Financial Times - November 16, 1999
CHINA/WTO: Foreign investors see safer future By James Kynge in Beijing and Andrew Hill in New York
Foreign investors yesterday said the detail and implementation of the market access deal between China and the US would be crucial.
In the absence of a clear and transparent legal framework, foreign investors in China have often had to adopt a "toe-in-the-water" approach. Under this homespun strategy, foreign businesses would drop a small amount of money into a project, wait, and if the authorities did not close them down - invest some more.
But with the bilateral trade agreement signed yesterday, such improvisation may gradually become a thing of the past, consultants said. "This agreement will introduce a greater degree of comfort for businesses in China," said Peter Batey, chairman of Batey Burn, an international business consultancy with 15 years experience in China.
While the agreement was unlikely to lead to an immediate surge in foreign investment, it could attract significant capital in sectors where foreign investment has been difficult or prohibited.
Foremost among these were telecommunications, distribution, wholesaling and logistics, Mr Batey said. The green light that the WTO deal provides for foreigners to conduct their own distribution for the first time may also help attract investment in some industrial sectors, consultants said.
David Miller, president of the Toy Manufacturers of America, said improved distribution would allow toy companies with a strong manufacturing presence to sell more into the growing Chinese market.
General Electric, the US conglomerate that has been investing heavily in Asia, said it hoped the agreement would lead to the development of a "strong, transparent market economy in China".
Among the biggest beneficiaries of yesterday's deal will be foreign media and telecoms companies with plans to invest in China's booming telecoms, internet and e-commerce markets.
The agreement signed yesterday stipulates that foreign companies may take a 49 per cent stake in Chinese telecoms service companies a classification that appears to include internet companies - from the date of China's entry to the WTO. This would rise to 50 per cent in two years' time.
Internet use in China has grown exponentially from a small base. There were around 4.2m users in July and many industry analysts predict around 10m users by the end of this year.
Production quotas that authorities are planning to impose on foreign manufacturers of mobile phones will also be incompatible with a WTO accord, analysts said.
Robert Mao, president of Nortel Networks China, said he expected the agreement would boost sales of telecoms equipment by foreign companies in the $7bn Chinese market, now among the biggest in the world.
Financial services companies will also benefit from Beijing's commitment to allow foreign investors to expand business in China. Dan Zielinski of the Washington-based American Insurance Association, said: "Implementation phases of such agreements are often a struggle, but we have to take this one step at a time - and this is a very large step."
Liberalisation may be a double-edged sword for some companies. Foreign oil companies already established in China could also be hampered by rules to restrict expansion of gasoline service stations to 30 in the three years after WTO entry.
US textile manufacturers have warned that China's entry into the WTO would cost 150,000 US jobs.
Delos Smith, senior business analyst at the Conference Board, the business-financed research group in New York, said: "Overall, business wants this very badly - if you are in electronic infrastructure, or any infrastructure sector, for example, this is a dream for you. But a lot of local political reaction may be against it."
The deal may also be a mixed blessing for car manufacturers that have invested in Chinese manufacturing facilities. They will lose the protection against new entrants that high tariffs offered.
Jean-Martin Folz, chairman of the managing board at PSA Peugeot Citroen was concerned over the impact that cutting car import tariffs from 80-100 per cent to 25 per cent in 2006 would have on the company's joint venture manufacturer in Wuhan, central China.
"The present situation is fragile and brutal regulations [under WTO] would certainly be very disruptive to our project and to others also," said Mr Folz last week.
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Deal puts economic reforms back on track By James Kynge in Beijing
Yesterday's agreement between the US and China on Beijing's accession to the World Trade Organisation was primarily a triumph for Jiang Zemin, the president.
His daring move could also be the defining moment of his presidency. His legacy may largely be composed of assessments on whether China was ready to meet the far-reaching commitments of WTO entry or whether the jolts to the country's economic and political systems precipitated by WTO membership were too harsh to bear.
More immediately, the deal represented the culmination of months of often unseen but deft political manoeuvring by Mr Jiang.
Opposition to joining the WTO among government ministries and state entrepreneurs surged following an unsuccessful attempt by Zhu Rongji, the reformist premier, to win a deal during a visit to Washington in April.
Domestic opinion was particularly outraged after a list of the generous concessions purportedly offered by Mr Zhu to the US was published on the internet by the US administration.
"Mr Jiang had to allow people's anger to be vented. He had to make many concessions to the conservatives during the summer and keep Mr Zhu out of the limelight," said one Chinese ministry official. "Now this agreement will help to bring Mr Zhu in from the cold," the official said.
There was no question that Mr Zhu's prestige was badly damaged by his failed WTO bid in April, and then subsequently by Nato's bombing of the Chinese embassy in Belgrade, which allowed his opponents to portray his WTO offer as capitulation to a foreign enemy.
He has barely figured in the public accounts of several top-level meetings on economic policy issues. But now, analysts said, the WTO deal has returned Mr Zhu's reform agenda to centre of Chinese politics. China's no-nonsense premier is also set to stage a gradual comeback. "WTO is the lock-in to Chinese reforms," said Stephen Roach, chief economist at Morgan Stanley Dean Witter.
"The achievement of market-opening initiatives [required under WTO] could probably not occur without the economic reforms that lies at the heart of premier Zhu Rongji's aggressive campaign of transitioning China to a market-based system," Mr Roach added.
Conservatives such as Wu Jichuan, the minister of information industry, who has imposed one restriction after another on foreign participation in China's telecoms and internet market this summer, are expected to become a less potent force in future policy making, analysts said.
Several months of drift in the reform of China's state owned enterprises, which still employ some 60 per cent of urban workers, may now be at an end. "This agreement will mean that state-owned enterprises can no longer go on drinking the government's milk. They will have to be weaned now," said Shen Jiru, director of the institute of world economics and politics at the Chinese Academy of Social Sciences, a top government think-tank.
Government economists said that Beijing would redouble efforts to reduce excess capacity in oversupplied industries, and divert investment into those sectors where demand still outpaced supply. Such a strategy was expected to lead to a continued slowdown in the growth of industrial output, which climbed 7 per cent in October compared with the same month a year earlier. This followed the 8.1 per cent growth recorded in September and 9.5 per cent in August.
Fixed asset investment, which last year was a key contributor to China's 7.8 per cent gross domestic product growth, was also expected to remain relatively depressed as the government focused on withdrawing excess capacity.
The reduction of capacity and a slowdown in fixed asset investment is not expected to alleviate deflation, China's greatest economic ill, in the short term, economists said.
Prices are expected to come under further pressure next year as some import tariff reductions start to take effect, analysts said. The prices of many key commodities in China, including most agricultural produce and some petrochemicals, are already higher than on the international market. Increased competition from cheaper imports may spur more price wars within China.
This could rekindle arguments among some economists for a devaluation of the renminbi, China's currency, economists said. But if exports hold up and the trade surplus continues to grow at a healthy rate, such arguments may have limited appeal among Beijing policymakers. "With investor confidence expected to rise in the wake of a deal, foreign direct investment could increase steadily to close to $100bn per year by 2005," said Roger Scher, head of Asian sovereign ratings at Duff and Phelps Credit Rating Co. in New York.
But in the short term, said Mr Shen, there will be considerable pain as the number of redundancies from inefficient enterprises increases and divisions between the rich and poor yawn wider.
If such stresses lead to social instability, the euphoria among China's leaders over yesterday's deal could give way to a more sober assessment of the WTO's promise.