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Courting the Dragon.

Consumer in China will be demanding everything from banking, agriculatural products and telecommunications providers to entertainment, insurance and Internet firms. But doing business there isn't like doing business here.

CHINA'S ECONOMY has weathered the Asian financial storm, with Beijing even confidently throwing a lifeline to its distressed neighbors.

According to U.S. Trade Rep. Charlene Barshefsky, speaking at a Washington conference, "China played a most constructive role with respect to the crisis." She contrasted Japan's contributions to crisis-tom Asia, on the other hand, as "absolutely inadequate."

Current economic indicators point toward China's capacity to maintain its current growth in 2000. However, the corporate failure of the largest of China's 240-odd trust and investment corporations, the Guangdong International Trust and Investment Corporation (GITIC), has shaken some bankers.

For those contemplating a China venture but influenced by media headlines, this may appear as cause to cut and run, or simply to write China out of longer-term plans. But China holds enormous potential for U.S. exporters.

The U.S Embassy in Beijing's economic brief notes the United States is the largest "overseas" investor in China (Hong Kong and Taiwan are the leading "foreign" investors), and numerous traders and investors have proven that U.S. firms can succeed in this market.

Look at China's track record. Its economy has been growing at almost 10 percent a year for over the past 18 years, and has become the second largest recipient of foreign direct investment in the world, after the U.S. This has brought great opportunities.

Unmet infrastructural needs for China's population of 1.2 billion 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 it needs. Urban populations have reached a point where the burgeoning middle class can afford many basic consumer goods such as televisions, stereos, portable telephones and even a family car. The growing upper class is into luxury homes, designer clothes, foreign vacations and fine food.

But the road to riches isn't without potholes. Here are some guidelines.

Create effective relationships

The American Chamber of Commerce in China (AmCham China) is quick to point out that regulatory restrictions, lack of transparency and corruption (among many other problems) make penetrating this market a daunting challenge.

The key to success is the development of an effective relationship with a Chinese partner. Among the first Chinese words a foreigner hears is guanxi, or connections. But the concept is frequently misunderstood, and even takes on a negative connotation.

The Chinese business culture is based on friendship, a precursor to developing a business opportunity. This can be contrasted to the Western approach where an opportunity is first identified, then a business relationship formed; seldom does this lead to any type of close friendship.

The Chinese, however, don't distinguish between personal and business relationships. As an expatriate from Shanghai succinctly puts it, "The whole country is based on relationships. Your balance sheet is meaningless without them. If you get to the level where your Chinese associates treat you like part of the family, the relationship is permanent."

Understand the business environment

Finding a trustworthy and reliable local partner can be time-consuming. Accustomed to a sophisticated legal environment and mechanisms for dispute resolution, American companies have a tendency to rush into a project or business relationship without taking the most basic steps to protect themselves -- the unstated position of recourse being arbitration, if not litigation, when failure seems imminent.

Americans view a contract as a bundle of agreed-upon rights and obligations, cast in stone. Most Chinese look at a contract quite differently. It's more an expression of a desired outcome, with an ever-changing bundle of rights and obligations being necessary to achieve the hoped-for result. Understanding this dichotomy helps to explain why Chinese contracts seem so simple and fluid -- and so often broken. In the Chinese approach to dispute resolution, arbitrators tend to arrive at "split-the-difference" rather than "spoils-to-the-winner" types of awards.

Be aware of the central government's role

Don't underestimate the importance of government in commercial affairs. Although more than 150 major laws and regulations apply to foreign investment, the legal and regulatory system reveals a general lack of transparency. Investors may well face bureaucratic influence in joint venture operations

China -- unlike the U.S., where federal and state jurisdictions are clearly delineated -- has a unitary system of government. A deal struck at the provincial level isn't always safe from changes in policy and regulation at the central level. The machinations of Chinese power structures aren't generally transparent to Westerners.

For example, current restrictions require foreign companies and foreign-invested enterprises to use Chinese middleman companies to get imported products to the consumer. American service companies face restrictions but, where permitted to operate, are required to take on a joint venture partner. While the recently signed bilateral trade agreement (Congress' acceptance yet to be granted) will, over the next five years, lower the bar for American companies doing business in China, such requirements currently remain a legal obligation.

Minimize the risks

Risk mitigation also ranks high among the challenges American companies face. Confirming the bona fides of a potential partner, making certain it's capable and trustworthy -- and that it holds the license needed to get imported products into the country -- are essential. There are recent examples of firms that failed to gain assurance that approval had been granted by the State Administration of Foreign Exchange (SAFE) on an overseas transfer of U.S. dollars, and are now paying the price.

Such information is typically gathered through an informal network of contacts, guangxi, which all companies quickly learn they'll need to survive. Information garnered through these connections may be accurate but often lacks needed detail and always costs dearly in time. From a financial manager's perspective, the reliability of information field managers glean through their network is always in doubt.

While China has scored great progress in making an increasing number of relevant rules and regulations publicly available, internal policy statements and notices continue to be issued at all levels of government. As AmCham China points out, these unpublished regulations function as law, despite the fact they're often not publicly available.

Exercise due diligence

Much of the information needed to conduct proper due diligence or credit assessment in China is available. Central government officials have become increasingly aware that difficulties experienced by foreign firms in accessing accurate and reliable information has been a deterrent to doing business. They responded by making available information such as ownership details, responsible government authority, size, capitalization, business scope, import and other licenses, shareholders and senior management. Overseas investors and corporations are free to request such information.

Bottom line: There are great rewards to be won in China. But caution is very much in order.

