# Presentation: 136294

## Overview of China’s Economy  and Market Opportunities 

- Bill Brekke
- Commercial Counselor
- U.S. Embassy, Beijing

## Headline News - 2005

- China’s GDP grows 9.9 percent, surpassing USD 2 trillion
- Per capita GDP up to approximately USD 1,500
- China’s banking system recapitalized with FDI
- FX reserves increased USD 208.9b to 818.9 b
- RMB de-pegged, but still not reflecting market forces
- China’s multilateral trade surplus up to 5 percent of GDP
- China plans to quadruple GDP in 20 years, which implies an average 7.3% annual growth.

**Notes:**
 - China has become the fourth largest economy in the world at current exchange rates: trailing U.S, Germany and Japan. 
- Per capita income has increased to about USD 1,700 about equal to Morroco
- China continues to serve as a major growth engine for the global economy. 
- At the same time, multilateral exports up 28% and multilateral imports up 17.7 percent leading to a trade surplus of over 100 billion or 5 percent of GDP.  
- With regard to the U.S., our exports were up over the trend level.
- But, the bilateral trade deficit continued to grow, surpassing USD 200 billion for the first time.  

## U.S. Exports to China Jan – Dec yoy

**Notes:**
In 2005, China was our 4h largest export market, now ahead of Germany and the U.K.  

It is growing rapidly. In 2005, we shipped USD 42 billion dollars, which is a 20 percent increase over the year before.  As a percentage of our total exports, China is growing in importance from 2.1 percent of our total export market in 2000 to 4.6 percent of our total export market in 2005.  

I should also point out that the U.S. exported USD 16 billion dollars to Hong Kong, much of which was destined for China.   

So, China is an important market for many American companies and becoming much more so.  

## Leading U.S. Exports to China (4 digits) (Jan. - Dec.  2005)  

_**Product**__**	**__**	**__**	**__**           **__**	**__**Value (USD)**__**	**__**%Change**_
- aircraft and parts			       3.84b	137.23% +
- digital integrated circuits		       3.12b	16.98%	+
- soybeans				       2.25b	3.25%	-
- cotton				       1.40b	1.51%	-
- ferrous metal scrap		 	       1.26b	34.39%	+
- auto parts / accessories		       1.03b	72.04%	+
- auto data processing equip. 		       0.78b	0.13%	+
- copper scrap			       0.76b	42.31%	+
- aluminum scrap			       0.72b	94.20%	+
- Waste paper	 		       0.69b	42.79%	+
- Electric Apparatus			       0.57b	7.79%	+
- Raw hides&skins of Bovine equine animal    0.56b	16.6%	+

**Notes:**
Five of our top exports are high technology categories, three are agricultural commodities and four are scrap items.   

## U.S. Imports (from China)   %Change

- _U.S. Imports__ __**(**__**from China)**__**   **__**%Change**_
**Elect. Machinery****	****        32.09%**
**Machinery****	****          ****	****        20.29%**
- Toys/Sports equipment      11.13%
- Furniture and bedding        18.27%
- Footwear                            12.10%
**Plastic                                27.82%**
- Knit apparel		        60.26%
- Leather Goods                    9.61%
**Iron/steel products**	        34.22**%**
**Vehicles                             24.54%**
**Optic/Medical inst.****	****         8.95%**
- Misc Textile	                       29.63%

- _U.S. Exports__ __**(to China)**__	__  __**%Change**_
**Electric.machinery****	****   20.41%**
**Machinery****	****    ****	****   12.60%**
- Aircraft,spacecraft	   124.59%** **
**Optic/Medical inst.****	****   15.03**%
- Grain,seed,fruit	   -3.45%
**Plastic****	****	****    25.77%**
**Iron and steel****	****    14.37% **
- Organic chemicals	    -4.87%
- Cotton+yarn,fabric	    -1.44%
- Wood pulp, etc.	    33.34%
- Copper		    40.02%
**Vehicles****	****	****    43.24%****	**

**Notes:**
This chart shows you the top twelve categories of bilateral imports and exports using American data.  

There are several interesting things about this chart.  First, the chart of the top twelve categories includes five industries where both countries are heavy exporters: electrical machinery, machinery, plastic, optics, iron/steel and vehicles. 

This pattern of trade is quite different from what you would see between the U.S. and other developing countries.  

