McKinsey director Gordon Orr goes behind the trends shaping the world's second -largest economy to explain what companies must do to operate effectively.
Table of contents
The indicators below describe three dimensions of investor protection: The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. This index is the average of the extent of disclosure index, the extent of director liability index, and the ease of shareholder suits index. This index is the average of the extent of shareholder rights index, the strength of governance structure index, and the extent of corporate transparency index.
The ranking of economies on the strength of minority investor protections is determined by sorting their distance to frontier scores for protecting minority investors. These scores are the simple average of the distance to frontier scores for the extent of conflict of interest regulation index and the extent of shareholder governance index.
This topic records the taxes and mandatory contributions that a medium-size company must pay or withhold in a given year, as well as measures the administrative burden of paying taxes and contributions and complying with postfiling procedures. The present value of the losses in interest earnings experienced by the firm because the utility holds a security deposit over a prolonged period. The time it takes to prepare, file and pay or withhold the corporate income tax, value added or sales tax, and labor taxes, including payroll taxes and social contributions in hours per year.
The total tax rate measures the amount of taxes and mandatory contributions payable by the business in the second year of operation, expressed as a share of commercial profits. The postfiling index is based on four components—time to comply with VAT or GST refund, time to obtain VAT or GST refund, time to comply with corporate income tax audit and time to complete a corporate income tax audit. If both VAT or GST and corporate income tax apply, the postfiling index is the simple average of the distance to frontier scores for each of the four components.
If only VAT or GST or corporate income tax applies, the postfiling index is the simple average of the scores for only the two components pertaining to the applicable tax. If neither VAT or GST nor corporate income tax applies, the postfiling index is not included in the ranking of the ease of paying taxes.
The ranking of economies on the ease of paying taxes is determined by sorting their distance to frontier scores on the ease of paying taxes. These scores are the simple average of the distance to frontier scores for each of the four component indicators — number of tax payments. The nonlinear distance to frontier for the total tax rate is equal to the distance to frontier for the total tax rate to the power of 0. The threshold is defined as the total tax rate at the 15th percentile of the overall distribution for all years included in the analysis up to and including Doing Business , which is All economies with a total tax rate below this threshold receive the same score as the economy at the threshold.
Names of taxes have been standardized. For instance income tax, profit tax, tax on company's income are all named corporate income tax in this table. The hours for Social Security include all the hours for labor taxes and mandatory contributions in general.
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The postfiling index is the average of the scores on time to comply with VAT refund, time to obtain a VAT refund, time to comply with a corporate income tax audit and time to complete a corporate income tax audit. This topic measures the time and cost excluding tariffs associated with three sets of procedures—documentary compliance, border compliance and domestic transport—within the overall process of exporting or importing a shipment of goods. The time and cost for border compliance include time and cost for obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures.
The time and cost for documentary compliance include the time and cost for obtaining documents, preparing documents, processing documents, presenting documents, and submitting documents. The total number of documents required per shipment to export goods. Documents required for clearance by government ministries, customs authorities, port and container terminal authorities, health and technical control agencies and banks are taken into account. The time necessary to comply with all procedures required to export goods. If a procedure can be accelerated for an additional cost, the fastest legal procedure is chosen.
The Cost to export for each year is divided by GDP deflator, to take the general price level into account when benchmarking this absolute-cost indicator across economies with different inflation trends. The total number of documents required per shipment to import goods. The time necessary to comply with all procedures required to import goods. The cost to import for each year is divided by GDP deflator, to take the general price level into account when benchmarking this absolute-cost indicator across economies with different inflation trends.
The ranking of economies on the ease of trading across borders is determined by sorting their distance to frontier scores for trading across borders. These scores are the simple average of the distance to frontier scores for the time and cost for documentary compliance and border compliance to export and import domestic transport is not used for calculating the ranking.
Enforcing Contracts measures the time and cost for resolving a commercial dispute through a local first-instance court and the quality of judicial processes index, evaluating whether each economy has adopted a series of good practices that promote quality and efficiency in the court system. The time to resolve a dispute, counted from the moment the plaintiff files the lawsuit in court until payment.
This includes both the days when actions take place and the waiting periods between. The cost in court fees, attorney fees where the use of attorneys is mandatory or common and enforcement fees expressed as a percentage of the claim value.
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The quality of judicial processes index measures whether each economy has adopted a series of good practices in its court system in four areas: The ranking of economies on the ease of enforcing contracts is determined by sorting their distance to frontier scores for enforcing contracts. The time and cost required to resolve bankruptcies is shown below. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process.
The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown. The recovery rate calculates how many cents on the dollar secured creditors recover from an insolvent firm at the end of insolvency proceedings. This means that creditors are unlikely to recover their money through a formal legal process. The index is the sum of four component indices: The ranking of economies on the ease of resolving insolvency is determined by sorting their distance to frontier scores for resolving insolvency.
These scores are the simple average of the distance to frontier scores for the recovery rate and the strength of insolvency framework index. Rankings on Doing Business topics -. Viewing the data for. Information View Methodology Compare all economies. Figure — Legal Rights in China and comparator economies.
