Pestle Analysis China (2021)

China

In this article, I am going to do a PESTLE Analysis of China, the biggest country in the world by population. China is a major player in the current world economy. I have always had a certain fascination for China without knowing that much about the country, let alone its business environment. After having done some research, I am going to provide you with an analysis of China’s external environment from a political, economic, social, technological, legal and environmental perspective.

Admittedly, China is such a large and complex country that it is impossible to cover even 0.001% of the environment. I am aiming for a helpful and comprehensive overview with insights into the external environment in China. What I won’t do is cover everything on every aspect of China. What I will do, is focus on recent developments that are relevant to the business environment.

This article is useful or interesting for you if one of the following applies to you:

  • You have a general interest in China and want to know more about its environment;
  • You are doing business in China or you deal with Chinese organizations;
  • You are thinking of or if you are thinking of doing business in China and you want a general and comprehensive understanding of the country’s external environment.

If you don’t already know what a PESTLE Analysis is, check out this article: Pestle Analysis

China Fact Sheet

Full name: People’s Republic of China (PRC)
Capital: Beijing
Continent: Asia
Population: 1.4 billion
Official language: Mandarin
GDP: $14.9 trillion (2020)
Form of Government: Republic

China Pestle Analysis Overview

Political Factors

Politics Overview

China is a socialist republic run by a single party: the Communist Party of China (CPC). The communist party was founded in 1921 and has been the single party in power since 1954. Head of State (2021) ofChina is Xi Jinping, General Secretary and President. China is divided into 22 provinces, four municipalities and 5 autonomous regions. This excludes Taiwan, which the CPC considers to be a province as well.

Recent Political Developments

Increasing influence on world politics

China has become a superpower, in many different aspects. The country is increasingly showing its political power. China became a member of the World Trade Organization in 2001 and the economy has grown extremely fast in recent decades. China has used this economic power to also become a major player in global politics. For the western world, this brings along uncertainty as it is unclear how China will use its status a superpower. What’s certain is that China’s politics are different to politics and democratic values in western countries. The western world hoped that as China developed economically, Chinese politics would also change in a more liberal direction, but this has not been the case under Xi Jinping.

China’s ambition to increase its political power also becomes clear when looking at the country’s military strategy. It is rapidly increasing its military strength and modernization and is now the second country in the world in terms of army expenditures ($261 billion in 2019.

Territorial disputes

China is involved in several territorial disputes:

South Chinese Sea

China has a territorial dispute with several countries around the South Chinese Sea: Philippines, Vietnam, Malaysia, Indonesia, Brunei and Taiwan. The South Chinese Sea is (among other reasons) important because a large amount of trade goes through the area. The disputes are about ownership of islands, reefs, banks, water, and other aspects involving the South China Sea.

Taiwan

Another dispute involves Taiwan specifically. China claims the island to be Chinese territory. Taiwan is governed independently from China, but most countries do not recognize it as a sovereign state because of pressure by China.

India

Dispute number three concerns a border in the Himalaya with India. China and India disagree on the exact location of this border, both claiming more territory than the other.

Japan

China also has a dispute with Japan over some Islands in the East Chinese Sea. To make it more complex, the islands are also claimed by Taiwan. The region contains valuable resources.

Hong Kong

Hong Kong is an autonomous city within China. This originates from the time Hong Kong was a British colony.

Recently, protests have been ongoing in the city as China tries to gain back more control without recognizing Hong Kong’s own legislation and politics. This can influence the western world as well, as Hong Kong is one of the most important financial centers in Asia. This status is now under pressure because of the uncertainty about its future within China.

Presidential Power

In 2018, China approved the removal of the requirement that a President cannot serve more than two consecutive terms from the constitution. This technically allows Xi Jinping to be in power until his death. The vote was approved by 2959 out of 2964 votes from the parliament. The two-term limit existed since 1990. Xi Jinping current term is until 2023.

Power & Control Communist Party

The Communist Party, led by Xi Jinping, has assumed more power in recent years. In 2018, a plan was announced and approved to increase the party’s control over media and policy.

There always has been a high level of censorship of media, but this position has been strengthened by the party as it was announced that media and television stations will be merged into a state entity. Western (social) media such as Facebook, Twitter and YouTube are blocked.

