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China
Defies Global Investment Trend
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Auto
Price War After WTO Tariff
Cuts
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Unions
Gain Veto On Management Decisions
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Hong
Kong Faces More Integration
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Preferential
Tax Treatment To Stay For Established Foreign Firms
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Retail
Industry Opens To Foreigners
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Bertelsmann
Targets China
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China
Defies Global Investment Trend
According
to the United Nations Conference on Trade and Development (Unctad), last
year’s dramatic decline in global foreign direct investment (FDI) will not
be recouped this year. Despite
global trends, however, there was an increase in foreign investment in Mexico, India
and above all China, the biggest developing-country recipient, where inflows
rose to US$47 billion last year.
Unctad expects foreign investment in China
to continue to strengthen following its accession to the World Trade Organisation.
This could rise to between US$60bn and US$100bn annually, depending
on China relaxing foreign ownership restrictions.
Several
FDI surveys have ranked China as the top recipient of future foreign
investment, in particular by
Asian multinationals. China has already overtaken the US as top destination for
Korean FDI,
while 25% of Japanese multinationals have already increased, or plan to
increase their investments in China.
China’ anxious neighbours, who have
been worried that they may lose out on investment, have been reassured that
Japanese investment plans are additional rather than a substitute for
existing FDI. According
to a survey last October, by the Japanese External Trade Organization,
one-fifth of Japanese multinationals plan to relocate production to China,
however, two-thirds of those cases involve a shift in production directly
from Japan.
Auto
Price War After WTO Tariff Cuts
According
to analysts, a full scale price war in China’s automobile industry is set to
explode during the first of the year. The price war appears
inevitable as a result of Chinese consumers' reluctance to
buy cars and secondly the increase of imported automobiles following
China's robust tariff cuts earlier this month.
Consumers
have been waiting for cheaper cars for years and this dream became a reality
after China entered the World Trade Organization (WTO), thus making a tariff
cut essential.
On January 1, the duty on automobiles of up to 3,000 cc was
reduced from 70 percent to 43.8 percent, and on higher powered
cars from 80 percent to 50.7 percent - the biggest cut in any
sector following entry to the WTO. These tariffs will gradually be lowered
to 25 percent by mid 2006.
The
import of cars, mainly from Japan, grew 37 percent in the first 10 days of
this month, illustrating the major effect of tariff cuts.
Meanwhile, the
price war in the local car industry continues. Domestic car manufacturers
are sharply reducing their prices in an effort to keep their market share.
Tianjin
Automotive Industrial Corp. started with impressive price-cuts of nearly 25
per cent. Competitors like the Sino-French joint venture Dongfeng Citroen,
and Hainan Mazda Motor Co. followed suit.
The
price battle is expected to become more fierce during the remainder of the
year. In addition Shanghai Volkswagen, which is preparing to launch a
moderately priced, compact model in the mainland, may cut prices on other
models later this year. "To remain competitive Volkswagen must
consider cutting the price of its automobiles and taking other action aimed
at keeping its market share", a Volkswagen sales manager said.
Unions
Gain Veto On Management Decisions
Hong
Kong lawyers recently warned that changes to the mainland's labour laws have
given union representatives in foreign-invested enterprises (incl. WFOE) an
effective veto over management decisions. Representatives of the trade
unions have to be present at all management meetings - including those of
foreign invested companies - otherwise decisions can be challenged in court.
The regulation has been in force since the beginning of this year. All
recognised trade unions belong to one government-controlled federation of
trade unions and have to be involved in
decision making, according to the new regulations.
"Now labour
unions must attend and you must obtain their co-operation, I can't see any
way out but to say they have a veto right on these matters. That's serious
stuff and I don't think anyone has woken up to this yet," a partner
lawyer of McKinsey & Baker was quoted. While
unions have a larger say in corporate affairs, it is not very clear whether
they intend to exercise that legal right. Very often non-state owned
enterprises do not have a trade union delegation and where it does exist,
they are very happy to pay the compulsory two percent of wages levy for
trade union activities, which normally would not
exceed the level of an annual outing in a park.
