Asian Region International Association of Cooperating Organisations
(ARIACO) Conference 1999
9 - 12 October 1999, Beijing, PRC
Written by John Zerby, Vice President for Trade Policy and
Commercial, Australia-China Chamber of Commerce and Industry of New South
Presented by John Wang, Chief Representative Beijing,
Australia-China Chamber of Commerce and Industry of New South Wales
The Australia-China Chamber of
Commerce and Industry of New South (which is more easily abbreviated as
ACCCI, or the “Chamber”) is grateful for the invitation to participate in the
ARIACO Conference 1999. Our objective
is to contribute some thoughts to the issues that comprise the theme of the
conference and to offer our support for the continuing discussion of these
We are particularly honoured to
be included at this time – just 10 days after the 50th anniversary of the
founding of the People’s Republic of China.
Much has been said both inside and outside of China about the nation’s
accomplishments during the past 50 years.
There is little that we can add to this, except perhaps to note the
celebrations in this city on the 1st of October in 1949 gave recognition to
the reunification of a nation that was the world’s sole superpower for more
than 10 centuries after the fall of the Roman Empire.
The thoughts of Mao Zedong, Zhou Enlai, Zhu De, Liu Shaoqi, Deng Xiaoping and
other “comrades of countless struggles” on that historic day were undoubtedly
quite different from the thoughts we will express today. Nevertheless, they are all part of the
more than 10 centuries of economic, social and political evolution of
China. In looking forward to
the new millennium we should base that vision on the continuum of the past,
for otherwise we have little or no capacity to achieve that vision.
ACCCI was established in Sydney
on 16 September 1976. Its purpose is
to foster two-way trade, commerce, industry, investment and cultural
relations between the two countries.
The strategy that was adopted by the Chamber early in this decade was
to establish co-operative agreements with up to 30 cities in China. These agreements are intended to establish
long-term associations with municipal authorities and organisations in the
Each agreement is an undertaking
by the Chamber to co-operate in the business areas of export and import, investment
joint ventures, business information including academic research and
development, commercial culture, such as the performing arts, and public
administration including social services.
Most of these agreements are
entered into with sub-branches of the China Chamber for the Promotion of
International Trade (CCPIT), which is also known in China as the China
Chamber of International Commerce (CCOIC).
We generally try to enter into accompanying agreements with vice
mayors responsible for foreign trade and economic relations and, where
possible, maintain communications with Party Secretaries in the relevant
Our decision to focus at the
municipal level of government is consistent with the decentralisation of
government administration in China in matters relating to trade, investment
and associated business activities.
This focus will undoubtedly remain for most of the next decade. We have noticed, however, that decision-making
at the municipal level in China has increasingly been affected by macroeconomic
As is generally known, during
the first half of China’s “opening” to the world, macro-economic management
was used mainly to assist in the transfer of productive resources from one
sector to another in response to market changes. Fiscal policies were based on tax incentives to encourage the
necessary transfer, and monetary policy assisted by way of credit allocation
and interest rate concessions. Revenue
sharing among levels of government was closely tied to microeconomic reform
of industrial enterprises.
This began to change in the
latter part of the 1980s.
Inflationary episodes became destabilising, both economically and
socially. Gradually, the central
government sought a greater degree of control over macroeconomic management,
and elevated these objectives to be co-ordinated with, but not to be
dominated by, enterprise and market reform.
After the East Asian financial and economic crisis that began in July
1997, fiscal and monetary policy in China became truly national in focus and
This evolution of policy in
China strengthens the position and potential areas of influence of
organisations such as the China Federation of Industrial Economics. ACCCI therefore recognises the need to
co-ordinate its activities with such organisations, while retaining our
existing ties with CCPIT sub-branches.
We note that Jiang Zemin said it
was “timely and necessary” for the Fourth Plenary Session of the Party's 15th
Central Committee, which convened recently, to concentrate on the reform and
development of state-owned enterprises.
Some details have already appeared about the planned restructuring of
state assets. They seem to be divided
into two components.
