The Australia-China Chamber of Commerce and Industry of New South Wales

ACCCI Business Letter No. 3

31 October 2000







Foreign Investment In China After WTO Membership



Jean-Marcel Malliaté, Total Career Management

Telephone:  (02) 9518 7314; facsimile: (02) 9518 7024

Part 1 (in B-Letter No. 2), began with the comment that “negotiations consist of learnt skills that are part of a universal process of achieving specific outcomes” and ended with 7 key elements for the avoidance of conflict.  Part 2 contains Jean-Marcel’s suggestions for structuring negotiations.

Step 1:  Discussion

The parties need to discuss freely their thoughts and express their needs and objectives.  The principal purpose of this as a first step is to generate good feelings about the negotiating process.  For cross-cultural negotiations it provides an opportunity to establish language links, an appreciation of cultural differences and a clear interest in the viewpoint of the other party. 

Consideration should be given early in the negotiations to recognising and accepting each party’s willingness to change.  In order to be able to process information about change, it is first necessary to decide if there is a need for change.  Such a need is difficult to define, and is therefore difficult to detect.  It is generally becomes apparent when the negotiations fail to produce satisfaction in meeting either party’s objectives.  A clear view of those objectives will therefore speed this process of recognition and acceptance.

Step 2: Preparation

Each party must assess the information gathered during the discussion.  Thorough analysis is often required, especially when cultural differences exist.  Making use of positive experiences can facilitate preparation.  Examining one’s own honesty, needs, and desires often makes a good starting point. 

The process of preparing ends when both parties are able to meet at the table, but it is more effective if it allows the assessment of information to be projected into the negotiation.  This will enable changes to be managed more effectively.

Step 3:  Offering a proposal

The proposal requires consideration of many facts and this varies in intensity and quantity between cultures.  The overall process of proposing, obtaining and providing can be viewed as crossing a bridge.  This process is completed when each party is satisfied and that will require meaningful dialogue from the point of entry to the “bridge” until an outcome is achieved.  The proposal often defines the point of entry and is therefore very important to the overall process. 

The way the proposal is phrased can have an effect on the dialogue.  For example, proposing a quick gain for extraordinary profit may well cancel the negotiation with one culture but it may inspire another.  Much depends upon the other’s party’s expected time-span for the relationship.  A brash, arrogant proposal often returns brazen reactions, which distort and may even destroy the dialogue. 

The proposal must be clearly understood.  “Get it in writing” is generally the standard thought in relation to proposals, and “Get it witnessed” is often recommended.  “Get it in front of a good lawyer is my experience when dealing” as often referred to in the press when dealing with “Foreign Devils”.  The objective of all of these thoughts should be to clarify the proposal and thus to prevent false steps along the “bridge”.

Step 4:  Bargaining towards agreement

The final step is where each party considers what is important and what is not important.  This determines which concessions are granted and which are not.  The objective is of course to move the process toward agreement, but failure in bargaining will move it the other way.

The agreement can be reversed, after it is reached, by many critical components, such as local, state, national and international legalities.  Social and cultural rules and beliefs are important to the post-agreement phase.  Will the agreement be negated or minimised?  Will re-negotiations be required?  

Bargaining is therefore multidimensional in the sense that it must include more than what can be obtained from the other party.  It must also include what the agreement provides and how it will provided.  

For more information on negotiations and conflict resolution, contact Jean-Marcel or his associates at the numbers listed above.





China’s expected entry into the World Trade Organisation has generally been hailed as a vehicle of opportunity for investors and as a challenge for Chinese enterprises.  Exactly where the opportunities are, and where the challenges are stronger, remains uncertain. 

A recent comment by Bruce Murray, resident representative at the Asian Development Bank’s Resident Mission in Beijing illustrates this:

It is difficult to gauge accurately the economic pros and cons of WTO membership for China.  However, one thing is clear: over the long term, China's accession to the WTO and the commitments to cut tariffs, liberalise trade and investment and open up domestic sectors for foreign participation will lead to significant efficiency gains.  (From a speech delivered on 7 September 2000, reprinted in ChinaOnline [] on 18 October 2000.)

Information on both the opportunities and the challenges is likely to emerge slowly.  Waiting until a sufficient amount has accumulated to remove most of the uncertainty will probably result in missed opportunities.  Progress reports, even if they are incomplete and somewhat fragmented, may at least give assurance that the stream of information has not been interrupted.

Where to invest -- in traditional industries or high-tech industries?

As we mentioned in previous E-Letters, China is rapidly advancing up the technology ladder.  During the nine months of this year, China exported US$25.98 billion of high-tech manufactured goods.  The growth rate of 53 per cent exceeded the 33 per cent increase in other exports (ChinaOnline, 30 October 2000). 

