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Key Changes in:
- Banking
- Insurance
- Automotive
- Agriculture
- Telecom
- The Downside of
Liberalisation
- What are Hong Kong's prospects?
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China
joined WTO
After
14 years of negotiations, China has finally joined the World Trade
Organization (WTO). In the next few years China will be
bound by WTO rules to cut import tariffs and to give foreign
businesses greater access to its potentially lucrative markets and to lift
restrictions in the insurance, banking
and telecom sectors.
The official accession was hailed
by numerous
papers, comments and seminars on the likely impact which
are causing more confusion than clarity. However, a WTO-compliant
legal environment will take time to establish and it will be at least five
years before the major trade barriers are lifted. Thousands of related laws
and regulations and especially the enormous discrepancies in legal practices will need to be comprehensively
revised. Much work remains to be done and patience should remain a key
element of any China strategy.
We
have summed up some major key changes that WTO will bring:
Foreign
banks will be permitted to conduct domestic currency business with the
Chinese corporate market companies after two years and with the public
sector (i.e.
retail banking) after five years. Foreign banks will be allowed to take a 30
percent stake in financial institutions, such as fund management. Rules on
making direct equity remain unclear. However
freeing up this sector is expected to have little impact as foreign
banks are still wary of the high market risk. Currently most foreign
banks in Shanghai are still unprofitable . Moreover there is some concern
that the Chinese banking sector with its huge bureaucracy, lack of experience and high risk ventures cannot
fundamentally change within 5 years.
China
immediately granted eight new licenses to European insurance firms which will
further open up the insurance market. The scope of business will expand
within two years to permit: health, pension and group life insurance and
all non-life activities with the exception of statutory insurance. Brokers
are allowed to undertake large-scale commercial risk and reinsurance. All foreign life insurers, however, must find Chinese joint venture
partners and are limited to a maximum stake of 50 percent. Foreign
non-life insurers will be permitted to set up joint ventures immediately
after accession, holding maximum stakes of 51 percent. They will be able to
set up wholly owned subsidiaries in two years after accession. All
geographical restrictions will be lifted in three years.
Foreign
Insurers Expectations
With
a population of 1.3 billion who have personal savings of approx US$845
billion makes China one of the largest pots of gold anywhere.
Currently most of it is deposited with state owned banks, earning
minimal interest and many Chinese are also worried that shaky state pension schemes might collapse. In line with the WTO lifting of restrictions many
foreign insurers are eagerly
anticipating the Chinese consumer taking up their pension policies and
using them as security for their old age.
But despite clear WTO rules there is still some ambiguity for insurers
from the USA and the EU. However, one of the major issues between US and the
European Union, which had threatened to delay China's WTO entry, was
"settled" recently:
AIG
and Chubb, both US insurers, have already achieved full ownership of their
insurance operations in China.
Even though China’s 50 percent foreign share policy was applicable
to all insurers. Under the terms of an additional agreement, China will
allow AIG to set up and operate wholly owned insurance operations in four
Chinese cities - Beijing, Suzhou (near Shanghai), Dongguan, and Jiangmen in
southern China. In return, AIG will be required to operate any future
operations under a 50 - 50 joint venture with a Chinese partner. The
compromise has already been agreed by the European representatives (despite
remaining an actual violation of WTO law) and officials considered this
issue as closed. However, the four new licenses for AIG, in particular
Beijing, gives them a head start over foreign rivals.
China
will slash import tariffs on cars and trucks to 25 percent by 2006 from the
present level of 80 to 100 percent. Beijing has also agreed to permit,
within two years after accession, wholly foreign owned companies to produce
auto engines and to lift the restrictions on the category, type and model of
vehicles made by joint ventures. That leaves manufacturers free to make such
decisions on a commercial basis. Demands
for cars could have an immediate boost from
the WTO accession - a move that will bring down import duties and enforce a
lower domestic price level. As a result, many consumers have been waiting to
see how far prices will come down before parting with their money. But
despite the additional growth in sales, domestic carmakers could suffer from
over-capacity caused by competition with rising imports. Except for a
handful of large companies, the automotive industry in China, with too many
plants and high production costs, is woefully ill-equipped to deal with the
new competition WTO will bring. Another major problem for Chinese carmakers
could be the undeveloped after sales service sector. In developed markets,
services account for 70 per cent of the industry's revenue. Mainland
after-sales services are weak in terms of quality and distribution networks.
However, after joining the WTO, Beijing will run short on options to protect
the home-grown car industry against foreign competition.
As
part of the accession, China will open up its agriculture market to foreign
imports, particular grain. Import duties on farm products like wheat, maize
and soya-beans will be cut from 22 to 17 percent. China will cap future
agricultural subsidies at 8.5 percent on domestic farm products (value
based). After lifting these restrictions it is expected that grain from the
US, Australia or the European Union will enter the Chinese market. With
their huge farms and use of modern machinery, foreign farmers can produce
wheat, maize and soya beans at costs up to 50 percent lower than the
Chinese farmers. But Beijing invests already heavily in transforming rural
villages into urban industrial areas to absorb uncompetitive farmers.
Foreign
companies will be permitted to take up to 25 percent stakes in mobile phone
firms; the limit will rise to 35 percent after five years. Import
tariffs on high-tech IT and related items will be eliminated by 2005.
