PESTEL analysis of China
The aim of this article is to explore some of the political, economic, social, technological, environmental, and legal factors affecting China today. China is an economic and political superpower. Over the years, it has implemented a number of significant programmes of change and made spectacular improvements in many fields. In terms of nominal GDP, it is the 2nd largest economy in the world.
Political factors affecting China
China is one of the most powerful countries in the world. It is a permanent member of the Security Council of the United Nations. It is also the 4th largest country in the world by land area. Beijing is the capital of China.
The Communist Party of China is the founding and ruling political party of the People’s Republic of China. Although China enjoys a stable political environment, the lack of political freedom is an area of concern. Many analysts question the lack of openness of China’s political system.
However, it is worth noting that with a stable political environment, cheap labour and improved infrastructure, China positions itself as a great destination for foreign direct investment (FDI). Unsurprisingly, China attracted a record high US$139 billion worth of FDI in 2016, making it the third largest FDI destination in the world. It attracted $135 billion worth of FDI in 2018.
As stated above, China is a permanent member of the UN security council. It is also a member of the WTO, APEC, BRICKS, BCIM, ASEAN Plus, and G20. It maintains good diplomatic relations with many great powers in the world trade and politics. However, its relationships with the United States has been very challenging for a long time. Likewise, recent protests in Hongkong have been a cause for concern.
Economic factors affecting China
Economic environment is the second element to address in the PESTEL analysis of China. As mentioned above, China is the 2nd largest economy in the world by nominal GDP. However, it is the world’s largest economy on a purchasing power basis. A lot of economic reforms started in the late 1970s which helped China make rapid economic growth. The country has made a shift from a centrally-planned to a market based economy and the GDP growth has averaged nearly 10 percent a year (The World Bank, 2020).
However, it is worth noting that economic development has also caused some challenges for China. High inequality, rapid urbanisation, and environmental damages are some of the challenges that the country needs to deal with in order to maintain its economic sustainability.
One of the reasons why many global companies manufacture their products in China is the availability of cheap labour. Cheap labour is a great source of competitive advantage for China; however, some analysts argue that the rapid economic growth has also led to a rapid increase in wages in the country. China’s average wage level tripled between 2005 and 2016 and now it is higher than in Argentina, Brazil, and Mexico. Does it mean ‘cheap labor in China is over’? Well, the analysts are divided and there is no unanimous position concerning this question.
China is a dominant overseas investor. Its foreign direct investment has reached many countries over the years. The United States, the UK, Australia, Pakistan, Bangladesh, Indonesia, the United Arab Emirates, Venezuela, Argentina, Angola, Chad and Niger are some of the countries where Chinese investment has been stunning.
The standard corporate income tax rate is 25%; however, the Chinese government reduces the rate to 15% for qualified businesses which operate in industries encouraged by the government. The individual income tax rates range from 3% to 45% (PwC, 2020).
Social factors affecting China
China is the most populous country in the world with a total population of approximately 1.4 billion (World Meters, 2020). This is a massive market for consumer products. As mentioned above, average wage level has gone up over the years resulting in an increase in consumer spending. It is also worth mentioning that many people in China, like the citizens of other emerging economies, long for status symbols such as luxury cars, latest smart phones and designer clothing to demonstrate their success. No doubt that increased consumer spending and status symbols are great opportunities for both domestic and foreign companies.
The literacy rate in China is 96.4%. Like the impressive progress in literacy rate, the country has also made stunning progress in poverty reduction. According to a report published by China’s State Council Leading Group Office of Poverty Alleviation and Development, the country has lifted over 68 million people out of poverty in the last five years. It should be mentioned that China aims to eliminate absolute poverty by 2020 (Brand, 2017). However, there are some social challenges facing China today. For example, ageing population is an area of concern. So, how should the country meet the incredible demands for labour? Many analysts suggest that China should increase the birth rate and invite more foreign workers.
Technological factors affecting China
China has the world’s largest online population with 829 million users (CNNIC, 2019). There are some big tech giants in China e.g. Baidu, Alibaba, and Tencent to name but a few. In fact, these companies and some others are so powerful that many big companies from other countries have failed in China.
China has set a vision to be a global leader in science and technology. To achieve this, the country launched ‘mass entrepreneurship and innovation’ programme in 2015. This programme aims to spread entrepreneurship throughout China. It also aims to help the country to move from a labour-intensive economy to an innovation-driven one. It is therefore not difficult to imagine how great the opportunities are in China for both domestic and international companies, particularly in science and technology sectors.
Environmental factors affecting China
China’s rapid economic development has impacted on its natural environment severely. Water and air pollution, industrial waste, deforestation, climate change, and biodiversity loss are some of the examples of environmental challenges facing China today. However, it should be mentioned that the Chinese government has taken a number of initiatives to address the environmental concerns. Examples of initiatives include but not limited to decentralization of responsibility to local levels, and encouraging public participation in environmental protection.
Legal factors affecting China
Legal environment is the last element to discuss in the PESTEL analysis of China. There are a number of laws that regulate business and employment practices in China. For example, labour standards, employee remuneration and benefits, labour disputes, and other relevant issues are regulated by The PRC Labour Law 1995, the PRC Labour Contract Law 2007, and various administrative regulations (Chen, 2019). The Catalogue of Industries for Guiding Foreign Investment regulates FDI in the country. The Catalogue divides FDI into four categories i.e. encouraged, restricted, prohibited, and permitted.
Encouraged category includes 384 industries. Agricultural machinery manufacture, and fruit and vegetable drink production are some of the industries in this category. Restricted category includes 35 industries. Construction and operation of power grids, banks, and securities companies are some of the industries in this category. Prohibited category includes 28 industries. Air traffic control, postal companies, and domestic express delivery of letters are some of the industries in this category. Permitted category includes industries that do not fall into any of the above mentioned categories (Chen, 2019).
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Last update: 11 Janaury 2020
BBC (2018) China Country Porfile, available at: http://www.bbc.co.uk/news/world-asia-pacific-13017877 (Accessed 26 March 2018)
Brand, D. (2017) China Says It Wants to End Poverty by 2020, available at: https://www.globalcitizen.org/en/content/china-end-poverty-2020/ (Accessed 01 March 2018)
Chen, A. (2019) Doing business in China, available at https://uk.practicallaw.thomsonreuters.com/8-501-1377?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 (accessed 10 January 2020)
PwC (2020) Overview of PRC Taxation System, available at: https://www.pwccn.com/en/services/tax/accounting-and-payroll/overview-of-prc-taxation-system.html (Accessed 10 January 2020)
The World Bank (2020) China Overview, available at: http://www.worldbank.org/en/country/china/overview (Accessed 5 January 2020)
World Meters (2020) China population, available at: https://www.worldometers.info/world-population/china-population/ (accessed 10 January 2020)
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Author: M Rahman
M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He is a graduate of Leeds Metropolitan University and London South Bank University.