Second, please look at last year’s growth rates.   You will see the fastest growing U.S. import sectors are machinery, electrical machinery, furniture and vehicles.  These not just labor intensive industries. China’s comparative advantage as a trading country is not only in the labor intensive industries.  

Let’s take a look at China’s total exports to see what is going on here.    

## U.S-China Bilateral Trade Balance

**U.S-China Bilateral Trade Balance**

**Notes:**
This graph represents our bilateral trade imbalance, in accordance to U.S. Customs’ statistics.    

According to U.S. figures, our overall trade is very uneven – resulting in a USD 124 billion dollar trade deficit with China in 2003 and 163 billion dollars in 2004.  This is our largest bilateral trade deficit ever.  

It is approximately 1 percent of our GDP and 23 percent of our total trade deficit with the world.  For the last several years, the trade deficit has been growing steadily about 20 percent a year. 

While our bilateral trade deficit with China is large, China’s multilateral trade surplus is not as pronounced.  

## Chinese Trade Balances

**In USD billion**

**Notes:**
As you can see, China’s overall trade is roughly in balance.  Both imports and exports have been increasing very rapidly.  China’s trade expansion was a key to world growth in 2004.  China's total imports increased about 147 b in 2003, compared 195 b in the U.S.  

In 2004, China was the third largest trading country in the world – behind the U.S., Japan and Germany. China is responsible for 5.5 percent of global trade.  China’s trade equals more than 70 percent of China’s GDP – by these measures China is a remarkably open economy.   

China’s big deficit with other Asian countries and big surplus with America (and Europe) is a result of China specializing in labor intensive assembly, testing, packaging and exporting. China imports components, intermediates and designs from the rest of Asia and exports finished products to the West.  This is a type of “vertical specialization” of the different stages of production.   

Overall, China’s trade surplus increased from USD 26 Billion in 2003 to 32 billion in 2004, due to a 35-36% increase in both imports and exports. Their total trade surplus in 2004 is 3% of their 1.1 trillion in total trade and less than 2% of their 1.4 trillion GDP. So, is the Chinese trade surplus large?   Is it excessively large?  It depends on where you are sitting.  One way to look at the issue of China’s trade surplus is to analyze China’s composition of trade

## China’s Multilateral trade balances by industry

**Notes:**
I have updated the trade balance slide to incorporate full year 2005 
data. I have attached the slide plus the underlying spread sheet so 
you have the actual numbers.

As expected, the basic trends continued. One interesting twist is in 
chemicals, where you'll notice the deficit did not increase very 
much. Basically, it looks like domestic production of downstream 
chemicals is catching up with domestic demand, so import demand for 
these is flat-lining. I was just at a chemicals conference and the 
most pessimistic view was that China's net import requirement in this 
category will decline slightly over the next few years, but China is 
unlikely to become a net exporter.

Upstream (basically, ethylene and propylene - the building blocks for 
everything else) - all the signs point to continued increased exports 
for the next decade. So on balance the chemicals line should remain a 
net negative, but it will not go much further into negative 
territory. Primay products demand is bottomless.

## Economic Snapshot of 2005

- 9.9% GDP growth in 2005: 9.9% in Q1, 10.1% in Q2, 9.8% in Q3, 9.8% in Q4
- 12.9% growth of retail sales in 2005.
- 25.7 % growth in net fixed asset investment.
- 11.4% growth in industrial production (48% of GDP)
- 5.2% growth in agricultural production (12% of GDP)
- 9.6% growth in service growth (40% of GDP)

**Notes:**
China is the 6th largest economy in the world  valued at 1.4 trillion or 10 percent of the U.S. at present exchange rates – after U.K

As you can see, the economy sizzled in 2003 – so much so that many suggest that China is overheating.  

Indeed there are a number of indicators that suggest China is in danger of overheating today.  They include:

	9.9 percent rate of growth in the 4th quarter
	9.1 percent growth in consumption
	30 percent rate of growth in fixed asset investment

Specifically, please pay attention to the 13 percent growth in fixed asset investment in manufacturing – which comprises 55 percent of Chinese GDP.  Indeed, 80 percent of china’;s growth in 2003 came from the manufacturing sector.  

So, is china overheating?  

