The Australia-China Chamber of Commerce and Industry of New South Wales
AUSTRALIA-CHINA TRADE & INVESTMENT TRENDS IN THE NEXT 10 YEARS 2001-2010
American Chamber of Commerce in China
2001 White Paper American Business in China
Analysis of Recommendations and Implications for Australian Business
24th May 2001
T & I Investment Centre Theatrette
225 George Street
Australia-China Chamber of Commerce and Industry of New South
In the process of assembling the information, we discovered a White Paper by the American Chamber of Commerce in China (referred to as AmCham-China), which we thought was important enough to bring to the attention of China-interested companies in Australia.
The White Paper was written mainly for government authorities in China. It does so by listing recommendations made by American companies to improve business relations in China.
The White Paper is an 82-page document and represents a “massive undertaking involving dozens of people from a wide range of professional backgrounds but with a common desire to achieve a healthy, world-class, and stable business environment”.
The many chapters of the report were written separately by various individuals from AmCham-China membership and then circulated among industry experts to ensure a consensus that fairly represents member companies.
The compiled results were reviewed and edited by AmCham-China’s Public Policy Development Committee, the members of whom are volunteers. After the committee’s review process, the manuscripts were re-edited for both format and style by AmCham-China’s director of communications.
The document was then translated into Chinese, checked by volunteer bilingual reviewers and, when approved by AmCham-China’s manager of Chinese public affairs, was submitted to the Chinese authorities.
This entire process is somewhat daunting for other bilateral chambers. The Americans obviously have far more resources available to them, and proceed in much more organised way, than the rest of us are able to contemplate.
It is unlikely that any
China-related organisation in Australia would consider undertaking a similar
process, but we should definitely note it and try to build upon it for our
own purposes. It is therefore the
focus of this session.
In the reference section of ChinaOnline’s Internet site (http://www.chinaonline.com), listings are given for 55 China-related organisations and business councils. Australia has five:
The Australia China Business Council (ACBC)
The Australia China Chamber of Commerce and
Australia Taiwan Business Council
Chamber of Commerce and Industry of Western
Ø Queensland Chamber of Commerce and Industry
Obviously not all of these exist exclusively for Australia-China business relations, but all have apparently expressed a major interest in China.
Among the Australian listings, only the ACBC has an Internet site, http://www.acbc.com.au, though all of the others have e-mail addresses.
The ACBC’s Web documents consist mainly of the China Update, which is a national newsletter. The current issue is Vol. 5, No. 2, April-May 2001. It contains:
A letter from the national president
“China Now”, which is a short note about China and
“China’s New Customs Law”
Ø “China Roundup”, which is a summary of news appearing (mainly) in People’s Daily
“Trade Fairs and Exhibitions”
Ø “Job Minimarket”
Some links to other Internet sites are included, as well as answers to frequently asked questions.
The Canada China Business Council (CCBC) is located in Toronto and Vancouver, and was incorporated in 1978 to facilitate and promote trade and investment between Canada and China. The Internet site http://www.ccbc.com states that its mandate includes the following:
to stimulate and support trade in goods
and services, investment and technology transfer;
to achieve greater economic growth and
a closer relationship between Canada and China;
to provide practical and focused
assistance to business;
Ø to be the voice of the Canadian business community on matters of Canada-China relations, both to government and to the public at large.
The CCBC provides market information, business and logistical support and services, and potential project leads to its members.
The China Britain Business Council (CBBC) provides initial China business advice to any British company free of charge. Members have access to a range of services, some of which are exclusive and are either free of charge or at valuable discounted rates. Some services are available to non-member companies on a pay as you go basis. The services include the following categories:
Assessing the Market
Ø free advice
Ø China business library
Ø customised market
Ø CBBC publications: China-Britain Trade Review and Ying Zhong Wei Lei
Entering the Market
trade missions, seminars and exhibitions
CBBC’s china offices
Ø CBBC's launchpad scheme
Maintaining a Successful Strategy
seminars and briefings
VIP events and trade delegations
lobbying for British business interests
Ø cross-governmental and industry sector projects
The CCBC library consists mainly of embassy reports, brochures and projects for a variety of provinces and cities in China. Its Internet site is http://www.cbbc.org.
