PESTEL analysis of China (Country Profile)
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 its capital.
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 major concern. Many analysts question the lack of openness in the country’s political system.
China is 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 particularly over the issue of Taiwan has been very challenging for a long time.
Likewise, recent protests in Hongkong, tensions in the South China Sea, sanctions by the US, and China’s retaliatory sanctions on some US and Canadian citizens have been big causes for concern.
Economic factors affecting China
The next topic of focus in the PESTEL analysis of China is the economic environment. As mentioned above, China is the 2nd largest economy in the world by nominal GDP. However, it is the largest one on a purchasing power basis. It has made a shift from a centrally planned to a market-based economy and the GDP growth has averaged nearly 10% in the last many years (The World Bank, 2022).
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. Its average wage level has gone up significantly and now it is higher than that in Argentina, Brazil, and Mexico. Does it mean ‘cheap labour 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 its investment has been stunning. Its multibillion-dollar Belt and Road Initiative (BRI) to connect Asia, Africa and Europe has already attracted support from many countries.
It is worth noting that with a cheap labour and improved infrastructure, China positions itself as a great destination for foreign direct investment (FDI). In fact, it has overtaken the USA to become the top destination for new FDI in the world (BBC, 2021).
China is a manufacturing giant. It has made a global name for its manufacturing power and become a specialist location to produce automatic data processing machines and components, clothes, clothing accessories, mobile phones, textiles, integrated circuits, and many other products (Ma, 2022).
The standard corporate income tax rate is 25%; however, the Chinese government may reduce 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, 2022).
Social factors affecting China
China is the most populous country in the world with a total population of over 1.45 billion (Worldometers, 2022). 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. It has lifted over 100 million people out of extreme poverty in the last eight years. However, some people question about the measurement of extreme poverty in the country which is defined as earning less than $620 (£440) a year (BBC, 2021).
Though China has made very good progress in eradicating extreme poverty, there are some social challenges facing it 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. Likewise, wealth gap, poor health care, and the rising cost of housing are some other challenges.
Technological factors affecting China
A very important issue that has a massive significance in the PESTEL analysis of China is the technological environment. China has the world’s largest online population with over 1.02 billion users (Statista, 2022). There are some big tech giants in the country e.g. Baidu, Alibaba, and Tencent. 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, it launched ‘mass entrepreneurship and innovation’ programme several years back. This programme aims to spread entrepreneurship throughout the country. It also focuses on moving away 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. However, many analysts argue that the country is facing regulatory challenges and struggling with how to accommodate the tech industry and giant tech companies into its socialist market economy.
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 it today.
However, it is worth mentioning 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 several Acts and various administrative regulations (Chen, 2021). The Catalogue of Industries for Guiding Foreign Investment regulates FDI in the country. It 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, 2021).
Summary of the PESTEL analysis of China (Country Profile)
To sum-up, there are several macro factors that offer China both opportunities and challenges. The country has grown rapidly and emerged as an engine for growth for the global economy. As the new wave of digital transformation sweeps across it, the impact on almost every sector of the economy has been immense. This article has provided an overview of the current scenarios and their implications on the demand for various services in China. In addition, it has touched on how these trends may impact on the market potential for different kinds of firms over the coming years.
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Last update: 26 August 2022
BBC (2021) China takes new foreign investment top spot from US, available at: https://www.bbc.co.uk/news/business-55791634 (Accessed 26 August 2022)
BBC (2021) China’s Xi declares victory in ending extreme poverty, available at: https://www.bbc.co.uk/news/world-asia-china-56194622 (accessed 25 August 2022)
Chen, A. (2021) Doing business in China, available at https://uk.practicallaw.thomsonreuters.com/8-501-1377?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 (accessed 26 August 2022)
Ma, Y. (2022) Export trade in China – statistics & facts, available at: https://www.statista.com/topics/1456/export-in-china/ (accessed 25 August 2022)
PwC (2022) Overview of PRC Taxation System, available at: https://www.pwccn.com/en/services/tax/accounting-and-payroll/overview-of-prc-taxation-system.html (Accessed 23 August 2022)
Statista (2022) Countries with the highest number of internet users, available at: https://www.statista.com/statistics/262966/number-of-internet-users-in-selected-countries/ (accessed 26 August 2022)
The World Bank (2022) China Overview, available at: http://www.worldbank.org/en/country/china/overview (Accessed 25 August 2022)
World Meters (2022) China population, available at: https://www.worldometers.info/world-population/china-population/ (accessed 20 August 2022)
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 holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.