## Factors of Sustainable Growth in the future

- Demographics and work force composition
- Benign geo-political environment
- Stable monetary and fiscal policy
- High saving and investment rates
- Rapid adoption of technology
- Trend toward market-oriented legislation
- Booming private sector
- Market depth – strategic range
- Foreign Direct Investment (FDI)

**Notes:**
In my view, the last 20 years of rapid serves as a model for other developing countries.  

Moreover, I believe that the rapid economic expansion is sustainable for the above reasons – which I would like to discuss in more detail.     

## Direct Exports
Sales Agent / Distributor 
Resident Representative Office
Wholly Foreign-Owned Enterprise 
Foreign-Invested Commercial Enterprise (FICE) 

**Sales Agent / Distributor **
**Resident Representative Office**
**Wholly Foreign-Owned Enterprise **
**Foreign-Invested Commercial Enterprise (FICE) **

**Market Entry Roadmap**

**Notes:**
 Those with a legal entity established in 2005:

11 percent joint venture
33 percent representative office
49 percent WFOE or FICE 

## 2006 CS China Trade Show Calendar

| Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |

**China Building (BJ)**
**Dental Expo (GZ)**
**SIMM 2006 (GZ)**
**SEMICON  (SH)**
**Pollutec****(SH)**
**World Travel Fair (SH)**

**SINOCES Consumer Electronic (Qingdao)**
**China Int’l Building Decoration Fair         (GZ)**

**Printed Circuit & Electronics Assembly (GZ) **

**CIPPE (BJ)**
**Water Expo (BJ)**
**NEPCON (SH)**
**Hotelex   (SH)**
**China Refrig (SH)**
**Sporting Goods (CD)**
** **
** **

**Con Expo (BJ)**
**Broadcast Network & Expo Comm    (GZ)**
**ELE/PT Comm China     (SH)**
** **

**Book Fair (BJ)**
**CIFTEE (BJ)**
**Analytica China   2006   (SH)**
**CIEME Equip (Shenyang) **

**Security China (BJ)**
**EP China (BJ)**
**PTC Asia/  Metal Working (SH)**
**Zhuhai  Air Show (GZ)**

**CCFA Franchising (SH)**

**SITL Logistics (GZ)**
**MEDTEC China (SH)**

**MEDTEC China (GZ)**

**Notes:**
This is the new calendar for 2006
As was mentioned earlier, a main theme for next year will be to build on this year’s success
That means participation in many of events that we’ve previously been involved with, but also the introduction of new events as they emerge
We would see this as a constant process of refining our list to meet the needs of each sector – it is a work in progress
Once again, we aren’t doing this just to do trade shows
These need to be industry driven, which means that each industry team must decide amongst themselves which shows to do, and how to support them.  These are YOUR shows.  
Shortly after lunch, we will be breaking into teams.  The trade show group will facilitate a separate session to review these on an industry basis.
Again, this is not static, but dynamic and fluid. 

## Anticipate Problems - Macro

- Intellectual Property Rights
- Patent			- Trade Secrets
- Copyright		- Trade Mark
- Industrial Standards and Certification Problems
- Transparency/Corruption
- Payment issues
- Dispute Resolution
- Price Competition

## Anticipate Problems - Micro

- Management-level human resources
- Bureaucracy
- Unclear Regulations
- Lack of Transparency
- Inconsistent Regulatory interpretation
- Corruption
- Contract Enforcement
- Local protectionism

**Notes:**
As ranked by the members of the American chamber of commerce

## U.S. Companies Profit/Risk in China - 2005

- 72% U.S. firms increased product offering in China
- 86% increased revenue substantially
- 63% increased profitability
- 34% have higher margins than global averages
- 92% are optimistic

**Notes:**
For increase product offering - 22 percent significantly, 50 percent somewhat
For increase revenue – 44 percent substantially and 42 percent somewhat
For increase profitability – 15 percent very profitable, 53 perent profitable, 26 percent breakeven or small loss
For margins – 14 percent are significantly higher, 20 percent somewhat, 25 percent comparable, 16 someowhat lower, 8 significantly lower, 17 percent not applicable.  
For ooptimism – 49 ercent optimistic, 43 percent cautiously optimistic, 6 percent neutral, 2 percent slignhtly pessimistic

## U.S. Companies in China

- Existing stock of investment exceeds $40 billion
- Goals:  62 %  Produce and sell in China
-                 11 %  Facilitate Exports from the US
-                 14 %  Manufacture for Export to the US
- US Exports from China to 3rd Countries --- $70 billion
- US China-production sold in China --- $75 billion (est)

