AdSlot 1 (Leaderboard)

Sweet and sour

It is easy to see why China is such an attractive place to do business. The People’s Republic is the single biggest emerging market on the planet.

It has a potential domestic consumer base of 1.3 billion people, 130 million of whom are below the poverty line, and more than 90% below the age of 65 with a desire to improve their standard of living. The growth opportunity is huge and being realised daily with the economy expanding at a rate of 8% a year while the markets of the west are mired in stagnation. And it is not only the scope of consumer sales that are the magnet for business; every form of public service and private business infrastructure is in need of upgrading or construction. If you can overcome the difficulties of doing business there, China is the place to be.

On the face of it, finding customers in a market the size of China ought to be easy. The problem is that it is too vast, too complex and too different from our own culture to approach remotely. Business organisations such the Department of Trade and Industry’s Trade Partners export promotion services and the banks recommend identifying an agent with a good knowledge of the sort of customer base you want to target. Often, British exporters have chosen to find one based in Hong Kong, where they are likely to speak English well, be used to British business methods and familiar with a British legal structure. The China Britain Business Council and Hong Kong’s Trade Development Council are two good places to start. Another route is to attend a trade exhibition, either in Hong Kong or one of the principal industrial cities such as Shanghai.

Old China hands will tell you one or two home truths about doing business there. First, don’t expect things to happen overnight. Negotiations take a long time and can be tortuous. Second, “Businesses should understand that a signed contract means the start of negotiations in China …” not the end, as westerners might see it, says Dr Wei-xin Huang, area head of Fortis Bank’s North-Asia operation. “At all times, cash should be king.

Businesses should not give credit – bad debts are not recognised under Chinese accounting practice,” he adds.

Payment is typically made by irrevocable letter of credit (LC), meaning that once goods have been shipped, shipping and other commercial documents can be presented to the bank handling the LC and payment should be made immediately, provided the documents comply with the terms of the credit.

But there are one or two wrinkles. LCs are not usually confirmed, meaning that documents cannot be handled in London. Payment will only be made, according to Trade Partners, when the Chinese authorities have inspected the documents, which causes additional delay in getting paid and additional documentary risk. And this is a very real risk, largely because of the influence customers may have with the local, usually state-owned, banks.

There have been many cases of what western LC bankers would regard as nit-picking documentation difficulties with payment being delayed.

Another word of warning from Dr Huang is in regard to intellectual property. He says that if a product can be copied in China it will be. Although Chinese intellectual property laws are in the process of being reinforced, this remains a real risk, which gives us a clue as to some of the main aims of Chinese businesses and state organisations when dealing with western companies.

Gaining know-how, producing products with international market appeal and developing management skills are high on their agenda. This, linked to western companies’ desire to tap into cheap production costs, has favoured the establishment of joint ventures involving foreign and Chinese partners.

China attracts a vast amount of foreign direct investment. Official figures report that $500bn of foreign investment has arrived in the country over the past 20 years. An article in the Financial Times stated that China will overtake the US this year as the most popular destination for foreign investment, and there are already 3,000 British-invested joint ventures in China, according to Trade Partners.

The joint venture route is certainly a well-beaten path, though not one without its difficulties. Tai Hui, global economist at Standard Chartered Bank in Hong Kong, stresses the importance of finding the right partner.

Many foreign companies choose partners that have strong relations with government organisations and local authorities. If problems emerge, it is often due to issues of who controls the joint venture and the difficulties that Chinese partners may have in meeting reporting requirements and management standards that western partners expect.

One successful example of a company with long-standing joint venture arrangements is industrial gases company BOC Group. It recently announced a $100m investment in three joint ventures in Taiyuan, Suzhou and the Pearl River region, where it is partnering with locals to manufacture gases for their use and for further sales locally. “We first established a representative office in 1985 and our first joint venture in Shanghai in 1987,” says BOC spokesman Christopher Marsay. “We don’t regard China as difficult – no worse, nor better than other markets where we work.”

BOC prefers to have local managers run its operations in China, although finding suitably trained staff in China can be a challenge. The company’s approach has been to train their own people but also to hire Mandarin speakers in the UK, US and elsewhere who have the management skills they need.

Joint ventures are widely perceived as the way to go for many major companies that want to tap into the production potential for export sales. There is currently a stampede among major western manufacturing businesses to establish themselves in China, usually through joint ventures. But there is also a defensive aspect. The company that does not get a slice of the action in China is likely to miss a major opportunity against competitors, ground that may be difficult to recover. For many, the Chinese puzzle poses a question of whether they can afford not to be in China now that the economic pendulum, so long suspended over the west, has swung powerfully to the east.

CHINA THE FACTS
Land area: 3.7 million sq miles
Population: 1.29 billion
Labour force (2001): 744 million
Capital city: Beijing
Government: Communist state
Official language: Mandarin
Currency: renminbi or yuan (CNY)
CNY/USD: 8.277 (official rate)
GDP (2002 est): $5.7 trillion
GDP per capita: $4,400
GDP growth (2002): 8%
Inflation (2002): -0.8%
Exports (2002): $326bn
Imports (2002): $295bn
Military manpower: 206 million
Infant mortality: 25 deaths per 1,000
Life expectancy: 72 years
Internet users: 45.8 million
Literacy: 86%

LL CHINA REVALUE?

China’s trade surplus with the US is more than $100bn and growing rapidly. Unions in the US are becoming increasingly strident in their calls for measures to be taken against cheap Chinese imports. They say it’s a major contributor to the loss of 2.7 million US manufacturing jobs.

US views on how much the Chinese currency should be revalued vary from 15% to 40%. In early September, two US senators, one from each party, introduced a bill to Congress that called for the imposition of a 27% tariff on all Chinese imports. With an election looming, it’s no surprise that President Bush fired off his treasury secretary, John Snow, to Asia to tell China what he said during an interview with CNBC: “… We expect our trading partners to treat our people fairly, and we don’t think we are being treated fairly when a currency is controlled by the government …”

China is drawing in foreign investment on a huge scale, principally from major multinational corporations led by the Americans who are relishing the opportunity to develop cheap production for re-export.

Meanwhile, the Chinese themselves are recycling their wealth in America’s capital markets, in effect, supporting the President’s funding calls.

According to Chicago-based David Hale, an economist writing on chinaonline.com on 25 September, “… The central banks of China and Hong Kong have purchased nearly $100bn of US government securities during the past 18 months … If China were to protest US foreign policy by selling the dollar for euros or gold, it could set the stage for a large correction which would drive up US bond yields, weaken the housing market, depress American domestic consumption and jeopardise the President’s re-election. But China has a $105bn trade surplus with the US and is anxious to promote American consumption, so it will (not) challenge Bush’s policies through the currency market.”

But this is not just a US-China story. While China may be running trade surpluses with the US, it is a net importer from its East-Asia neighbours.

China is a motor for the entire region, sucking in components for assembly and re-export to the west. And Japan also sells more to China than it buys. Revaluing China’s currency would not only put the brakes on China’s exports to the west, it would also rein in economies of the east, where memories of the 1990s’ currency crisis are still fresh.

China, like the US, looks after its own. “China doesn’t feel the revaluation pressure. It sees the revaluation as a US domestic issue,” says Tai Hui, global economist at Standard Chartered Bank in Hong Kong. He sees a revaluation coming eventually, but over several years. US election-year jitters are of no consequence in China where, despite rapid economic growth, history and economics are viewed from a long perspective indeed.

Related reading

nigel-chism
Theresa_May
katherine-grover-semafone-cfo