1 U.S. Department of State FY 2001 Country Commercial Guide: China The Country Commercial Guide for China was prepared by U.S. Embassy Beijing and released by the Bureau of Economic and Business in July 2000 for Fiscal Year 2001. International Copyright, U.S. & Foreign Commercial Service and the U.S. Department of State, 2000. All rights reserved outside the United States. TABLE OF CONTENTS I. Executive Summary II. Economic Trends and Outlook A. Major Trends and Outlook B. Principal Growth Sectors C. Government Role in the Economy D. Infrastructure Investment III. Political Environment A. Brief Synopsis of Political System B. Political Issues Affecting Business Climate C. The Nature of Political Relations IV. Marketing U.S. Products and Services A. Distribution and Sales B. Selling Factors/Techniques C. Advertising and Trade Promotion D. Product Pricing and Customer Support E. Sales to the Government F. Intellectual Property Rights (IPR) Protection G. Local Professional Services H. Due diligence 2 V. Leading Sectors for U.S. Exports and Investment A. Best Prospects for Non-Agricultural Goods and Services Pharmaceuticals Medical Devises Insurance Franchising Telecommunications Equipment Computers and Peripherals Computer Software Cable Television Equipment Airport and Ground Support Equipment Pollution Control Equipment Machine Tools Plastic Materials & Resins Building Materials Power Generation Fine and Specialty Chemicals Agricultural Chemicals B. Best Prospects for Agricultural Goods and Services Grains Grass Seeds Oilseeds Poultry Meat Hides and Skins Snack Foods Fresh Fruits Beef and Pork Variety Meats Dairy Ingredients Seafood Forest Products VI. Trade Regulations and Standards A. Import Tariffs and Custom Regulations B. Trade Barriers C. Import Documentation D. U.S. Export Controls E. Chinese Export Controls F. Inspection Standards G. Labeling and Marking Requirements H. Special Import Provisions I. Prohibited Imports J. Customs Contact Information 3 VII. Investment Climate A. Openness to Foreign Investment B. Conversion and Transfer Policies C. Expropriation and Compensation D. Dispute Settlement E. Performance Requirements/Incentives F. Right to Private Ownership and Establishment G. Protection of Property Rights H. Transparency of the Regulatory System I. Capital Markets and Portfolio Investment J. Political Violence K. Corruption L. Bilateral Investment Agreements M. OPIC and other Investment Insurance Programs N. Labor O. Foreign Trade Zones/Free Ports P. Foreign Direct Investment in China and Major Investors Q. U.S. Embassy Survey of U.S. Investors VIII. Trade and Project Financing A. Banking System B. Foreign-Exchange Controls C. General Financing Availability D. Terms of Payment E. Insurance F. Project Financing IX. Business Travel Appendices: Economic and Trade Statistics A. Country Data and Domestic Economy B. Trade Data C. Investment Statistics D. U.S. and Country Contacts E. Market Research F. Trade Event Schedule 4 I. EXECUTIVE SUMMARY China is rich in contradictions for U.S. firms. The world’s most populous nation, China covers an area larger than the United States. Yet the China market is small and concentrated in a few areas along the eastern seaboard. China is one of the world’s oldest civilizations, with thousands of years of history, literature and culture. Yet the People’s Republic is a mere 50 years old and most of the laws and regulations governing business and trade have been written in the past twenty years. Cour- tesy toward guests is a virtue in Chinese culture, and Chinese people can be extraordinarily hospi- table and kind. Yet everyday discourse in China is rude and confrontational and the China market is full of cheats and swindlers. China is a communist country; the first article of the Chinese constitu- tion states that China is a socialist country under the leadership of proletariat. Yet, over the past twenty years China has moved from a planned to market economy and is now in many ways more capitalist than communist. Many of the stunning contradictions in China have been nurtured by the unprecedented changes of the past twenty years. Since the beginning of the policy of “reform and opening-up” in 1979, China’s economy has grown more than tenfold. Previously rationed goods such as bicycles, textiles and grains are now in over-supply. Foreign invested firms, practically non-existent in the 1970s, now number over 300,000 and account for almost 50% of China’s exports. Foreign trade has grown from $38 billion in 1980 to over $361 billion in 1999. Although most Chinese firms remain rela- tively small, under-capitalized and poorly managed, there are pockets of excellence in Chinese industry. Chinese firms have competed successfully with world leaders in the white goods and home electronics markets. Chinese PC manufacturers have won back market share from such firms as Compaq and IBM. These economic changes have brought relative