Hong
Kong Faces More Integration
With
Beijing relaxing rules on outsiders doing business on the mainland, everyone
from Hong Kong retailers, financial services companies or developers
are plotting new beachheads in China. "If
Chinese mainlanders won't come to us, we will take our shops to them"
is the slogan. And
more and more Hong Kong business-people are expressing the same sentiment.
Most of the China investment over the last 20 years went into factories
making goods for export to the U.S. and Europe. Meanwhile, the service
sector was content to concentrate on Hong Kong itself, since Beijing’s
regulations prevented foreigners from making inroads into China.
Now,
with the handover safely completed, China having joined WTO, and with Hong
Kong stuck in a deflationary spiral, desperate businessmen and policymakers
say Hong Kong can no longer afford to wait. As a result, Hong Kong is
finally embracing integration. In recent month, the Hong Kong corporate
establishment has increased the pressure on the government to help to make
it easier to live, work and invest in China.
So, while the Hong Kong
government moves cautiously, the private sector is becoming increasingly
aggressive. "We're tying one hand behind our backs by not doing
economic integration" Eden Y. Woon, Director of the Hong Kong General
Chamber of Commerce stated recently. With
complaints growing louder, the Hong Kong authorities are pushing through a
host of measures to alleviate mainland border crossing congestion so as to
make integration easier. It is planning new transportation links,
liberalising tourism and immigration policies, and extending operating hours
at the border - with the stated goal of starting round the clock
checkpoints. The pressure is now on for more integration with mainland
China which is crucial for Hong Kong's future.
Preferential
Tax Treatment To Stay For Established Foreign Firms
Foreign
funded companies already operating in China will keep some of the
preferential tax treatment it was reported recently.
The
director of the State Administration of Taxation, declared that even under
World Trade Organisation (WTO) rules, some
of the tax incentives that foreign funded companies have enjoyed for years
will be maintained. He did not outline further which incentives would
remain. However, future established foreign funded companies will be
liable to the general trend of equalising tax for domestic and
foreign-funded firms. This should lead to fairer competition. Currently,
foreign-funded companies enjoy a profit tax rate of 17 percent, while
domestic firms pay 33 percent. A timetable for implementing a unified
corporate profit tax policy does not yet exist and the adjustment process
might take years. China's total tax revenue grew 19.8 percent compared to
the previous year, reaching US$182.8 billion. Foreign funded companies
contributed US$6.2 billion in profit tax, a growth of 57 percent compared to
2000.
Retail
Industry Opens To Foreigners
China
will open its doors to foreigners following accession to WTO.
"Given
their (Carrefour and Wal-Mart) rich operation experiences, global purchasing
and sales networks, high-technology logistics systems and high-quality
services, the world giants' entry into the Chinese market will inevitably
deal a blow to the relatively fragile domestic retailers," Guo Geping
chairman of the China Chainstore & Franchise Association said. US-based
Wal-Mart and French-based Carrefour, the world's leading retailers, stepped
up their expansion drive into the Chinese market. However,
with the retail sector becoming saturated in China's coastal provinces, big
foreign operators are turning their attention inland. German-based
Metro, which opened its first China store in Shanghai in July, opened a mega
store in Changsha, capital of Hunan province, and has announced plans for
ten more mainland stores. The opening made Metro the first international
hypermarket in Changsha, which has a population of 1,7 million. Carrefour
also plans to open ten more stores and set up ten purchasing centres in
China.
Bertelsmann
Targets China
German
media giant Bertelsmann signed a letter of intent to establish a joint
venture printing company with two Chinese partners. The company further
plans to break into the still tight-regulated media market by entering the
television, radio and e-commerce sections. Bertelsmann will take a 50
percent share in a printing company in Shanghai, which according to
Bertelsmann will become one of the largest in the mainland’s printing
market. "This deal marks the beginning of our expansion into new
industries in China", Bertelsmann chairman Thomas Middelhoff was quoted
in the Shanghai Daily recently. "Our next step in China is to enter the
TV, radio and e-commerce fields." However, details or a time schedule
for the expansion were not revealed. But estimates of the investment vary
from US$ 145 million to US$ 500 million in the coming years.