The US-China Business Council (USCBC) is separate from AmCham-China, with its main office in Washington, DC, and representative offices in Beijing and Shanghai. Its Internet site is http://www.uschina.org and USCBC is similar to the ACBC, CCBC and CBBC in purpose and function. That is, it provides information and services for businesses located in the US to enter the Chinese market.
AmCham-China (http://www.amcham-china.org.cn) and other chambers of commerce in China, such as the China Australia Chamber of Commerce (AustCham), have member companies that are located in China. Therefore, the first two categories listed by the CCBC (assessing the market and entering the market) are not relevant. AmCham-China members have already ‘assessed and entered’.
other similar organisations, act as representative bodies for their members
and convey whatever is necessary to fulfil that representation.
China’s WTO accession will benefit China because it will help advance China’s reform and development, improve the quality and reduce the cost of goods and services, spur investment and the creation of new jobs, and promote the rule of law. It will benefit foreign companies because it will foster a more transparent and predictable business environment and dramatically expand market access for our goods, services, and farm products. It will also make Taiwan’s immediate accession to the WTO politically possible.
AmCham-China nevertheless recognised that “given the breadth and depth of the numerous specific commitments made by China during the negotiation process, full compliance will not be easy and will not be achieved overnight”. The document is therefore intended partly to point to specific areas where improvement is needed.
The biggest problem China faces after WTO accession is maintaining employment and family incomes at socially responsible levels. “Should this prove to be difficult, there is a risk that China will defer on the timetable for WTO commitments”.
Exploitation of loopholes in the agreement is a concern, but this must be viewed in terms of the following:
Legitimate exploitation of loopholes versus
aggressive interpretations of ambiguities.
Delays or incomplete compliance arising from
practical difficulties following good-faith efforts for compliance versus
blatant disregard for clearly defined obligations.
Ø Delays or incomplete compliance arising from inadequate resources versus unwillingness to seek solutions through procedural changes and innovative resource allocations.
The document cautions member companies not to rely excessively on WTO dispute resolution machinery, but to apply due diligence when contemplating specific transactions and to explore more immediate forms of conflict resolution.
US businesses were optimistic about their China operations. Ninety-one percent of 160 respondents to a membership questionnaire conducted by AmCham-China in 2000 said they were either cautiously optimistic or optimistic about their business outlook for the next five years; 8 percent were neutral, leaving only 1 percent pessimistic.
AmCham-China members anticipate reduced tariffs, better distribution channels, more impartial, objective tendering practices, stronger legal protection of intellectual property, improved ownership structures, and more international-standard accounting and business practices in China.
Tempering this positive outlook is the realisation that the structural and process-oriented changes that Chinese institutions must undergo to meet WTO standards will not be easy to implement, despite the government’s strong commitment to do so.
While a number of the recommendations made by AmCham-China to the Chinese Government are noteworthy, some convey a desire to create in China the type of business-government relations that closely resemble those in the US. It is of course not surprising that US companies in China would seek a business environment with which they have already gained experience and have a proven track record in succeeding.
Among the international
practices that AmCham-China members most wish to see implemented is
transparency in government. Broadly
defined, transparency would include: allowing business and other interested
parties to comment on draft laws and regulations before they are finalised;
making public all laws and regulations in full detail; and making public the
reasoning used in later interpreting these laws and regulations.
On the one hand, the rapid development of the legal system, a high rate of economic growth, and rapid social change are welcome. On the other hand, the government is forced to respond rapidly to changing situations. It often does so pragmatically, to deal with short-term needs, and without good co-ordination among different agencies and levels of government.
This situation is exacerbated by the prevalence of local protectionism, local regulations or practices inconsistent with national law or policy, and the inability of the central government to enforce uniformly its policies.
Since China does not have a federal system, the central government has very few employees in localities and is dependent on successive layers of provincial and local government and party organisations to carry out its directives.
