Foreign Trade in China

Foreign Trade in China: How does an International Company successfully enter and establish foreign trade in China.

Today, the modern world is all about global integration and innovation, which is achieved through the exchange of ideas and services, people and goods. Broadly speaking we can outline three vehicles through which countries can integrate in economic terms with the rest of the world:

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§  Through the importing or exporting of technological and organizational innovations;

§  Through merchandise trade and the import and export of capital;

§  Through international migration.

The need is to reflect upon the development strategies adopted by large economies. After the 1950s, certain economies in Asia successively adopted an export-oriented development strategy, which has led to the rise of the so-called “four tigers” or “four dragons”. Large economies like China and India were largely encouraged by IMF and World Bank to apply the export-oriented strategy in developing the economy. This impacted the world economy with a completely different challenge for the whole world to cope with.

A news agency “http://www.pbc.gov.cn/english//detail.asp?col=6400&ID=572” says:

China has made tremendous efforts and has achieved remarkable progress. In late 2003, Bank of China and the China Construction Bank conducted a high degree renovation to restructure the financial processes, also including capital replenishment, writing-off of non-performing assets and joint-stock transformation. The same renewal process was also carried out in the Industrial and Commercial Bank of China in the first half of this year. According to the current statistics, three out of four state-owned commercial banks have undergone complete financial restructuring and also have implemented join-stock reform measures. In the year 2003, reform of the 30,000 rural credit cooperatives was initiated, and more than half of the work has been completed. Of course, banking reform will take a long period of time, and we cannot wait to start reforming the exchange rate regime until all banking reform measures have been completed. But most of the reform measures should have been put in place.

China’s commercial banking system comprises of four levels:-

§  Wholly state-owned commercial banks

§  Joint-stock commercial banks

§  City commercial banks

§  Rural banking institutions.

Out of these 70 to 80 percent of each level have basically completed reform and restructuring and have entered into a favorable development stage.

“By looking at the above flourishing conditions one should know the in outs of the policy of foreign trade in china to establish a company in China.”  – Governor Zhou Xiaochuan speech in Canada)

Some facts of China Import/Export

Source: – http://www.uscc.gov/hearings/2004hearings/written_testimonies/04_02_05wrts/terrystewartwrtest.htm

Aitken, B., G. H. Hanson, and A. Harrison (1997). ‘Spillovers, Foreign Investment, and Export Behavior’. Journal of International Economics, 43 (1): 103-32.

The U.S. trade deficit with China was $124.0 billion in 2003, a 20.3 percent increase over the $103.1 billion deficit in 2002. U.S. goods exports to China increased by 28.4 percent to $28.4 billion in 2003, compared to $22.1 billion in 2002, as China is currently the fastest growing export market for U.S. goods. Indeed, over the last three years, U.S. exports to China increased by 76 percent, while U.S. exports to the rest of the world decreased by 9 percent. U.S. imports from China increased by 21.7 percent to $152.4billion in 2003, compared to $125.2 billion in 2002. The pace of growth in U.S. exports to China has outstripped the growth in U.S. imports from China over the last three years; 76 percent to 52 percent.

U.S. exports of private commercial services (i.e., excluding military and government) to China were $6.1 billion in 2002 (latest data available), and U.S. imports were $4.1 billion. Sales of services in China by majority U.S.-owned affiliates were $2.6 billion in 2001 (latest data available), while sales of services in the United States by majority China-owned firms were $144 million.

The stock of U.S. foreign direct investment (FDI) in China in 2002 was $10.3 billion, down from $11.4 billion in 2001. U.S. FDI in China is concentrated in the manufacturing and mining sectors.

The three areas which continued to generate significant problems for China are:–

§  Agriculture

§  Intellectual property rights (IPR)

§  Services.

 The area of agriculture proved to be especially contentious between the China and United States. Serious problems were encountered on many fronts during the first two years of China’s WTO membership, particularly with regard to China’s regulation of agricultural goods made with biotechnology, the administration of China’s tariff-rate quota system for bulk agricultural commodities, and the application of sanitary and phytosanitary (SPS) measures and inspection requirements.