In terms of policy control, the party has taken on responsibility and increased its influence over the ties with Chinese people living abroad. Additionally, more power has been gained regarding control over Chinese ethnic minorities and religions.

Corruption

Corruption has always been a relevant problem in China and it still is today. The country ranks 80th on the global corruption index from Transparency International, a list of all countries based on the level of corruption. To reduce the level of corruption, president Xi Jingping has started an anti-corruption campaign to decrease the level of corruption within the government.

Economic Factors

Economic Overview

China’s GDP is estimated at $14.9 trillion (2020). The country is a member of the World Trade Organization (WTO) since 2001 .Some of the biggest industries in China are manufacturing, the services industry, agriculture and mining. China contains many state-owned companies. The Asian superpower is also world’s number one exporting country.


Recent Economic Developments

Economic Growth

China realized an incredible economic growth in the last four decades. This growth has raised the average standard of living. However, this growth is slowing down as China’s economy is maturing. While the GDP growth was over 10% in 2010, this has slowed down to just over 6% in 2019.In addition, Covid-19 had a major negative impact on China’s economic developments in 2020. China remains the only large economy that did manage to grow economically during 2020.

Trade War

In recent years, China has been involved in a trade war with the United States. Both countries announced trade tariffs on the import of each other’s goods. The USA has accused China of unfair practices and stealing intellectual property. China has denied these claims. The trade war was at its most intense state during the years Donald Trump was president. It is uncertain how the future will be now that Joe Biden has taken over.

Partner of Emerging Economies

China has established itself as one of the main investment and trading partner of emerging economies in Asia, Latin America and Africa. In this context, I should mention the so-called Belt and Road Initiative. This is a program by the Chinese government, started in 2013, focusing on infrastructure development in many other countries in all parts of the world. The initiative is mostly focused on Asia and Europe.

Made in China 2025

Made in China 2025 is a strategic initiative of the Chinese government. The initiative aims to turn China from a low-cost developer to a manufacturer of high-end and high-tech products. The Chinese government invests heavily in this program, which is seen as a threat by Western countries (especially the U.S). Made in China is a ten-year plan that started in 2015. The program aims to reduce China’s dependency on foreign technology. Additionally, the initiative contributes to prevent the Chinese economy from stagnating. 

Social Factors

Sociological Overview

China is the country with the largest population in the world: around 1.4 billion citizens. 60% of Chinese people live in urban areas. As the economy grew, the standard of living of the Chinese population has also increased. However, the rapid development of the population size also brought along several problems. Let’s have a look at recent developments in the social dimension of China.

Recent Social Developments

Population Growth

China’s population has grown immensely in recent decades. The population was less than 1 billion in 1980, and is now over 1.4 billion in 2021. Before the 1980s, the population growth was even stronger. There is a clear reason why the Chinese population growth slowed down after 1980. From 1980 to 2015, China had a one-child policy. This means that most families were not allowed to have more than one child. The policy was installed to be able to better control the population growth. This extreme form of population influencing changed to a two-child policy in 2015.

The standard of living of the citizens of China have increased together with the economy growth. This also had an effect on the average life expectancy, which increased significantly as well.

Human Rights

There are many ethnic minorities in China. Amnesty International mentions several human rights violations against these minorities (2019):

“Repression conducted under the guise of “anti-separatism” or “counter-terrorism” remained particularly severe in the Xinjiang Uighur Autonomous Region (Xinjiang) and Tibetan-populated areas (Tibet). Authorities subjected Uighurs, Kazakhs and other predominantly Muslim ethnic groups in Xinjiang to intrusive surveillance, arbitrary detention and forced indoctrination.”

In terms of gender equality, there is still a degree of gender inequality between men and women, although this gap has gotten much smaller over the last decades. Discrimination based on sexual preferences still takes place. Marriage between same sex couples is not allowed in China.

Education

China has significantly improved its quality of education. There are several university rankings that rate universities globally, and China is nowadays well-represented. Chinese students also increasingly spend their studies (partly) abroad. Similar to the Ivy League in the U.S., China has the C9 League. This is an official alliance of nine universities with a good reputation.

Covid-19

Being the first place to be hit by covid-19, the coronavirus had a significant impact on China. With extremely strict lockdowns, China has been able to control the virus much quicker than other countries. I do know enough about it to say whether it is true or not, but this may have something to do with the differences between the Chinese society and other (western) societies. I would say the Chinese mentality is generally more obedient and has a lower degree of individualism than many other countries. This, together with strict regulations, could lead to people being more willing to adapt their lives to avoid further spreading of the virus.