As a result, there are very few truly national markets but rather an assortment of local markets regarding each other suspiciously.
For firms willing to operate in legal or regulatory grey areas, local flexibility may provide advantages in terms of special incentives or technically improper approvals to enter restricted businesses. There is always the risk of being caught in a crackdown, but if the return on investment is quick, some may take chances.
For companies in capital-intensive or technology-intensive industries making large investment and facing long payback periods, including most US companies, the lack of nationwide consistency and the varying characteristics of local markets are severe constraints.
Most observers of macroeconomic policy agree that capital controls helped protect China during the Asian financial crisis. Those managing businesses, however, are aware that the necessity to distinguish capital account transactions (dividends, debt repayments, investment) from trade transactions (purchase or sale of goods and services) in order to restrict and regulate the former leads to cumbersome and complex regulations hindering the flow of goods and services across the Chinese border.
Among the problems often noted are:
- Import prepayment is limited to 20 percent of order value. This means that companies cannot use ‘wire transfers before shipment’ for urgently needed import items, though these terms are frequently used on export orders. This restriction causes delivery delays, as companies have to wait for the processing of letters of credit.
- Import invoices must be paid within 90 days after customs clearance. After 90 days, it becomes extremely difficult to apply for foreign exchange to make the payment. This causes cash flow and cost problems to customers, mostly Chinese companies, and makes them non-competitive. Frequently, overseas suppliers are willing to accept terms longer than 90 days.
- Chinese-standard import contract forms must be used for all import orders. For imports, a simple purchase order is the normal international practice, but companies are required to use the Chinese-standard import contract form for all import orders, which is in fact a foreign exchange requirement instead of a commercial requirement. Without the standard contract, companies cannot get approval for foreign exchange to pay invoices. This practice is not appropriate for inter-company purchases from foreign investors’ overseas affiliates, as it adds to the cost but brings no benefit.
- Accounts cannot be settled with foreign partners or investors by offsets. Consider an example where a foreign company owes a Chinese company US$100,000 for goods and the Chinese company owes the foreign company US$75,000. The international standard of settlement allows the foreign company to make cash payment of US$25,000 and issue credit to the Chinese company for US$75,000. But this is not allowed in China because the customs verification sheet for export of US$75,000 in goods cannot be reconciled with US$25,000 payment. This system is inefficient and adds cost to the transaction.
- It is difficult to get foreign exchange to pay for services. Invoices for overseas services do not have customs stamps on them; therefore, it is very difficult for the recipient firm to obtain foreign currency to pay for such services.
above, these controls are mainly for protection against the use of trading
accounts to shift funds into and out of China for non-trading purposes. The controls are nevertheless
administratively complex, difficult to administer, expensive, and frequently
provides the occasion for corruption.
It is important to balance the benefits of specific control measures
against the costs of such controls, and to strive continually to make them as
efficient as possible.
Specific schedules for the elimination of such restrictions vary, but many are to become effective within three years of accession and most within five years. The opening of the sales, service, and distribution sectors to direct foreign participation is a critical element in greater market access that will be enjoyed by foreign companies in the China market under the provisions of WTO.
AmCham-China recommended further liberalisation of the retail sector, including the following:
Allow foreign retailers to import finished goods and
sell them directly to Chinese consumers.
Grant retailers one national license that is
applicable to all regions and cities, eliminating all other retail licensing
Allow reasonable royalty payments to foreign retail
Commit to enforcement of hygiene requirements and
other permits on an equal basis for domestic and foreign retailers.
Ø Permit direct-selling operations and allow companies to compensate distributors for services provided to the company with incomes from product sales, and prohibit pyramid schemes, distinguishing the two under the law.
Despite the recent growth and increased professionalism of the legal profession and improved competence of the judiciary in certain localities, many observers believe that lack of progress on other important fronts has outweighed the effect of those advances in the short-term.
Improvements in transparency during the past few years are reported to be minimal. To be transparent, laws must be publicly available, objective, and unambiguous. In the haste to comply with global standards the government has issued regulations that are vague, contain subjective standards, and even explicitly require further approval or input from governmental authorities for their interpretation. In many instances this occurred without the criteria for such approval ever being made public.