 In the IPR area, China has made significant improvements to its framework of laws and regulations, but the lack of effective IPR enforcement remains a major challenge. In addition, concerns arose in many services sectors, largely due to transparency problems, delays in the issuance of legislative measures, and China’s use of prudential and entry threshold requirements that exceeded international norms. Transparency concerns cut across sectors, and although China has made notable improvements in this area, China’s decision-making and regulatory processes largely continue to be opaque. While some ministries and agencies took steps to improve opportunities for public comment on draft laws and regulations, and to provide appropriate WTO enquiry points.

Recognizing that adjustments must be made to address fundamental issues of transparency more systemically, China’s leadership has instructed government to draft concrete reform proposals on a wide array of legal and policy issues to improve the transparency and efficiency of China’s market structure.

As the slowdown in China’s WTO implementation efforts, became evident in 2003, senior Administration officials stepped up and made huge efforts to engage senior Chinese leaders. U.S. Trade Representative Zoellick made two separate visits to China for talks on WTO implementation matters with Premier Wen and with Vice Premier Wu Yi. He also raised U.S. concerns throughout the year with his MOFCOM counterpart. The Secretaries of Commerce and Treasury made their own trips to China, again carrying the message that China’s WTO implementation was a matter of the highest priority. Sub-cabinet officials from various U.S. economic and trade agencies also met with their Chinese counterparts in China, Washington and Geneva to work through areas of concern, including WTO implementation issues, on numerous other occasions. The Administration also utilized the newly established sub-cabinet dialogue on WTO compliance and other trade matters, which brings together U.S. economic and trade agencies and various Chinese ministries and agencies with a role in China’s WTO implementation.

Although China has made remarkable transformation over the past quarter century, it still suffer from its command in economy legacy. As a result, Chinese economic policy-making operates in a way that prevents U.S. businesses from achieving their full potential in the China market.

China restricts the types and numbers of entities with the right to trade. Only those domestic and foreign firms with trading rights may import goods into or export goods out of China. Restrictions on the type and number of firms with trading rights contribute to systemic inefficiencies in the trading system and create substantial incentives to engage in smuggling and other corrupt practices.

In January 2004, China circulated a draft of a new Foreign Trade Law for comment. This new law is intended to institute an automatic trading rights system and bring China into full compliance with its WTO commitments on trading rights for all Chinese-foreign joint ventures, wholly foreign-owned enterprises and foreign individuals. The United States subsequently raised two concerns with this draft, and China indicated that it would make the changes sought by the United States. In connection with the run-up to the April 2004 meetings of the Joint Commission on Commerce and Trade (JCCT), to be hosted by Commerce Secretary Evans and U.S. Trade Representative Zoellick, the United States has sought assurances from China that it will issue any necessary implementing regulations swiftly after it finalizes the new law, so that China will be in a position to comply fully with its trading rights commitments by the December 11, 2004 deadline.

Under the terms of China’s WTO accession, the import of some goods such as grains, cotton, vegetable oils, petroleum, sugar, fertilizers, news publications and related products can still be reserved primarily for state trading enterprises. However, for grains, cotton, vegetable oils and fertilizers, China committed to making a portion of the tariff-rate quotas (ranging from 10 percent to 90 percent) available for import through non-state traders. In some cases, the percentage available to non-state traders increases each year.

Issues Related to the Reform of the Exchange Rate Regime

Source: –

Chan, K.-W., and Z. Li (1999). ‘The Hukou System and Rural-Urban Migration in China: Processes and Changes’. The China Quarterly, 160: 818-55.

Chen, J., and B. Fleisher (1996). ‘Regional Income Inequality and Economic Growth in China’. Journal of Comparative Economics, 22 (2): 141-64.

On July 21, 2005, the People’s Bank of China made an announcement on the reform of the RMB exchange rate regime. That was real surprise to the market at that time.

Chinese government is targeting all its pro-market economic reforms to be centered on making a socialist market economy in China. The exchange rate regime should be consistent with the market economic system. The currency should be convertible, with its price being able to reflect the relationship between supply and demand so as to meet requirements of a market economy with a relatively high degree of openness, and the exchange rate should be allowed to float. China will seek to establish and improve the managed floating exchange rate regime based on market supply and demand to keep the RMB exchange rate basically stable at an adaptive and equilibrium level.

Efforts are being made to realize RMB convertibility under capital account. This will be executed by lifting the restrictions on cross-border capital movements in a selective and step-by-step manner. Exchange rate reform and other financial reforms have attracted broad consensus.

