Country Commercial Guide FY 1999: People's Republic of China Report prepared by the U.S. Embassy, Beijing, People's Republic of China Released August 1998. International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U. S. Copyright Law, Title 17, United States Code. This is an official U.S. Government source for information on the WWW. Inclusion of non-U.S. Government links does not imply endorsement of contents. Country Commercial Guide FY 1999: People's Republic of China Report prepared by the U.S. Embassy, Beijing, People's Republic of China Released August 1998. Table of Contents Chapter I -- Executive Summary Chapter II -- Economic Trends and Outlook Chapter III -- Political Environment Chapter IV -- Marketing U.S. Products and Services Chapter V -- Leading Sectors for U.S. Exports and Investment Chapter VI -- Trade Regulations and Standards Chapter VII -- Investment Climate Chapter VIII -- Trade and Project Financing Chapter IX -- Business Travel Chapter X -- Economic and Trade Statistics Chapter XI -- U.S. and Country Contacts I. EXECUTIVE SUMMARY While China's economy had been growing at 9 percent a year over the past 10 years, a slower economic growth is projected for 1998, perhaps below 7 percent, due to domestic economic factors and the regional economic crisis. However, with 1.3 billion people China remains a market with great potential for U.S. exporters. U.S. exports to China grew a meager two percent in 1996, but increased by 6.9 percent in 1997. The strongest growth in U.S. exports to China was in the services sector which showed a positive trade balance in 1997 of $1.1 billion. In spite of this, China remains an extremely difficult market with significant barriers to sales by U.S. firms. While U.S. exports to China grew, China's exports to the U.S. grew even faster. The 1997 U.S. trade deficit with China grew by $10.2 billion to almost $50 billion, a fifty percent increase since 1995. The Chinese government will attempt to both increase exports and domestic consumption to mitigate the slowdown in the near term. Large infrastructure spending programs are planned to absorb some of the layed off workers which will result from reform efforts and the slowdown. Actual U.S. investment in China has grown every year since 1992, to reach a total of $14.1 billion, which makes the U.S. the largest "overseas" investor in China (although Hong Kong and Taiwan businesspeople are still by far the leading "foreign" investors in China). Increased U.S. investment in China and continual market openings by the Chinese government suggest greater U.S. exports to China in the future. Throughout 1998, however, China will be experiencing some of the fallout from the Asian economic crisis which is expected to slow growth. U.S. exporters and businesspeople looking to enter the China market must balance the tremendous potential of the market against the daunting barriers to success. U.S. firms can and have succeeded in the China market, but success is often slow and difficult. Firms attracted to the long-term potential of this vast country must pay attention to the basics of producing, distributing and marketing a successful product. The economic growth that China has seen over the past two decades has brought great opportunities in its wake. China's unmet infrastructural needs are staggering. Foreign capital, expertise and equipment will have to be brought in if China is to build all the ports, roads, bridges, airports, power plants, telecommunications networks and rail lines that it needs. Although the majority of China's 1.3 billion people remain poor peasants who live in an almost subsistence economy, China's urban population has reached the point where the middle class can afford consumer goods such as televisions, stereos, portable telephones and even a family car. Moreover China has a growing upper class that can afford the accouterments of the upper class -- luxury homes, designer clothes, expensive cars, foreign vacations and fine foods. There are opportunities for foreign firms in almost every sector of the economy, from providing expertise and equipment to meet China's infrastructural needs, through supplying industrial equipment and supplies to China's booming industries, to retailing consumer goods and services to China's burgeoning middle class. But the Chinese market has barriers and bottlenecks that make it extremely difficult for foreign firms to realize the vast potential of the market. Although communist economic ideals are clearly gone from the scene, China is not a capitalist society. Capital is still controlled -- though no longer wholly generated -- by the State. More importantly for U.S. businesspeople, China's economic planners, although they no longer attempt to control the pricing and distribution of goods through a detailed central plan, still reserve for themselves a leading role in planning and managing the growth of China's economy. Investment is guided to certain sectors and state-owned enterprises in many areas are protected from competition by law, regulation and/or custom. China's leaders seek to reserve for state-owned firms leading roles in almost every key industry -- from steel, to telecommunications, to consumer goods. The March 1998 meeting of the National People's Congress (NPC) and the elevation of Zhu Rongji to the premiership also marked the beginning of a Chinese central government reorganization and downsizing. A decrease in the number of ministries from 41 to 29 was a much anticipated development at the March Congress, with many of the former industrial ministries becoming bureaus under the State Economic and Trade Commission (SETC). The stated purpose of the reorganization is to separate the business functions of the old Ministries from their continuing regulatory responsibilities. II. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook China's economic growth was slowing down in the first half of 1998 and retail prices continued to decline slightly. The official estimate for half year GDP was 3.47 trillion RMB, a 7% increase over the same period in 1997. This is the lowest return in the past seven years. The outlook for the second half of 1998 is for a slight recovery in third and fourth quarters as the government undertakes to increase infrastructure spending to help stimulate the economy. Real growth, however, may not reach 8% for the year in 1998. Official figures put out by the Chinese government are generally acknowledged to reflect major economic trends. Many analysts credit China for having achieved a "soft landing" for its economy -- single digit inflation and stable growth. The current growth path contrasts sharply with the overly rapid and inflationary expansion during 1993-1994. Structural problems, however, especially in the industrial and financial sectors, combined with the problem of reducing employment levels in the state enterprise system, continue to pose serious challenges to sustaining long-term, economic growth. A tight monetary policy, strict credit ceilings, and administrative price controls over the last year have brought inflation to below 4% at the end of 1997. The government policy continues to emphasize keeping inflation (targeted at 5%) below the real rate of economic growth (targeted at 8%). Price stability is likely to continue in the second half of 1998. The pressure to devalue the Renminbi will grow. China has received international prestige by managing to hold the line so far in 1998. Financial experts believe that China will have to devalue its currency by 15% to 20% by year end if the regional crisis does not stabilize substantially before then. The government has stepped up its efforts at downsizing the state sector, where total investment in 1997 amounted to 1.342 trillion RMB. State-owned enterprises (SOEs) represent a net drag on the economy, a problem which the government recognizes and seeks to correct through such pilot projects as in the plan to reform 1,000 key SOEs. The SOEs have close linkages to the banking system through policy loans that create constraints on the pace of financial market reforms. Tight monetary policies and constraints on bank lending have led to a build-up of intercompany "triangular" debt now estimated at almost one trillion RMB. Total inventories in the SOEs at the end of 1997 remained high, with 40% real growth in their build-up over the last two years. These stockpiles, which often consist of goods which are not marketable because of poor quality, distort data on industrial output. SOE sales were down 5.3% in the first half. The central government acknowledges that growing unemployment as well as interregional and intra regional income disparities are serous concerns. Average per capita GDP of urban residents in 1997 was 5140 RMB (US$621) while rural per capita income was 2,080 RMB (US$251), with some areas having incomes of below half that average. China's chronic and growing labor surplus is not reflected in the official unemployment rate of 4.0%. The official data do not account for the approximately 23 million considered to be underemployed in the state sector or the 80-120 million surplus rural workers who make up the so-called "floating population" that migrates between agriculture and construction jobs as well as unemployment. A more accurate estimate of urban unemployment, cited by private researchers, would be between 10 and 15%. B. Principal Growth Sectors Industrial output rose to RMB 2.85 trillion in 1997, an increase of 10.7% over 1996.