While the government has made greater efforts to create an appearance of transparency, in fact unpublicised internal guidelines or personal relationships continue to determine the ultimate meaning of published regulations and, hence, which activities are permitted or not.
Inconsistent enforcement of contracts and laws continues to limit further increases in foreign investment. While the quality of judges in major metropolitan areas has improved, the quality of the courts in the provinces continues to be a problem.
Specific recommendations include the following:
Establish a mechanism similar to the Federal
Register in the United States to publish draft laws and regulations.
Open the drafting process of new laws and
regulations, providing industry and affected parties the opportunity to
comment at a meaningful stage prior to promulgation. Establish an appeals process where public
opposition to draft laws and regulations can be heard. An open process will improve the clarity,
practicality, and enforceability of new laws and regulations.
Give adequate advance public notice before a new law
goes into effect or an existing law will be implemented.
Strive to make regulations and regulatory guidance
issued by all government agencies objective and unambiguous. To a much greater extent than exists
today, regulations should be specific and not subject to broad and subjective
interpretation by the agencies and ministries that wrote them.
Publish internal standards or eliminate them.
Provide private rights of action as a means of
redress for individuals or entities that believe they have been treated by
government agencies in an illegal way.
Such complaints should be heard by independent, competent judiciary
(in the best case scenario) or at least by qualified administrative panels
specially created to hear such cases without interference from the government
department under complaint.
Rotate judges to help insulate them from local
Provide better pay for prosecutors and judges while
taking stronger punitive action where corruption is found.
Ensure enforcement of court judgments when the local
public security bureau does not execute a court judgment.
Establish independent working groups at provincial
and central levels to monitor and supervise enforcement.
Ø Establish a national codification system for all laws and circulars; increase efforts to publish new circulars for immediate access to the public; post all circulars on a consolidated government website.
In the International Institute for Management Development’s World Competitiveness Yearbook, China's ranking actually slipped from its 1999 position. The main reasons cited included the recent brain drain (only one-third of Chinese students studying abroad return) and a lack of training that produces technologically skilled people who can also think creatively and have good people-management skills.
The good news is that investments continue to pour in from foreign and private Chinese sources. China approved 7,433 new foreign investment companies between January and April of 2001, which is an increase of 23 per cent from the same period in 2000.
Contracted investment totalled US$20.25 billion, which represents an increase of 38 per cent from the same period in 2000, and actually used foreign investment was US$10.95 billion, increasing 12.4 percent over the same period in 2000.
This inflow of capital will support the continued development of Chinese organisations and talent, and add to the pool of qualified personnel in China.
Other progress includes the following:
easier access to the labour market with the rollout
of the Internet throughout China including Web-based recruiting services and
more flexible handling of personnel files transfers between localities
more trained engineers and scientists, making it
easier to staff research and development centers in China
improved banking infrastructure allowing more efficient
handling of payroll and statutory benefits
loosening of regulations allowing PRC staff to
participate in stock option schemes as well as variable pay schemes
Ø improved professionalism of labour agencies and bureaus in large cities.
Allow companies entering joint ventures to take only people they need to operate on a profitable basis.
Eliminate lifetime employment requirements.
Clarify and update regulations controlling how redundancy may be implemented and severance payments calculated.
Clarify and relax current regulations regarding foreign stock ownership, including stock options, by PRC nationals
Continue efforts to monitor and better control:
co-operation of local public security support at
the scene of labour unrest on the premises of foreign businesses
the security of employee balances in pension
compliance with safety regulations
consistent enforcement of laws in all types of
Certify skills in audit and control functions.
Continue and increase support for modern management programs in China.
Systematically review and update both national and local labor regulations to better meet the needs of companies doing business in China today.
Standardise and streamline the administration of labor and benefits laws at all levels--national, provincial, district, and city.
Standardise the labour benefits law across the nation and make pension, medical, and housing benefits more transparent and open to private or individual employee channels
Announce in November the dates of national holidays for the coming year.