The various milestones have to be achieved in the following areas before reforming the RMB exchange rate regime.

§  First, banking reform has to headway and the banking system has to be strengthened.

§  Second, steps have to be taken to remove the unwarranted controls on foreign exchange transactions, including those on certain capital account transactions.

§  Third, with deepened development of the foreign exchange market, domestic financial institutions and importers and exporters have to be able to operate in more favorable market environment and with more risk-hedging instruments.

Reform and restructuring have entered into a favorable development stage to achieve the above goals. In addition to above:

§  Some of the unwarranted controls over capital account transactions have been removed

§  The capital markets are now increasingly open to the outside world

§  Many restrictions on the current account transactions by the individuals and enterprises are now relaxed

§  Business scope and market entry have been further expanded

§  Improvement of financial market infrastructure has laid a sound foundation for the reform of the exchange rate regime.

Macroeconomic environment will also change due to the exchange rate reform. The Chinese economy is maintaining steady and fast growth; the investment sector has observed excessively rapid growth; the increase of CPI is moderate; the global economic performance is stable, with the interest rate of the US dollar rising steadily, which is also an important condition for the reform of the RMB exchange rate regime.

The principles and motives for the reform of the RMB exchange rate regime

Source: –

Boyreau-Debray, G., and S.-J. Wei (2005). ‘Pitfalls of a State-dominated Financial System: the case of China’. NBER Working Paper 11214. Cambridge, MA: National Bureau of Economic Research.

Brulhart, M. (1998). ‘Economic Geography Industry Location and Trade: the Evidence’. World Economy, 21 (6): 775-801.

The various reforms associated to RMB exchange rate regime must proceed in a proactive, controllable and gradual way.

“Proactive” means the reform mode; contents and timing must be based on the needs arising in the process of China’s domestic reform and development.

“Controllable “implies that Chinese must be able to control the changes brought by the reform of the RMB exchange rate regime at the macro level so that the reform momentum could progress steadily to avoid large fluctuations of the financial markets and the economy.

“Gradual” means the reform of the exchange rate regime must be carried forward in a gradual manner to ensure sufficient resilience of all the parties involved.

The way to strengthen the socialist market economic system of China is to reform the RMB exchange rate. It is consistent with the requirements put forward by the central government regarding establishing a managed floating exchange rate regime based on market supply and demand and further improving the RMB exchange rate system so as to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level. This development also boosts up the long-term interests and fundamentals of the country, thereby using a scientific approach to economic development.

Other factors which will boost up by reforming the RMB exchange rate regime are domestic demand; to ease external trade imbalance, strengthen competitiveness of the Chinese enterprises and upgrade the level of economic opening up.

By the various reforms in exchange rate, China is aiming to achieve an enhanced equilibrium of the balance of international payments through changes in relative prices, so as to provide more sustained support to the long-term growth of the economy.

The features of the new RMB exchange rate regime

The current figures show that after the various reforms, the RMB is now no longer pegged to the US dollar. Instead, now the RMB exchange rate is determined based on a certain major currencies selected with assigned weight. Market supply and demand situation is now the important factor to evaluate the managed floating exchange rates.

The role of the central bank in the new exchange rate system

The major role of the central bank in a managed floating exchange rate regime is to smooth the high degree fluctuations in amplitude and frequency of the abnormal movements including excessively large or too frequent changes. The role of the bank is adaptive in nature, so as to make the economy more resilient to shocks. The central bank has to do the risk management, should any emergencies arise, such as the outbreak of wars, natural disasters or financial crisis, the central bank may take special actions to intervene in the market.

Reform of China’s exchange rate regime, and the plans for next step reform

Since China strengthened its presence on the international market, it has been following a gradual approach to reform its strategies and reform methods about some deep core matters regarding the market changes. While on theater hand, other countries usually followed a “shock approach” and brought about fast track changes, as compared to China’s slow track. This slow change brought about a definite change in the exchange rate regime.

Fast reforms bring about changes that are not targeted while slow reforms brings about radical changes in the mindset of the people and tries to solve the core problem issue by changing and reforming the ideologies and the actions. The gradual process shift that China has undertaken has brought about a sensible fine-tuning of interest sharing in the alteration process. The results over the past 27 years have shown that the gradualist advance is a correct and victorious alternative for them, which has brought about significant changes within the economy. In future also, Chinese will go on to approve such an advancement to improve their economic reforms.