Details — Legal Rights in China. Figure — Credit Information in China and comparator economies. Details — Credit Information in China. Details — Paying Taxes in China. Border compliance hours The time and cost for border compliance include time and cost for obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures. Border compliance USD The time and cost for border compliance include time and cost for obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures.
Documentary compliance hours The time and cost for documentary compliance include the time and cost for obtaining documents, preparing documents, processing documents, presenting documents, and submitting documents. Documentary compliance USD The time and cost for documentary compliance include the time and cost for obtaining documents, preparing documents, processing documents, presenting documents, and submitting documents. Details — Trading across Borders in China. Almost no consumer-facing business in China can succeed without an online and offline strategy today.
Mall owners are struggling to find a new economic model. Retailers are trying to bring order to their nationwide distribution chains to exert control over the price at which their products are sold online. The impact on employment is just starting to appear, but many millions of sought-after white-collar jobs will be eliminated in the next few years.
This growth is not risk free. Perhaps most critically, Chinese consumers remain relatively unsophisticated. A loss of confidence as a result of a default in a wealth-management product, or a decline in housing prices in a specific city, could easily become a nationwide contagion creating a vicious cycle of consumers who withdraw from spending, thereby worsening market conditions. One has to be over 40 to remember a recession in China. A final and rising risk is the underemployment of graduates. Of the seven million graduates each year, maybe only three million find jobs that require a degree.
The remainder discovers that their aspiration of joining the middle class and owning a home and a car is possibly out of reach permanently. They are a large, dissatisfied, and growing segment of society. Many of the industries with the highest growth potential in China over the next decade are in the services sector, but not all. For example, energy and agriculture will have segments with very rapid growth.
Below is a very brief snapshot of where we see opportunities. E-tailing The online share of retail in China, at 8 percent in , is higher than it is in the United States and is not close to reaching saturation. Increasingly, this is conducted through mobile devices. The payments system is in place, logistics are improving, and online providers are trusted. Many retailers will adapt, often with far fewer physical locations. Malls will have to become destinations for services beyond retail.
Modernization of supply chains is a key enabler of increasing productivity in many sectors in China today. Until recently, most goods were carried by individual truck owner—operators. Alibaba alone is committed to spending billions of dollars on its own logistics. Third-party carriers such as SF Express are rapidly becoming regional leaders on the back of growth in China. Nearly two-thirds of registered kindergartens in China are privately owned.
Private universities are expanding.
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Traditional and online vocational learning schools are publicly listed multibillion-dollar businesses. Niche businesses, such as preparing children to apply to US, UK, and Australian high schools and universities, are also flourishing. The amount the Chinese are willing to spend on tutoring and support for their children is almost unlimited. As the middle class becomes wealthier, the increased ability to spend will drive market growth.
More than 1, new private hospitals opened in China in , a number of which are percent foreign owned. The shortcomings of the mainstream public healthcare system in China are not likely to be overcome quickly. Patients are looking for solutions where both cost and quality are more certain, and private and foreign companies are being encouraged to deliver.
There is a related boom in supplying equipment to these new facilities. Available hotel rooms in China have tripled over the last decade. Four million mainland Chinese visited South Korea in ; four million visited Thailand. The more than one million high-net-worth individuals in China remain generally unsophisticated as investors, seeking advice on how to broaden their investment portfolio both onshore and offshore. Finding the chief information officer in a Chinese company is often hard, especially in a state-owned enterprise.
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Historically regarded as simply a support role for the business, CIOs were pushed three to four levels down in the organization and attracted little talent which instead went to Internet start-ups. A typical Chinese company spends only 2 percent of revenue on IT versus international benchmarks of around 4 percent. As these companies struggle to bring technology into the core of their operations, they need massive amounts of help to do so. The cost of good IT talent is already soaring.
Most Chinese companies will be unable to solve their technology challenges for themselves. China already produces 60 percent of solar panels and wind turbines. Increasingly, it is consuming this output domestically. For example, 11 gigawatts was installed in large-scale solar farms in , and this will grow an additional 30 percent in China is also investing heavily to exploit its shale-gas assets and develop cleaner coal technologies. China does not feed itself today—certainly not with the kind of quality and value-added products that the middle class seeks—but it will be challenged to do so in the future.
Continual food-safety crises illustrate the challenge. For many successful technology investors, such as Legend Holdings, agriculture is the new Internet. Chinese companies are investing in agriculture outside of China at scale, from Chile to the Ukraine, for China. They also invest in China, especially in value-added products—such as fruit and the production of frozen ready meals.
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Often in China, the fundamental barrier to success is less about identifying the opportunity and more about the inability to execute the plan more effectively than others. Joint ventures have been part of doing business in China for more than 30 years. In many sectors, they remain the only way to participate, often in a mandatory minority position. But there are a number of clear lessons:. Many potential joint-venture partners are highly successful and very large within China, who sees international partners as little more than a temporary accelerator of growth.
Place a trusted senior colleague in China with a commitment to have him or her be there for the long term. He or she is your go-to person when things get volatile in China, someone whose viewpoint the global management team will trust, and someone the head of your joint-venture partner will also learn to trust.
Usually, this person will be very strong in people development, with skills almost overlapping with a head of HR. And he or she will need to be percent trusted to enforce compliance and to role model required behaviors.