Technological Factors

Technology Overview

Simultaneous with the economic growth, China’s technological capabilities have also increased in the past few decades. Stimulated by the Chinese government, many industries have become much more advanced and innovative.

Recent Technological Developments

From low cost labor country to advanced technology leader

I already touched upon the Made in China 2025 initiative in the economy section. This initiative has the objective to turn China from a low-cost developer to a manufacturer of high-end and high-tech products. The program has a big impact on China’s high-tech capabilities. Aside from Made in China 2025, there are several other active national R&D programs.

In the last decade, many high tech and innovative companies have become active not only in China but also globally. Some examples:

Huawei and Xiaomi, two large smartphone manufacturers

ByteDance, owner of social media app TikTok

Tencent, a technology company with a wide range of services (including messaging app WeChat)

Alibaba, a large E-commerce firm (the Amazon of China)

Education

China has become one of the largest providers of highly skilled personnel. The country has increased the quality of its education and is now able to deliver many engineers and scientists every year. This development has a positive effect on technological developments in the country. Chinese people who studied overseas also stimulated technological developments in China. These students were able to learn about the newest technologies and brought that knowledge with them to China.

Legal Factors

Legal Overview

The Chinese legal system differs from the ones in western countries. The main legislative organ within the country is the National People’s Congress (NPC). This is a body with close to 3.000 members, elected for a term of 5 years. The NPC meets once a year in a session that takes several weeks.

The legal systems in Hong Kong, Taiwan and Macau are different from the systems in China itself.

If you are planning to do business in China, I would highly advise to seek an experienced legal advisor who knows the Chinese legal system and business laws.

Recent Legal Developments

Restrictions to Foreign Companies

China restricts foreign (and especially western) companies to operate in China. The most visible example is the blocking of social media such as Facebook, Twitter, YouTube and Instagram, as well as search engine Google.

Aside from these blockades, there are many other restrictions for foreign companies. There is a Foreign Investment Negative List and a Market Access Negative List that include restricted or prohibited activities for foreign companies.

Trade tariffs also exist for foreign businesses wanting to sell their goods in China.

Intellectual property rights

China has a strict and developed IP protection system. Although china is a member of the World Intellectual Property Organizations, intellectual property rights held in other countries are not automatically protected in China when your patent/trademark is not registered at the applicable Chinese institutions. You have to register your intellectual property also in China.

Environmental Factors

Environmental Overview

China is the fourth largest country by area, which means it has a large geological diversity. Additionally, there are immense urban areas as well as massive rural areas. The fast development of China’s population and economy did not come without a cost. The rapid industrialization brought along several serious environmental issues.

The Chinese government recognizes climate changes as well as the Kyoto Protocol. This international treaty focuses on committing states to take action against climate change. However, being a so-called Annex I country, China is not required to have the same level of emission limitation as other countries.

Let’s have a look at some of the Chinese environmental concerns in more detail.

Recent Environmental Developments

Pollution

Pollution is a colossal problem in China. Both water pollution and air pollution are major issues.

Air pollution

Air pollution in China is a threat to the public health. This bad air quality is largely a consequence of coal usage. For all that fast economic growth, large amounts of coal are needed, a relatively cheap source of energy. We all know images of smog in major cities such as Beijing, and people wearing masks long before they were worn in the western world because of covid-19.

The Chinese government has taken action against air pollution through an air pollution action plan. This has improved the air quality significantly. However, in many areas, the air quality is still not up to acceptable levels.

Water pollution and shortage

The fast industrialization came at the cost of polluted water. Water sources in China are contaminated by industrial waste. During the focus on rapid economic developments, there had been a lack of attention to environmental effects. As a consequence, the water quality in China has suffered greatly.

To make matters worse, the lack of good quality water also means that there is a water shortage. This is a major issue in many Chinese cities.

The Chinese government invests heavily in tackling water pollution.

Conclusion

Hopefully this PESTLE Analysis has been interesting and of use to you. If you think I should have mentioned other topics, feel free to drop a comment. Would you like to read more analyses? Take a look here: More Analyses

Sources

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