A specific business model to follow in order to be successful

 There is a specific model that based upon a co-venture with foreign companies. This model has been working well in China lately and has helped the Chinese industry to flourish with the help of this model. The basic aim of this model is to increase the communication of the Chinese market with that of the international market and slowly encourage the use of supply chain activities. The organizations develop and promote the networking model between cross cultures. These activities like supply chain management, resource procurement, and logistic activities help the people get to know more of each other and share more of professional experiences with each other.

Some of the companies that were a part of these strategies were IKEA, Esquel, Huntsman Textile, Rainbow Logistics, West True Dragon Transportation, Prologis, Newell Rubbermaid, COSCO Logistics, Effem Foods and Inventis. (Ref: www.coldchainchina.com)

 “By bringing industry leaders together, the China Supply Chain Council is facilitating this sharing of information that benefits not only the industry, but the individuals and companies that participate” said Max Henry, Executive Director. “Our expansion to Guanggdong region proves again that the Council lead the supply chain profession and it’s in perfect position to duplicate the success that we have had in Shanghai region!”

The model promotes the growth of supply chain management ideas by interconnecting the knowledge, skill and modern technology and people from across the world with those in China.

Definitely, the specific business model to increase the communication with the international market will face some challenges. However, these challenges will easily be overcome, if once there exists a complete harmony between the two interacting companies.

Here listed are some perfect examples of Chinese and international collaboration.

      Bayer Polymers (Shanghai) Company Ltd Caojing polycarbonates plant

      China Petrochemical International Urumqi paraxylene facility

      Energy Development Corp. (EDC) Cheng Dao Xi oilfield development

      Hong Kong & China Gas Co Ltd Hong Kong gas reforming plant

      Ineos Chlor Shengda chlor-alkali plant

      PetroChina Dushanzi Petrochemical Project

      Phillips Petroleum Xijiang XJ-24-3 and XJ-30-2

      Shanghai Municipal Gas Company Shanghai town gas plant

      Shanghai Secco Petroleum Company Ltd Secco ethylene plant

      Shenhua Ningxia Coal Industry Group Ningxia coal-based propylene plant

       Sinopec Luoyang Petrochemical Complex etc. (Ref. Amec.com)

Apart from the intercommunication skills, it is also important for the companies to manage the human resources. There should be special HR management programs to cultivate the Human Resource skill amongst mangers. The aim of these managers should be to bring about perfect co-ordination with the different cultural work forces within an organization.

Conclusion

About two to three decades ago china was predominantly a closed economy. But analyzing the international trade volume, china thought that she had a role to play, so she started preparing ground for entering into international trade in a big way. Chinese manufacturing units with the help of advanced technological threshold produced goods on a large scale for their consumption by other developed and developing economies. In return china got foreign exchange thus bargaining power of people increased apart from domestic goods they preferred foreign goods. As Chinese population is large, she required large volumes of goods to be imported, which led foreign companies to think of establishing businesses to have trade with the Chinese. As China is a member of WTO, thus, bound by its agenda, therefore she had to open her domestic markets for foreign companies under pressure of other developed nations. But china besides opening up the markets levied several obstacles/ barriers for foreign trade companies to enter Chinese territory.

Under present day business, environment China is forced to open up her domestics markets for foreign companies with an open heart and with fewer obstacles, which she is doing in a gradualist approach.

References

Amiti, M. (1999). ‘Specialization Patterns in Europe’. Weltwirtschaftliches Archiv, 135: 1-21.

Bai, C.-E., Y. Du, Z. Tao, and S. Y. Tong (2004). ‘Local Protectionism and Regional Specialization: Evidence from China’s Industries’. Journal of International Economics, 63: 397-417.

Clerides, S. K., S. Lauch, and J. R. Tybout (1998). ‘Is Learning by Exporting Important? Micro-dynamic Evidence from Colombia, Mexico, and Morocco’. Quarterly Journal of Economics, 113 (3): 903-47.

http://books.google.com/books?

http://links.jstor.org/sici

http://www.pbc.gov.cn/english//

http://www.ingentaconnect.com/

http://www.supplychain.cn/en/cms/

http://www.ln.edu.hk/econ /staff/yuema/Chn_IIT6.pdf

 

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