China: Country Profile

China skyline

Background information

History

For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences, but in the 19th and early 20th centuries, the country was beset by civil unrest, major famines, military defeats, and foreign occupation. After World War II, the communists under MAO Zedong established an autocratic socialist system that, while ensuring China’s sovereignty, imposed strict controls over everyday life and cost the lives of tens of millions of people. From 1978, MAO’s successor DENG Xiaoping and other leaders focused on market-oriented economic development and by 2000 output had quadrupled. For much of the population, living standards have improved dramatically and the room for personal choice has expanded, yet political controls remain tight. Since the early 1990s, China has increased its global outreach and participation in international organisations.

Economy

Since the late 1970s, China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role; in 2010, China became the world’s largest exporter. Gradualist reforms began with the phase out of collectivised agriculture, and expanded to include the gradual liberalisation of prices, fiscal decentralisation, increased autonomy for state enterprises, growth of the private sector, development of stock markets and a modern banking system, and opening to foreign trade and investment. In recent years, China has renewed its support for state-owned enterprises in sectors considered important to “economic security,” explicitly looking to foster globally competitive industries. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. In 2015, China stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. Still, China’s per capita income is below the world average.

China kept its currency tightly linked to the US dollar for years, she moved to an exchange rate system in July 2005 that references a basket of currencies. From mid-2005 to late 2008, cumulative appreciation of the renminbi against the US dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the global financial crisis until June 2010, when Beijing allowed resumption of a gradual appreciation. In 2015, the People’s Bank of China announced it would continue to carefully push for full convertibility of the renminbi after the currency was accepted as part of the IMF’s special drawing rights basket.

The Chinese Government faces numerous economic challenges including: reducing its high domestic savings rate and correspondingly low domestic consumption; facilitating higher-wage job opportunities for the aspiring middle class, including rural migrants and increasing numbers of college graduates; reducing corruption and other economic crimes; and containing environmental damage and social strife related to the economy’s rapid transformation. Economic development has progressed further in coastal provinces than in the interior, and by 2014 more than 274 million migrant workers and their dependents had relocated to urban areas to find work. One consequence of population control policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment – notably air pollution, soil erosion, and the steady fall of the water table, especially in the North – is another long-term problem. China continues to lose arable land because of erosion and economic development. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development.

Several factors are converging to slow China’s growth, including debt overhang from its credit-fuelled stimulus program, industrial overcapacity, inefficient allocation of capital by state-owned banks, and the slow recovery of China’s trading partners. The government’s 13th Five-Year Plan, unveiled in November 2015, emphasises continued economic reforms and the need to increase innovation and domestic consumption in order to make the economy less dependent in the future on fixed investments, exports, and heavy industry. However, China has made only marginal progress toward these rebalancing goals. The new government of President XI Jinping has signalled a greater willingness to undertake reforms that focus on China’s long-term economic health, including giving the market a more decisive role in allocating resources. In 2014, China agreed to begin limiting carbon dioxide emissions by 2030.

GDP (purchasing power parity):
$19.39 trillion (2015 est.)
$18.14 trillion (2014 est.)
$16.91 trillion (2013 est.)
Note: data is in 2015 US dollars
Country comparison to the world: 1
GDP (official exchange rate):
$10.98 trillion (2015 est.)
Note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China’s output vis-a-vis the rest of the world; in China’s situation, GDP at purchasing power parity provides the best measure for comparing output across countries
GDP – real growth rate:
6.9% (2015 est.)
7.3% (2014 est.)
7.7% (2013 est.)
Country comparison to the world: 18
GDP – per capita (PPP):
$14,100 (2015 est.)
$13,300 (2014 est.)
$12,400 (2013 est.)
Note: data is in 2015 US dollars
Country comparison to the world: 113

(Information courtesy of The CIA World Fact Book)

Employment Issues

It is mandatory for full-time employees to have written contracts and employers have one month to finalize contract terms – if this is not followed employees are entitled to twice their salary while they remain without a contract until they have been employed for one year. (Although it is not all that uncommon for local employers to forgo a written contract).

