Question

What is the political risk assessment of China and how would a company deal with the risks? 630 words with references.

Answer 1

No investment destination shows better how critical political risk management is than China. Over the past twenty-five years, the economic reforms of the Chinese Communist Party have opened the doors to vast flows of foreign investment, produced almost miraculous prosperity, lifted hundreds of millions out of poverty, and propelled Chinese companies to the global scene. But the economy of the country and the foreign enterprises that rely on its resilience are especially vulnerable to external shocks, such as spikes in global commodity prices (especially energy), epidemics, regional political instability, and Western protectionist sentiment.

There are also risks raised by domestic political unrest: economic growth; the dislocation of tens of millions of people as state-owned corporations has shed workers; public outrage over land redistribution; growing income gaps; and major industrial incidents, including chemical spills, have all fuelled social turmoil. This volatility has the potential to force dramatic policy intervention, such as major social spending or structural crackdowns; disrupt supply chains; threaten fixed assets; and erode trust among investors.

Apart from these shocks, China's foreign companies work in an unstable investment environment dominated by politics. Sometimes, local Chinese competitors are more able to manage the labyrinthine business environment in the region. Legal protections are poorly implemented. The copyrights are protected incoherently. The financial system is volatile and favors state-owned enterprises, which, given all the growth in the private sector, still make up 40% of China's economic operation, according to the OECD. And there is always the possibility of protectionist retaliatory policies that would benefit Chinese firms at the expense of foreign ones.

They will work with their home governments to encourage the Chinese government to respect its commitment to free markets, create clear road economic rules, implement the rules it has, and protect intellectual property rights. China remains a transitional economy under the rules of the World Trade Organization, with several facets that are not open, equitable or even legal. By overlooking these concerns, currying favor with the Chinese government is a short-term tactic that will inevitably weaken foreign firms. International corporations should set and stick strongly to principles of corporate responsibility in order to reduce reputational risks at home. Their members should be transparent about what they will and will not consider as the price of entry to China's marketplace with the Chinese Government (and within their own boardrooms).
International companies should prepare for the challenges they're likely to face in China in the following different ways.