The
state-owned Shanghai Packaging Group and the Shanghai Printing Group will
share the remaining equity in the company. The corporation will print books,
magazines and newspapers.
This reflects heightening awareness among foreign
companies that China's need for foreign capital and expertise is creating
many opportunities in the media sector. Mr. Middelhoff promised to visit China
every quarter during the next 10 years to help achieve targets for the
mainland. Bertelsmann most visible presence is its 1.5million member book
club.
The book club and the company's online retailer, BOLChina.com, a co-operate
with Chinese publishers and audio and video enterprises, both provide
content and sell Bertelsmann products. The
private held company may also soon move its Asia-Pacific headquarter to
Shanghai , demonstrating Bertelsmann's seriousness to become a big player on
the Chinese market. Furthermore
the plan shows, once again, that the restrictive regulations regarding
foreign investment in the Chinese media are not a deterrent. Media giants
News Corp (TV station in Guangzhou) and AOL Time Warner are also getting a
foothold in China.
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China's
companies on acquisition trail overseas
In
January, China's largest offshore oil company finalised one of the largest
international acquisition deals in the country's history. China National
Offshore Oil Co Ltd (CNOOC) bought Indonesian oil assets from Spanish oil
giant Repsol-YPE. CNOOC said it has agreed to pay US$598 million in cash
for part of the working interests in five oil and gas fields of Repsol-YPE,
one of the largest European oil companies. This investment is part of a
general expansion drive by major Chinese companies. Recent deals have
included take over (Telecom, Semiconductor etc.) of overseas companies
especially from the USA. "We see this trend continuing in view of
Chinese companies desire to access overseas markets and technology"
says J. Sinclair of CDI China, a Merger and Acquisition specialized firm
advising Chinese company.
No
WTO-Gold Rush ?
Despite
China's accession into the World Trade Organization (WTO) the American
Chamber of Commerce (Amcham) in Beijing does not expect an increase of
foreign investments into China in 2002, a representative said at a press
conference on Amcham's outlook for 2002.
"We see this year no gold rush from the foreign investors," Kim
Woodard of the Amcham public policy development committee said. US
investments reached a record high in 2001 with US$ 7.37 billion, up 15.4
percent compared to 2000. "We expect that foreign investments will be
at the same level in 2002 or even slightly lower than in 2001,"
Woodard said. Generally the Beijing Amcham has a rather gloomy view on
China's economic developments, compared to the Shanghai Amcham, who tend to
be critical yet optimistic.
Industrial
output surges
China's
industrial output grew by 9.9 per cent last year over the previous year to
reach 2.7 trillion yuan (US$325 billion), the National Bureau of Statistics
said last Tuesday. The growth was a major factor contributing to last
year's overall economic growth of 7.3 per cent. China's
industrial output, which covers both manufacturing and mining, outweighs
both agriculture and services in terms of proportion of gross domestic
product. GDP
growth in 2002 is expected to be around 7 per cent.
Shell
signed an US$18 billion gas project
Royal
Dutch/Shell will strengthen its presence in the Chinese market now
that it has signed a preliminary deal with PetroChina for a US$ 18
billion gas project. PetroChina, the mainland’s biggest oil firm, and a
foreign consortium including Royal Dutch/Shell, Russian gas giant Gazprom
and Hong Kong & China Gas Co will team up for the biggest investment in
China’s energy sector to date. Royal Dutch/Shell and Gazprom will take a
45 percent stake, while PetroChina holds the other 55 percent. The deal
seems a major setback for Exxon Mobile, which was also aiming for a stake
in the project that includes the construction of a 4,000 kilometers gas
pipeline from east to west China. The major project involves exploration
and development of gas fields in the Xinjiang Uighur autonomous region, as
well as construction of the pipeline from Xinjiang to Shanghai. The
pipeline is planned to be fully operational by 2004.
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