prosperity to millions of Chinese, and that prosperity has been accompanied by a great expansion of personal liberties for the average Chinese. A burgeon- ing Chinese middle class lives in relatively comfortable flats fully equipped with the accoutrement enjoyed by most Westerners: refrigerator, TV, VCD player, stereo, air-conditioner. Such Chinese have enough disposable income to dress well, eat out when they want to and take trips to domestic tourist sites. Although personal cars and foreign travel are still relatively rare, the presence of these and other luxury goods and services in the media and in the lives of the members of China’s upper class create a latent demand. For over two hundred years foreign firms have been entranced by the enormous potential of the China market, a potential that remains largely unfulfilled. U.S. exports to China were only slightly more than $13 billion in 1999, only 2% of our global exports, and less than U.S. exports to China’s smaller neighbors such as South Korea ($23.0 billion) and Singapore ($16.2 billion), and even to Taiwan ($19.1 billion). U.S. firms are major investors in China and in 1998 actual U.S. investment in China rose to almost $4 billion, but this is still less than U.S. investments in the U.K. ($4.6 billion) or Mexico ($4.7 billion) and is only slightly more than what U.S. firms invested in South Korea ($3.1 billion). The cumulative U.S. direct investment in China is dwarfed by our investments in Europe, Japan and Latin America. 5 China is a market with vast potential. The trick is realizing that potential. China’s pending acces- sion to the World Trade Organization (WTO) will make it easier for U.S. firms to do this, but it is false to believe that WTO entry provides an end-all solution. Do your due diligence – twice. Oppor- tunities are available in China, but companies must pay heed to the many obstacles. This report can help identify both. Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank on CD-ROM or via the Internet. Please contact STAT-USA at 1-800-STAT-USA for more informa- tion. Country Commercial Guides can be accessed via the World Wide Web at HTTP:// WWW.STAT-USA.GOV, HTTP://WWW.State.Gov/, HTTP://WWW.MAC.DOC.GOV. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. Exporters seeking general export information/assistance and country- specific commercial information should contact the U.S. Department of Commerce, Trade Informa- tion Center by phone at 1-800-USA-TRADE or by fax at 202-482-4473. II. ECONOMIC TRENDS AND OUTLOOK A. Major Trends and Outlook China’s economy picked up some momentum in the first half of 2000, and consumer prices in- creased for the first time in over two years. The government expected GDP to grow by over 7% in real terms, compared with the previous year, when the growth rate was 7.1%. Growth in 1999 was already the lowest in the past eight years and would have been much lower without a two-year special spending program that stimulated the economy from mid-1998 to mid-1999. (Official fig- ures put out by the Chinese government are often inflated by incorrect, even exaggerated reporting from the provinces. They are generally acknowledged to reflect major trends.) Many analysts credit China for achieving a “soft landing” for its economy — bringing about stable growth with low inflation after earlier bouts of inflationary excess. Stringent monetary policies actually caused consumer price levels to decline in 1998 and 1999. But some economists worry that China may not be able to create the high levels of investment and profitability needed to resolve the structural problems that beset the nation’s state-owned sector, which has far too many workers and which includes huge state-owned banks that amassed a mountain of bad debt. Together with the chronic difficulty in finding employment for hundreds of millions of rural Chinese seeking a better life in the cities, these problems pose a serious long-term challenge. Little pressure to devalue the currency (renminbi — RMB) existed in mid-2000. A growing gap between relatively lower Chinese interest rates and generally higher overseas rates, however, caused many individuals and corporations to shift their bank balances in China. (Foreign exchange controls help prevent the kind of capital flight that plagued Mexico, Thailand and other countries in earlier periods.) China received international acclaim for maintaining the value of its currency during and following the Asian financial crisis in late 1997. Although some believe China will widen the band in which its currency trades, China continues to enjoy large trade and investment surpluses and has accumulated a war chest of $156 billion in official reserves, more than ample to defend the exchange rate. The government has stepped up its efforts to downsize many state-owned enterprises (SOEs), but 6 investment in the state-owned sector accounted for most new investment in 1998 and 1999.