinese economy proved resilient during the global financial crisis, thereby indicating that it is a strong and stable economy. In this respect, investing in the country would be safe as the economy is not volatile to changes in the global financial market. It would therefore be prudent for the Australian firm to set up its textile manufacturing company in the country.

  Conclusion

All in all, all factors taken into consideration, the Chinese economy is a favorable investment destination. China’s textile industry is robust and full of potential. Currently, it is the largest in the world both in terms of production and exports. Therefore, the Australian based firm can comfortably set up its textile manufacturing industry in China. Mainly, this decision is based on the fact that the Chinese economy is robust and full of life with consistent levels of economic growth rate.  Over the past ten years, the country has been experiencing an increase in the annual growth rate. Additionally, the levels of inflation in the country are substantially low, thereby indicating that the economy has stable prices that are not volatile to changes. What is more, the country was able to offset the effects of the global financial crisis without the economy suffering volatility and changes in the level of economic growth. Unlike most economies, China recorded a significant economic growth rate during this period. In turn, this boosts the confidence of the investor in setting up their firms in the country. It is also worth noting that the Chinese economy has a favorable business environment that focuses on attracting and retaining foreign direct investments in the country. Its government has set up various legal rules and policies that aim at protecting the minority investors in the country. The registration and licensing process of a foreign company in the country is also relatively simple and less complicated, thereby making it easy for the foreign company to enter and set up a textile firm in the country. The procedure for obtaining a construction permit and getting electricity connection is also straightforward. Therefore, setting up in the country will not be a complicate process for the Australian firm. However, it is worth noting that the average wage rates in the country are relatively high compared to most economies of the world. As a result, the firm might be forced to spend more money on wage expenses. But, the human capital in the country is also efficient and productive and will work towards the productivity and profitability of the firm thereby offset the high wage costs.

After a critical analysis of the Chinese macroeconomic variables, the following recommendations can be made to the Australian textile manufacturing company that seeks to set up a firm in China.

1. The firm should enter the Chinese market as a Wholly Foreign Owned Enterprise (WFOE). This way, the company will be able to operate without restrictions to the business. As such, a WFOE in the Chinese economy operates as a legal entity and can therefore enter into contracts with local and foreign businesses, borrow loans and even make profits in the country. Its operations are also not restricted. Therefore, this is the best venture to enter and operate in the Chinese economy.
2. The Australian firm should ensure that it fulfills and meets all registration requirements laid out by the Chinese authorities from the beginning. Mainly, this is because the Chinese government is strict on approving proposed projects in the country, and once the relevant authorities have disapproved the project, the firm cannot be registered or obtains a license.
3. The Chinese market is a robust economy with great potential for the growth and expansion of the textile firm. Therefore, the firm should take this great opportunity and invest in the Chinese economy.

Reference List

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Borrowing in China. (n.d.). [Online] HSBC.  Available at: https://www.hsbc.com.cn/1/2/misc/faqs/financing [Accessed 13 May. 2018].

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