The first component is a
debt-to-equity swap for about 500 state-owned enterprises (SOEs) with a total
debt burden of RMB 300 billion, according to Huang Yong, (Zhongguo Zhengquan Qihuo (China Securities and Futures),
25 September 1999). Associated with
this arrangement is an increase in the proportion of direct financing for
SOEs through foreign and domestic capital markets, as well as an increase in
the proportion of tradable stocks. In
addition, certain non-listed SOEs will be able to sell their land-use rights
in order to increase their funds, pay their debts or restructure (according
to Renmin Ribao (People’s Daily),
21 September 1999).
The Chamber believes that this
is an important step since it gives “breathing space” for SOEs and removes
some of the pressure now applied to China’s four large commercial banks to
reduce their ratio of non-performing loans.
It should nevertheless be emphasised that this is an additional step and not an end in
itself. Considerably more is needed
in order to ensure that the objectives of SOE reform are met. We will say more about this in a moment.
The second component may be a
shift of focus from government support of SOEs in competitive sectors to SOEs
in those sectors deemed most critical to the national economy. This is likely to entail a transfer of
support away from medium-sized and smaller SOEs to larger SOEs. According to recent reports (China Daily,
22 September 1999), China has about 238,000 SOEs, 4 per cent of which are
categorised as large, while the remaining are small or medium-sized
enterprises (SMEs). Last year, over
45 per cent of the state’s allocations of RMB 13,500 billion went to SMEs,
many of which are believed to be involved in production that is duplicated by
larger enterprises, and frequently done better by the larger SOEs.
The Chamber recognises the need
to avoid wasteful duplication of industrial production in China, especially
during a period of over supply.
Nevertheless, although cutting down small trees may help the larger
trees to grow even bigger, when the large trees eventually cease growing
there may be no medium-size trees to replace them.
An important aspect in both of
these components of SOE reform is frequently referred to as “corporate
governance”. Five or six years ago,
the Chamber hosted a number of study visits from China’s Northeast provinces,
particularly from Liaoning. As is
generally known, SOEs in the Northeast were the first to privatise, and they
frequently did so by selling shares to employees of the enterprise.
The Chamber suggested that
several additional steps are generally followed in the privatisation of
state-owned enterprises in Australia.
The basic objective in privatisation is to extend the accountability
of the enterprise beyond the government authority that is directly responsible
for its operation. By exposing the
enterprise to a well-functioning market, consisting of many buyers and
sellers, the enterprise is accountable to many people with diverse
backgrounds and varied interests.
This is generally not achieved by restricting shareholding to existing
We suggested that a reasonable
first step in the process is to enlarge the board of directors of the
enterprise (allow more “seats” on the board) and to appoint to the board
people with diverse backgrounds and varied interests. Together with this, there must be an
understanding that the management of the SOE is accountable directly to the
new board and only indirectly to the relevant government authority.
Admittedly, this step is not an
easy one. First, there must be a
number of suitable candidates from which to choose in making appointments to
boards of directors. Second, the
candidates must have a satisfactory amount of professional competence,
particularly in the area of financial accounting and reporting. Third, there must be a method for
resolving conflicts of interest.
Large SOEs, in particular, are frequently concerned that “outside”
appointments to their boards of directors may result in the exploitation of
An additional step in the
privatisation process is to gradually remove any advantages that the SOEs
enjoy in comparison with non-state sector enterprises, and to insist that the
enterprise, including its directors, be exposed to the same legal and
regulatory requirements as non-state sector enterprises. This generally results in corporate
reports that give a fair and impartial statement of the performance of the
enterprise. This, in turn, allows potential
shareholders to assess the strengths and weaknesses of the enterprises.
The final step is to prepare for
a share float by engaging the services of a specialist company that is
familiar with share markets as well as the specific industry in which the SOE
is a participant. These specialist
companies frequently make recommendations about the desired composition of
ownership (the number of small shareholdings, relative to larger
institutional shareholders). They may
also negotiate with institutional shareholders whose participation on the board
of directors is considered to be desirable.