Ercel Baker is chairman of Baker Group International Inc. and its subsidiary, China ProDiligence Inc., in Vancouver, Canada. China ProDiligence has an exclusive representational arrangement for North America with a company, established with the support of Chinese authorities, created to compile pertinent information from the various state sources that hold it. Baker can be reached at (800) 360-9568, or visit

Road to the WTO

Ercel Baker

Joe Borich

In April 1999, China's premier, Zhu Rongji, delivered a straightforward message to America's political and business leaders. He told audiences in Los Angeles, Washington D.C., Denver, Chicago, New York and Boston that "the fate of China is inextricably linked to the fate of the U.S., and China's highest foreign policy priority is a strong, mutually beneficial relationship with the U.S."

In his attempts to alleviate the carping on human rights, Taiwan, the trade deficit and other issues plaguing the U.S.-China relationship, he added, "In the past 20-odd years, China has changed more than it has ever changed in over 5,000 years of recorded history. Its work is not complete, but its goal is, and will remain, becoming a partner among the world's developed nations -- economically, politically and socially."

China's bid to join the World Trade Organization (WTO) is the deepest new commitment to economic reform in a generation. But joining the WTO will bring China much short-term pain. Its readiness to undergo that pain underscores Premier Zhu's message of commitment to reform.

The U.S.-China Bilateral Trade Agreement

After six days of tense negotiations in November 1999, the U.S. and China finally reached a bilateral trade agreement that will open the way for China's accession to the WTO. Although the agreement is complex and warrants close examination by each exporter and investor, these are its major elements:

* Industrial Tariffs -- Tariffs will fall from an overall average of 24.6 percent in 1997 to an overall average of 9.4 percent in 2005. On U.S. priority industrial products, tariffs will fall to an average of 7.1 percent, with most of the reductions occurring by 2003. For information technology, tariffs on products such as computers and Internet-related equipment will fall an average of 13.3 percent, to zero by 2005.

* Agriculture -- The overall average of agricultural tariffs will fall from the current 31.5 percent to 14.5 percent by 2004. China has pledged to expand foreign access to its market for bulk commodities, including corn, cotton, wheat, rice and soybean oil. For the first time, China will permit agricultural trade between private parties.

* Services -- On industrial goods, China will let foreign traders deal directly with buyers and suppliers, bypassing state trading corporations. Foreign sellers will have full distribution rights. Telecommunications, Internet service and content providers, insurance, banking securities, audio-visual, legal, accounting and other professional services will all have expanded market access.

One Last Hurdle

The agreement with the U.S. clears a major hurdle for China's accession to the WTO. All that remains is for China to complete bilateral market access negotiations with its other major trading partners. Chief among those partners, the EU has signaled that it expects to follow the model established by the United States, as most probably will other trading partners.

China's bid to join the WTO is now on its own trajectory -- accession is a virtual certainty. This will happen whether or not Congress passes legislation conferring permanent normal trade relations status (PNTR) on China. If Congress fails to approve such legislation, under WTO rules China can (and likely will) demand an exception for the United States to its market-opening agreements and accession protocol. Given Congress' angst over granting China normal trade relations status -- the next annual review is scheduled for late May -- the trade agreement isn't a shoo-in.

If Congress fails to pass PNTR legislation, every WTO member except the United States will enjoy liberalized access to China's market.

But the euphoria over this long-sought trade agreement -- and China's accession to the WTO -- should be tempered with the reality that China isn't going to change overnight. Conventional wisdom in China holds that it takes 100 years to effect significant change.

Assuming China's government makes a good-faith effort to implement fully the terms of its agreements, that will have little immediate bearing on the business practices of thousands of communities, and hundreds of thousands of enterprises. As with Japan, overcoming cultural inertia will be a long-term project.

Nevertheless, the terms under which China will enter the WTO constitute the most dramatic opening of China's trade policy in its recorded history. With this agreement, China has cast its lot with the global trading community, and signaled its desire to stabilize relations with the United States.

Opening a China Shop

U.S. exports to China are expected to mushroom under World Trade Organization auspices. According to The Kiplinger Washington Letter, exports total $15 billion now, excluding Hong Kong, making China the 11th-ranked U.S. customer. But promises of economic reforms by the Chinese government should 'Wake China a bigger U.S. customer than all but five countries by '09. Robust economic gains in coming years will boost consumer demand. Figure China's economy will grow 5 percent in '00. Longer term, look for average growth of about 7 percent a year over [the] next decade," Kiplinger says.

China's market of 1.2 billion people is far from monolithic; its industry- and geography-specific. But if your company is considering opening a China shop, here are some resources.

* -- The American Chamber of Commerce in China -- Beijing has over 1,100 corporate and individual members and represents over 500 American companies doing business in China. It's the officially licensed chamber of commerce for the American business community there.

* -- This site offers China-related headlines and commentaries; stock reports; a calendar of pertinent events worldwide; profiles and advertising data for 100 publications in the Peoples Republic; and information on trade organizations and business councils. There's also a black market currency watch. And the Eye on Taiwan section has briefings on politics, finance, trade, defense and foreign relations.

* -- China Venture Advisors, with offices in San Francisco and Beijing, has, among other things, facilitated the first U.S.-China wine joint venture; done an initial market survey for an eyeglass-frame manufacturer; and identified and qualified licensees for a clothing manufacturer.

* -- ChinaVest offers long-term investment capital and management experience to growing companies doing business in or with China, and has taken stakes in companies ranging from fast food to light manufacturing to high-tech.

* www.uschina.arg -- The Washington, D.C.-based United States-China Business Council publishes China Business, a journal on China trade and investment. It also holds three annual conferences (two in the U.S. and one in China) and other, smaller meetings, and provides research, consulting and policy advocacy.
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Author:Baker, Ercel
Publication:Financial Executive
Date:Mar 1, 2000
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