The following is a useful set of guidelines to follow when negotiating terms of an employment contract and offer letter with an employee in China – these represent fairly standard benefits in China:

Public Holidays
7 national public holidays are celebrated in China, including:chinese-sign
• New Year’s Day
• Chinese New Year (Spring Festival)
• QingMing Festival
• Labour Day
• Dragon Boat Festival
• Mid-Autumn Festival
• National Day
The statutory minimum is to provide paid leave for the legally required holidays, however, market norm/best practice (as New Year is such a major cultural event in China) is to permit all employees some flexibility around the Chinese New Year so that they can avoid the peak travel days. Offering employees an extra day off before and after the officially published dates is an excellent supplementary benefit which is much appreciated.

Bonus
A 13th month salary or annual bonus is not legally required but has become market norm in China and it is very difficult to attract good staff without granting this benefit. (However, a commission plan could be seen as replacing this for sales employees. When negotiating with employees, it is recommended to very clearly state the exact monthly salary, how many months it will be paid (i.e. 13) and the total annual salary.

Hours of Work
The Labour Law of the People’s Republic of China designates a five-day working week of no more than 8 hours a day and no more than 44 hours a week. As a rule of thumb, offices are usually open from 8am to 6pm each day with a two-hour lunch taken from noon to 2pm – these norms though can alter on a regional basis.

Holiday Entitlement
Employees who have worked:
• Less than one year generally receive no vacation
• Between one year and less than 10 years are entitled to 5 days of paid annual leave.
• At least 10 years but less than 20 years are entitled to 10 days of annual leave.
• 20 years or more of work entitles employees to 15 days of annual leave
• However, the employment landscape for good people is tight and most overseas employers hiring mid-level to senior executives in China will provide 2-4 weeks of annual vacation days.
• Pay attention to the following: employers can require employees to take their entire annual leave entitlement each year because if an employee does not use all of his or her annual leave in a certain year, and does not agree to carry the leave forward, then the employer must pay the employee 200% of the employee’s average daily wage for each day of unused annual leave, in addition to regular salary.

Sick Leave
• Employees are entitled to between three and 24 months’ leave for medical treatment depending on the length of service with the employer and the number of years in general employment.
• Sick pay should not be below 80% of the local minimum wage.
• If the employee becomes injured or sick on the job, he/she is entitled to a maximum of 12 months’ leave at full pay for medical treatment.

Maternity/Paternity Leave
• Women are allowed 98 day paid maternity leave, which they can take starting 15 days before child birth.
• If the mother has a multiple birth, an additional 15 days is granted for each additional child.
• Women who have children after the age of 24 are generally granted an additional “late maternity leave” of about 30 days. The actual number of days depends on the region or city.
• Women may be entitled to receive full pay during their maternity leave. This is either paid through social security, or if the employer did not contribute to social security on her behalf, then it is to be paid by the employer.
Paternity leave varies widely, depending on location, but by statute does not exceed 14 days. In Shanghai, a male employee can expect 3 days of leave, while in Shenzhen he can expect 10 days if the mother is 23 or older.

Termination/Severance
A probation period is usually agreed to between employer and employee in an employment contract. The maximum length of a probation period for an indefinite employment contract is 6 months.
• The amount of notice for termination varies with length of service.
• One month to two years employment requires a minimum of one week’s notice
• More than two years employment requires notice of one week per year of completed service up to a maximum of 12 weeks of notice.
• Terminations must be with cause and the reasons must be clearly documented.
• Contracts may include a payment in lieu of notice (PILON) clause which allows employers to pay employees instead of requiring them to work their notice. Service of such notice (or payment in lieu) will satisfy an employee’s contractual rights, but further statutory rights against the employer may arise on termination. Much longer periods of contractual notice, binding on both parties, are common.
• It is illegal to terminate a pregnant employee or one who is on maternity leave or breastfeeding.

Taxes
Statutory benefits in China include the famous five “insurances” and include health insurance, pension, worker’s compensation, unemployment insurance, and maternity benefits. Housing benefits are included on top of the five insurances. The amounts vary by province and by the employee’s income bracket.