Chinese authorities are clearly encouraging continued growth in these exports.  Preferential policies are to be established in special export zones within existing high-tech industrial parks.  These policies include (ChinaOnline, 23 October 2000):

·         closed-customs systems,

·         free hard currency transactions,

·         permission for foreign and private businesses to establish joint ventures,

·         exemptions of various taxes, including value-added tax, income tax and business tax,

·         relaxation of import-export licenses authorisation, and

·         special passports for residents which allow for easier travel.

Before making investment decisions, however, it is important to consider what “high tech” means in China.  Put simply, it is a manufacturing process that reflects a higher level of technology than most Chinese enterprises currently employ.  The export growth mentioned above is attributed mainly of consumer electronic products, including home appliances, new materials and bio-medical products.  Many of these products, and their production processes, may be considered “lower tech” in developed countries.

China’s rate of urbanisation, fed mainly by rural-to-urban migration, is likely to continue for some time, thus sustaining a steady flow of unskilled labour.  Traditional industries will not disappear in China within the next 10 years.  However, based upon the experiences of other developing nations, this flow will eventually taper off and tighter labour market conditions will result in higher wage rates.  International competitiveness in the traditional industries will therefore diminish unless productivity increases can be achieved through technological change.  The authorities are apparently anticipating this situation and laying the groundwork for a smooth changeover.

Longer-term investment in Chinese manufacturing is therefore likely to focus on the middle rungs of the global technology ladder, but continued growth in the traditional industries can be expected, especially if significant portions of the manufacturing process can be partly or fully automated.

What location to choose – coastal cities or interior cities?

The technology ladder in China is likely to become increasingly more stratified, with a concentration of specific high-tech industries in particular cities within the coastal region, medium-tech industries in the central provinces and more traditional industries in the western provinces.

The municipal government of Shanghai recently announced that current development plans focus on five industrial sectors (ChinaOnline, 27 October 2000):

·         electronics, including integrated circuits, telecommunications, computers, digital audio and video products and software,

·         motor vehicles, including the design and production of motor cars, minivans and buses,

·         electrical equipment, including power generating and transmitting equipment, machinery for processing and assembling, automated equipment and electrical transport equipment,

·         quality steel products, including steel for motor vehicles, shipbuilding and stainless steel for appliances, and

·         chemicals, including petrochemicals and major synthetic components and products.

Other cities are likely to announce similar intentions of focusing on specific areas of industrial concentration.  This will not only act to attract investors who have a similar focus, it will also lead to a workforce that has the necessary skills.

What trends are noticeable?

During the first three quarters of this year, China’s Ministry of Foreign Trade and Economic Cooperation approved applications for direct investment from a total of 247 foreign enterprises. Among these, 223 are in the service, trade or processing industries.  They most probably would not be considered to be globally high tech. 

The remaining enterprises, nevertheless accounted for 22 per cent of the total approved investment, despite representing only 10 per cent of the number of applications. 

The coastal provinces have received the lion’s share of foreign direct investment in the past, and continue to be more successful.  The investment is nevertheless distributed among 160 counties and regions with large investment syndicates formed to finance development in the western provinces (ChinaOnline, 27 October and 30 October 2000).

When is the best time to invest?

China’s entry into the WTO is likely to occur early next year.  While it will be regarded as an important milestone in China’s economic development, there will be few, if any, overnight changes.  Many regulatory changes have already been made in line with WTO commitments.

For example, drafts for the revision of China’s major laws for Sino-foreign joint ventures and cooperative enterprises, as well as for wholly foreign-funded enterprises were submitted for deliberation to the 18th Session of the Standing Committee of the Ninth National People's Congress on 23 October 2000.  The previous regulations were developed during periods for which China’s foreign exchange reserves were relatively low, and required these types of enterprises to:

·         arrange an approximate balance between enterprise outlays in foreign currencies and enterprise income denominated in foreign currencies, and

·         purchase in China raw materials, fuel, parts and other materials or purchase them on the international market using the enterprises’ own foreign currencies.

Both of these regulations are to be abolished, thus removing the implicit instruction to conserve China’s foreign currency.

Similarly, foreign-funded enterprises were previously required to “be instrumental to the development of China's national economy and adopt advanced technology and equipment, or export all or most of their products".  To enforce this, the operational plan of the relevant enterprise was filed with “the departments in charge and executed through economic contracts”.  The revised regulations state only “that state encourages the establishment of foreign enterprises that export products or adopt advanced technology" and operational plans do not need to be filed.

China’s economic growth for this year is likely to be close to 8 per cent, and may be even higher in 2001.  There may have been good reasons in the past to postpone investment decisions, and some of these most probably remain.  But whatever those reasons were, there would seem to be fewer of them now.



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