May
2000
Welcome
to the first edition of China 2000. We
hope that it will provide you with useful and up to date information about
investment in China. China’s
expected accession to the World Trade Organisation (WTO) is leading to a
quickening of the pace of foreign direct investment (FDI), as you will see from
the following articles. China has
emerged from the Asian financial crisis relatively unscathed, although the
investment euphoria of the mid-nineties has receded.
However,
the WTO negotiations have once again raised the countries profile as a
destination for FDI as companies realise that China will become a member of WTO
in the near future and they begin to position themselves for the expected growth
in both the domestic market and international trade.
The spoils will go to the companies that are prepared, so be sure that
you are among them.
China’s Accession to
WTO
Over
the past few months much has been written on China’s imminent accession to the
World Trade Organisation (WTO). But what is the process and how long will it
take?
First,
China must complete bilateral negotiations with all the other WTO member
countries which have requested them. There
remain some negotiations to complete, the most important of which are with the
EU and the time to the conclusion of these will decide how long it will be
before China becomes a member of WTO.
There
is also a multi-lateral aspect of the accession process which is being conducted
by the WTO Working Party on China. This
has two strands, the first of which is to harmonise all the bilateral agreements
so that each WTO member will receive the best deal that has been
struck with China on every tariff line item.
Clearly, this cannot be completed until the EU and other countries
negotiations with China are concluded. The second strand is the Protocol which
will set out the conditions for China’s membership.
This is being worked on but significant progress will again have to await
the conclusion of negotiations by the EU and other countries.
Once
all these negotiations have been completed, China will be admitted to the WTO on
a consensus basis. In theory, it
could be decided by a formal vote, where admission would require a two thirds
majority but this has never happened in the past and is unlikely to be required
on this occasion
US
Permanent Normal Trade Relations
The WTO accession process
should not be confused with the Permanent Normal Trade Relations (PNTR) issue
which is currently being debated in the US Congress.
Congress, itself, cannot decide the vote on China's accession.
It can only vote on whether the US should grant PNTR to China.
PNTR encompasses the Most Favoured Nation (MFN) treatment which, despite
its misleading name, actually means that a country has parity of treatment with
other countries.
Currently Congress votes
annually on the MFN issue bur, as PNTR is a WTO requirement from its members,
the US will have to change its law. However,
even if Congress votes not to approve PNTR status for China, subject to the
successful completion of the negotiations outlined in the previous article,
China would still become a member of WTO and all existing member countries would
enjoy the freer market access and reduced tariffs.
All, that is except the US, whose companies would still be denied the
freer access and lower tariffs. Indeed,
in theory these could even be increased by the Chinese, although this is
unlikely as the Chinese have no wish to antagonise the US, at least in trade
matters. Thus, having led the way for China’s membership of WTO, US
companies could find themselves virtually excluded from the Chinese market by
the actions of their own Congress.
FDI
turns the corner
Actual
Foreign Direct Investment (FDI) in China fell by 2.7% year on year to US$ 7.14
billion during the first quarter of 2000, but the rate of decline is moderating.
In January/February FDI was down 8.3% and for the whole of 1999 FDI
dropped 11% to US$ 40.4 billion compared with 1998.
However, it looks as if FDI will soon begin to rise in anticipation of
China’s accession to WTO, as contracted investment (investment agreed but not
yet committed) for the first quarter 2000 was up 27% to US$ 11.1 billion.
It
is evident that companies are gearing themselves up either to expand their
existing investments in China or to undertake new projects.
It will be important to start negotiating now rather than wait for
accession, if companies want to obtain an advantageous position in the new,
expanded market.
Economic
Growth Gathers Pace
China has confirmed that GDP grew by 8.1% during the first quarter of 2000, the first increase in the rate of GDP growth since the fourth quarter of 1998 and a much better performance than the 6.8% GDP growth posted in the final quarter of 1999. Exports are leading the way, up a whopping 34% year on year, compared with the 16.7% growth year on year that was achieved in the final quarter of 1999.
New
accounting law
China’s new accounting law will go into effect on 1st July as part of the government’s drive towards international standards. China’s listed companies already follow the new accounting rules which include measures such as a system of accounting for bad debt losses and obsolete inventories.
For thousands of state-owned enterprises, these concepts represent a “grey area” and many managers will need to learn about these concepts and how to apply them. The introduction of the new accounting law is a major step on the way to introducing transparency into Chinese accounts.