Health Insurance
Basic health and pension insurance is provided through the state-run national system, however, supplementary health insurance is often provided to the employee.

Additional Benefits
Chinese employers contribute to a housing fund, similar to a 401k plan in the US. The fund subsidises employee real estate rent and purchasing cost. Some contributions are compulsory; however, employees normally negotiate for an increased housing fund rate.
• Employers usually have to contribute anywhere between 5% and 25% of an employee’s annual salary.
• Different cities and regions have different policies related to the housing fund.
Issuing stock options to employees in China is extremely complicated. Take serious legal and tax advice before looking at this as an option.

Cost of benefits
It is sensible to budget something in the region of 20-30% for employer taxes on top of the total cost of an employee’s salary in order to get a feel for the total cost of employee compensation in China.

Employment Contracts
It is a legal requirement to put a robust employment contract in place in China which clearly defines the terms of the employee’s compensation, benefits, and termination requirements. Both the offer letter and employment contract should always state the salary and any compensation amounts in Chinese Yuan Renminbi rather than a foreign currency.

Chinese Trade Tariffs
An overview of the trade tariff regime which applies when trading with China can be found on the website of the General Administration of Customs of the People’s Republic of China.

There is a great deal of very useful information on this site but we strongly recommend that you take advice on how this information applies in your specific circumstances.

Business Culture in China – top tips

Tip 1great-wall-2
The development of Guanxi, or personal relationships, are especially important when doing business in China. Never underestimate the importance of the relationship building process.

Tip 2
People are most comfortable to spend time building relationships with honourable people who show respect to those to whom respect is due.

Tip 3
Due to the hierarchical nature of society all relationships are unequal and it is important, if you wish to appear honourable, to show respect to age, seniority and educational background.

Tip 4
Managers tend to be directive and directional, which reflects the Confucian concepts of the hierarchical nature of society.

Tip 5
In return for loyalty, the boss is expected to show consideration and interest in all aspects of a subordinates’ private life as well as business.

Tip 6
There are often close relationships between senior management of a company and local party officials.

Tip 7

It is important that you do not make people ‘lose face’ in front of their group. For example, always respect seniority and do not openly disagree with people in meetings.

Tip 8
Do as many favours for people as possible because debts have to be repaid.

Tip 9
Business cards should be formally exchanged at the beginning of meetings. Treat the business card with great respect, as the card represents the man.

Tip 10
Meetings are often long and seemingly without clear objectives. Very often the meeting is mainly an exercise in relationship-building and the target of the meeting might be to move the relationship, rather than any specific business task, forward.

Tip 11
It can take several, very long meetings before any tangible progress is made. Patience is essential if you wish to capitalise on a potential opportunity.

Tip 12
The Chinese are looking for long-term commitment. Build long-term goals and objectives into all proposals – don’t just emphasise quick wins.

Tip 13
Do not be overly direct. Strive for diplomacy, consensus and harmony. Remember that this can take time to achieve.

Tip 14
Do not assume people have understood what you have said. It is often useful to go over the same point several times from different angles in order to aid comprehension.

Tip 15
It is very difficult for the Chinese to say ‘no’ directly. Anything other than a direct ‘yes’ could in fact mean ‘no’. Be circumspect and summarise any agreements reached.

Tip 16
It is difficult to read body language as, by western standards, this is somewhat muted in China. Be very alive to any changes of posture, animation etc.

Tip 17
Gift giving is an everyday part of Chinese business culture. Giving and receiving gifts helps to cement relationships. Take gifts with you when visiting and put some thought and effort into the gift selection process.

Tip 18
Make sure gifts are wrapped before presenting them. Gifts are rarely opened in front of the giver.

Tip 19
The Chinese are an intensely patriotic race. Never make disparaging remarks about China, the political situation, human rights etc.

Tip 20
Entertaining is a very important part of the relationship building process. If you are entertaining, do it well. If being entertained, take your lead from your hosts – they will enjoy taking you through the process.

For a more comprehensive guide to business culture in the UK please visit here.

The information above is intended as background information only and professional advice should always be taken in advance of making any decisions.