It is of course essential that the company performing this function is
independent of the relevant government authority and of the management of the
Other aspects of corporate governance
are also important, but there is not sufficient time to discuss them
today. We bring to your attention a
recent report by the International Monetary Fund on corporate governance in
South Korea (“Republic of Korea: Selected Issues”, IMF Staff Country Report
No. 98/74, August 1998, available online from http://www.imf.org). There are of course a number of
differences between Korean chaebol
and Chinese SOEs, but there are similarities as well. Some of the comments of the IMF staff are
therefore relevant to China.
We prefer to use the time
available today to suggest that industry associations in China represent an
important element in developing a code of conduct that will ultimately form
the basis for better corporate governance in China. These associations have the capacity to work within the
framework of existing laws and regulations to develop a more practical
step-by-step procedure for enterprise reform in specific industries.
We believe that China's securities
market is developed enough to permit debt-to-equity conversion. We believe further that the new Securities
Act that was implemented on July 1 of this year is likely to be a key element
in improving the environment for SOE reform.
Not only does the law reinforce the position of the securities market
in China's socialist market economy, but it also sets up a legal framework to
regulate the market. The legal rights
of small investors will be better protected since strict requirements now
exist regarding the transparency of listed firms and their listing procedure,
and forbids cheating and manipulative activities and under-the-table
The Chamber is pleased that the
main architect of the Securities Act, Professor Li Yining, Director of Beijing
University’s Guanghua Management Institute and also
Vice-Director of the National People's Congress's Finance and Economics
Committee, was the Chamber’s first appointment as Honorary Associate
Director. Professor Li’s appointments
in China are of course far more meritorious than his appointment with us, but
that only increases the extent to which we are privileged to have been
associated with him over the years.
As with many aspects of
regulation of business enterprises, governments can only establish the
institutional framework that is required for that regulation. Industrial associations have an important
role in establishing concrete and specific rules, or codes of conduct, that
are required to make the regulation efficient and effective.
China's application for
membership to the WTO began in 1986, when the organisation was known as the
General Agreement on Tariffs and Trade (GATT). In January 1995, GATT was formally replaced by the WTO, and
China’s formal application for membership in the WTO was made in December
China made substantial tariff
cuts in the subsequent period, with the view to complying with WTO
requirements. Average tariffs were
reduced from 36 per cent in 1994 to 17 per cent in December 1998. Further reductions to 15 per cent are
foreshadowed for the year 2000 and the tariff rate on industrial products
could fall to 10 per cent by the year 2005.
China’s entry into the WTO at
the end of this year nevertheless remains uncertain. Entry must come eventually, however. The WTO announced that China became the
9th largest exporting nation in 1998, with an export volume of US$183.8
billion. By convention, Hong Kong SAR
of China is treated separately and was ranked 10th in the world according to
export volumes during that year. The
combined effect of Mainland China and Hong Kong is therefore substantial and
cannot be ignored for long by existing WTO members.
The more immediate benefit to
China of WTO membership is the achievement of Normal Trade Relations
(formerly Most Favoured Nation treatment) that are extended by more than 130
WTO members and acceding states to all other members and acceding
states. This would provide stability
for both trade and investment. It
would also eliminate the potential danger of a trade war arising from efforts
by the United States to reduce its trading deficit with China. When China becomes a member of WTO, the US
would agree to resolve trade disputes with China on a multilateral basis, as
it does with the other nations that are currently WTO members, and not
through unilateral remedies such as Section 101 of US trade law.
The longer term benefits of WTO
membership are associated with a freer and more open global trading
environment. This involves a built-in
incentive to raise the economic efficiency of all industrial activities. However, these benefits can be achieved
only by transferring productive resources away from industrial activities
that are not globally competitive and toward those industrial activities that
In the context of a global
trading environment, the identification of industries that are likely to
expand and those that are likely to contract is generally difficult. Much of the outcome will depend upon the
flow of foreign goods and investment into China following WTO membership.
For example, China is expected
to benefit from the phasing out of the Multi-Fibre Agreement that imposes
quotas based upon country of origin.
The new textile and clothing agreement within the WTO will eliminate
these quotas and allow producers in China to compete more freely in the US
and EU markets. Nevertheless, China’s
clothing and textile industry is experiencing slower export growth partly
because Chinese enterprises have shifted production to other countries. This was undoubtedly motivated by the
desire to escape from the quotas associated with the Multi-Fibre Agreement,
but it has had the effect of slowing the rate of new investment in the
clothing and textile enterprises remaining in China.