Structure a flexible program that
would allow certified private companies to manage employee pension and
housing accounts or allow the employees to manage their own accounts.
intellectual property rights
safety and quality standards
venture capital investment
Ø chambers of commerce registration
Specifically, AmCham-China believes that unilateral economic sanctions imposed for political reasons are ineffective. They disadvantage US exporters vis-à-vis other competitors abroad whose governments provide extensive financial and other support.
After more than a decade-and-a-half of negotiations, the United States and China achieved a market access agreement in support of China’s WTO accession. In order to take advantage of China's market opening, US companies should enjoy the full support of relevant US export promotion and finance programs.
Prior to 1989, the US Trade and Development Agency (TDA) and the Overseas Private Investment Corporation helped US firms, particularly small and medium-sized ones, take advantage of commercial opportunities in China.
TDA generated US$467 million in downstream exports of US goods and services during the period in which it operated in China. With the support of these government programs, US firms were able to provide equipment, technology, know-how, and investment that helped China enhance infrastructure development.
To further restrict US firms'
export of dual-use technology to China without a corresponding commitment
from our multilateral trading partners forces US companies to cede the
playing field to other nations. Other
governments’ restrictions on their firms’ export activities often are not as
stringent as those of the United States, which maintains the most restrictive
export control policies of China's major trading partners.
Agriculture, food and beverages
The AmCham-China document nevertheless provides additional, practical detail concerning these changes. They also serve to highlight the potential problems that newly established, foreign-funded enterprises may encounter.
Similarly, the fact that many of the listed changes are necessary to China’s more complete opening to the outside world is already known to Chinese officials. However, the tendency for those officials to concentrate on their individual area of responsibility most probably means that few, if any, have a working knowledge of the full range of desired changes.
Many of the industry-specific recommendations are new and have generally been missed from the more broadly based changes that have emerged from the multilateral organisations such as the World Bank, International Monetary Fund and the Asian Development Bank. These recommendations rarely, if ever, get factored into bilateral support programs.
This is an important contribution since the broader programs will be less effective if they fail to alter, in a significant way, the cost structure of enterprises in China. This often occurs when economic reforms are planned and implemented in a “top down” manner. Input and feedback from enterprises is essential.
Perhaps the greatest
contribution of AmCham-China is to signal a willingness of their members to
participate in this “input and feedback” process. That willingness should also be conveyed by Australian
enterprises in China.
Table 1: Ratio of Merchandise Exports to Gross Domestic Product
Perhaps of greater importance, Australia’s world ranking as a trading nation is steadily increasing. Treating European Union nations as a single unit, and including only extra-EU trade, Australia ranked 13th in terms of total trade in 1999 (see Table 2).
Table 2: Exports, Imports and Total Trade by Value (in US$ billions) and Share – 1999
That contribution to world trade yields us less influence that that of the United States and Japan, and the gap is substantial. The US remains one of China’s important export destinations, accounting for 21 per cent of China’s exports. If re-exports from Hong Kong are included, the US market will make up roughly 40 per cent of China’s exports.
The Japanese market accounts for 17 per cent of China’s exports. The two markets combined receive more than half of China’s exports. Relative positions change with changing economic conditions. The growth of China’s exports to the United States fell by 46 percent in the first quarter of 2001, compared to the same period in 2000, while growth in exports to Japan declined 8 percent. This was due almost entirely to the slowdown in the US and Japanese economies.
China continues to recognise the importance of a diversification in trading activities in order to avoid excessive exposure to such downturns. In this sense, Australia’s influence is greater than its normal market share.
China also recognises contributions made by various trading partners for the adjustments that the Chinese require for timely and effective compliance to WTO rules. The Department of Foreign Affairs and Trade, AusAID and other Australian government departments that participate in China programs have made significant contributions. The Australian business community has contributed little, especially in comparison with American companies.
There may have been good reasons for this in the immediate post-World War II period, but it is difficult to accept the same reasons now.
There are many ways in which
Australian enterprises can contribute and we leave this to a discussion
during the seminar. We also leave
open the possibility of a follow-up summary being released after the seminar.