On the other hand, it is not surprising to see that the State Council is
still adhering to a more protectionist approach towards the licensing
process relating to the infrastructure telecommunications business. In order
to qualify for a license to operate an infrastructure telecommunications
business, at least 51 percent of the total equity of an applicant must belong to
the State. Also the State Council will be the sole authority to examine and
approve the licenses.
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The
Downside of Liberalization
The
WTO entry will put an ill-prepared China under severe pressure to get things
right in a much shortened time-frame. Above
all it will take a heavy toll on the manufacturing industry, especially
large state companies that have been shielded for 50 years from competition
by high tariffs, quotas and licenses. The entry of efficient foreign
companies will force uncompetitive state-owned industries to close or
restructure, throwing millions out of work. The worst hit will be
capital-intensive industries like motor vehicles, metals and petrochemicals,
with up to 12 percent of the workforce losing their jobs. The main reason will be lower import tariffs. Moreover China's inefficient
agriculture sector - providing basic living for at least 800 million - could
be destabilized
by cheaper farm imports from abroad. A mass exodus from farms would add to
the already huge army of surplus rural workers flowing to the cities. Except
for a handful of large companies, the manufacturing industry in China, with
too many plants and high production costs, is woefully ill-equipped to deal
with the new competition WTO will bring. But whatever the WTO says, there is
plenty of room to play around. For foreign car makers for instance
additional import certificates are in the pipeline and elaborate safety
inspections are being implemented to reduce the impact of WTO included
tariff cuts. In the past the Chinese government often tended to slow
down crucial elements of market liberations in this way.
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What
are Hong Kong's Prospects ?
Its
GDP could rise by an additional one percent annually in the next five years
as trade in financial services and shipping rises. The main reason for this
is simply that Hong Kong's northern neighbour, Guangdong province, attracts
the most foreign direct investment and trade in China. The general WTO
accession boost which is likely to be given to this area, leads to more
demands for the goods and services Hong Kong provides. Nearly three out of
five people interviewed see more business opportunities, however, there are
also a number of concerns that Hong Kong could lose some of its
competitiveness. In the longer term, there are fears that Shanghai's economy
could overtake Hong Kong as a financial capital. While Hong Kong's GDP was
five times that of Shanghai's in 1990, it had narrowed to just three times
in 1999. But if tariff and non-tariff barriers are lifted, foreign
companies are expected to pump more investment into the region of Shanghai,
as a financial centre for the mainland.
The
most likely impact on Hong Kong is to accelerate the speed on which
the city will have to adjust to the mainland's rising economic power.
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South
East Asian Worries
The
biggest challenge from China's emergence could be to the South East Asian
nations with their reliance on cheap labour and export of electronics and
other goods. What most worries in the Asian countries is that China
out-competing them in the industrial sector. Nations without the means to
move into services, fear they may be pushed to de-industrialize and
end up as raw material providers fuelling China's growth. But the
assumption that Chinese products are less expensive than goods produced
elsewhere in Asia has to be taken seriously. However, a trade theory says
that countries with high value exports could benefit from a wide range of
export opportunities to China.
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After
all
China's
entry into WTO will accelerate the economic revolution that started in the
late seventies - not only in the coastal cities but also in the hinterland.
WTO membership should help to insure that the market reforms continue
opening the economy to domestic and foreign competition. A
Beijing Businessman summed up fittingly: “The effect will be good and bad,
fast and slow.”. There is something in there for everybody and due to the
almost daily announcements and changes, every company will need to
maintain a monitoring system to watch developments in general and its
particular industry.
___________________
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Motorola
to invest US$6 billion in China
US
telecommunications equipment giant Motorola has announced it will invest
US$6.6 billion in China over the next five years and double the annual
production of its Chinese subsidiary and joint ventures. Motorola's
investment in China - now a cumulative US$ 3.4 billion since it first
invested in China in 1992 - would reach US$10billion by 2006. It is
expected that the annual output of the China unit, Motorola Electronics
Ltd, and its eight joint venture firms will double to US$10 billion by
2006.
Japan
boosts China investment
Chinese
figures show that, in the first half of this year, contracted Japanese
investment increased
of 90 percent over the same period last year. The total for the year is
likely to come close to record levels. Toshiba announced it would move its
Japanese production of colour TVs to China, Hitachi said its investment in
the mainland would reach about US$1 billion by 2005, while Itochu said it
planned to open 3,000 of its 24-hour Family Mart convenience stores in
China from scratch. Pioneer is already manufacturing its DVD drive in
Dongguan and Matsushita Electronics is producing its most modern
"plasma display" television set in China. One major reason for
this development is that wage
levels in China are 5 percent of those in Japan and
the pressure of globalisation forcing firms to seek lowest costs.
Taiwan's accession
Taiwan
also joined the WTO. The effect of its economy is less clear. It has a
highly protected agriculture sector which will suffer after it lowers trade
barriers and has been backing EU proposals to slow down the liberation of
the agricultural industry.
But its dynamic industrial base - now battered by the global
economic downturn will benefit from a guarantee of open markets, and it
will probably be able to expand its investment in mainland China which
totals US$70bn. There are concerns that agricultural and industrial
products from mainland China could deal a devasting blow to industries in
Taiwan that are geared
towards the domestic market. Taiwan's official WTO entry is set
for 1st of January 2002 and covers, amongst others, an average
import tariffs cut from 8.2 to 5.53 percent and a farm subsidies cut of US$110
million, or 20 percent by 2002.
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