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 Wales
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 issues.
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 respective cities.
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 cities.
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 developments.
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 objectives.
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 employees.
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 confidential information.
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 enterprise.
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 transactions.
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 1994.
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 are competitive.
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 membership.
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 services.
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 regulations.
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 today.