Membership in the WTO may lead
to a recovery of this investment.
When combined with mergers among the existing SMEs, as the central
government had been attempting for several years, it is possible that the
clothing and textile industry in China can be rejuvenated. That outcome is not certain, however.
Similarly, WTO membership allows
protection for infant industries and for intellectual property rights. Both of these involve complex
assessments. Exemptions from tariff
reductions for undeveloped industries, including some of China's industrial
electronics goods, such as digital-controlled machine tools, precision
processing equipment, industrial-use control systems, and high-precision
meters and instruments, may be allowed continued protection. These exemptions, however, generally
include a timetable for industries to “mature” and require evidence that the
timetable is being followed.
Intellectual property rights are
sometimes difficult to trace when culture and traditional knowledge is
involved. This has been a major
problem with China’s pharmaceutical industry and with computer software.
Trade disputes arising from
these issues are certain to require a substantial amount of time and effort
in defending current practices, or in justifying actions associated with the
trading rules. These considerations
touch upon the main point we want to make in relation to China and WTO
With WTO membership, China will
be required to adhere to the rules and regulations of the international
business community. For this to
occur, it will be necessary to distribute information about those rules and
regulations to all enterprises in China, not just to joint-venture
enterprises and not only to enterprises involved in foreign trade. The rising trend in component manufacturing
results in strong linkages among various stages of the production process and
often involves service industries as well.
China’s decentralisation of
decision making, and its three distinct levels of government, will require careful
attention in the distribution of trading information. Among China’s 666 cities, some are equal
to provinces while others are “open cities” with some degree of autonomy in
relation to provincial governments.
Other cities must obtain approval from provincial authorities in
matters relating to foreign trade and economic relations.
The system for the two-way flow
of industrial information among the levels of government therefore varies
considerably among cities and provinces.
This is certain to add to the administrative complexity in adhering to
WTO rules and regulations. Despite
this increased burden placed on government administrators, half of the work
force in China's local governments (provinces, autonomous regions and
municipalities) will be made redundant in an effort to further streamline
government employment (according to Zhongguo
Xinwen She (Chinese Overseas News Agency), 19 July 1999).
Industry associations in China
should plan to fill this gap by actively participating in the two-way exchange
of information between enterprises and the relevant section of MOFTEC that
will become the main contact with the WTO organisation. This will not only involve an educational
program for enterprise managers, but must also include a procedure for
notifying MOFTEC of problems encountered as a result of WTO compliance. Associations such as the China Federation
of Industrial Economics are in excellent positions to contribute
significantly to China’s economic development following WTO membership.
Australia is certain to benefit
from China’s entry into WTO. As
stated by our Department of Foreign Affairs and Trade (http://www.dfat.gov.au):
When China becomes a WTO member
and commences implementation, tariffs and other barriers facing a wide range
of Australian exporters will be reduced.
Industries that will benefit include the wool, sugar, wheat, barley,
meat, seafood, horticulture, dairy, cotton, rice, oilseeds, wine, processed
food, hides and skins, chemicals, pharmaceuticals, metals, information
technology and auto sectors. China
will also be liberalising its services sector, which will be of considerable
value to a wide range of services exporters, including banking, insurance,
legal, accountancy, architectural, telecommunications and distribution
Australia has little or nothing
to lose as a result of China’s WTO membership and therefore has a trading
obligation to assist China in its transition to WTO rules and
How can we help? The Chamber believes that conferences such
as this one involving Asian Region International Association of Co-operating
Organisations are important elements in this process. The procedure ultimately adopted by China
will of course have Chinese characteristics, but it is important to be
informed about what other nations have done, and are doing.
We suggest that these
conferences be continued and that each additional conference should be
focused more directly on potential problems.
We also urge that information be exchanged on a regular basis in the
period between meetings so that the benefits from a concentration on specific
issues are more widely dispersed.
As a bilateral chamber of
commerce and industry, the ACCCI would be privileged in being asked to
participate in this exchange and we again thank you for inviting us here