## Find the right markets and partners with our products and services

**CNUSA – Chinese edition**
**Featured U.S. Exporter**
**International Partner Search **
**Customized Market Research **
**Gold Key Service **
**International Company Profile**
**Single Company Promotions**
**Trade Missions, Trade Fairs and Catalog Exhibitions**

## American Trading Centers:

- Harbin	    Nanjing
- Dalian	    Ningbo
- Qiangdao	    Chongqing
- Tianjin	    Kunming
- Xiamen	    Zhuhai
- Wuhan	    Shenzhen
- Hangzhou	    Xiamen

## ATC Program Coordinators

| Beijing | Shanghai | Guangzhou |
| --- | --- | --- |
| Ms. Julie Jiang | Ms. Cindy Qian | Mr. Barry Zhang |
| Julie.jiang@mail.doc.gov | Cindy.qian@mail.doc.gov | Barry.zhang@mail.doc.gov |
| (86 10)8529-6655
* 809 | (86 21) 6279-7630
*6145  | (86 20)8667-4011
*22 |

## Thank You  

- Thank You

## Direct Exports
Sales Agent / Distributor 
Resident Representative Office
Wholly Foreign-Owned Enterprise 
Foreign-Invested Commercial Enterprise (FICE) 

**Sales Agent / Distributor **
**Resident Representative Office**
**Wholly Foreign-Owned Enterprise **
**Foreign-Invested Commercial Enterprise (FICE) **

**Market Entry Roadmap**

**Notes:**
 Those with a legal entity established in 2005:

11 percent joint venture
33 percent representative office
49 percent WFOE or FICE 

## Direct Exports  

**Evaluate Prospects**
**Are You China Ready?**
**Market Research**
**Regulatory Environment**
**Create a Marketing Plan **
**Develop Trade Leads **
**Attend a trade show in China, many supported by CS **
**Participate in a trade mission, organized by USDOC, state government or trade association**
**Monitor the CS International Buyer Program via your USEAC**
**Monitor CBIC tender announcements, ADB and World Bank**
**Featured U.S Exporter (FUSE)**
**CNUSA, Chinese edition**

## Sales Agent / Distributor ( I )

**Advantages**
**no investment in office overhead**
**no registration requirements, no physical presence**
**lower likelihood of non-payment**
**no responsibility for customs clearance**
**Responsibilities**
**Comply with safety and quality certifications, China Compulsory Certification, other standards requirements**
**Comply with the U.S. Foreign Corrupt Practices Act**
**Comply with U.S. Export Control regulations**
**Prepare a contract that protects your legal interests, see a local attorney**
**Closely monitor the agent / distributor’s activity**

## Sales Agent / Distributor ( II )

**Manage Expectations**
**use worldwide selection criteria, then evaluate skill sets**
**explore their view of market prospects, approach to business development **
**ask to see a prior marketing plan and market research report**
**discuss cost sharing for Chinese language brochures, participation in trade shows, demonstration equipment, training in the U.S.**
**contract should contain clear reporting requirements and performance goals to monitor whether the Chinese company can do what it purports to be able to do**
**evaluate capacity to stock and warehouse **

## Sales Agent / Distributor ( III )

**Due Diligence**
**Many exaggerate trade experience, check trade references**
**Ask for a copy of the firm’s business license, SAIC inspection, trading rights license, visit business premises**
**Triangular debt common for entities lacking trading rights and foreign exchange**
**Obtain a DD report through local service providers or CS.**
**	****China lacks a corporate credit rating system**
**Government system for verification of business registration on line is emerging – SAIC Red Shield (Hong Dun) Program**

## Sales Agent / Distributor ( IV )

**Contract Terms **
**seek professional legal advice before contracting, do not rely upon your Chinese business partner**
**ensure the dispute resolution clause limits time for “friendly discussion or mediation”**
**do not accept obligations outside of your control:  visas, export licenses **
**do not  export on open account or D/P terms**
**ensure contract has non-competition and non-disclosure clauses to protect trade secrets, in the event the relationship  ends badly**

## Resident Representative Office

**RRO may perform a useful government liaison and marketing function, contract implementation. Useful for getting into government procurement projects.**
**Restrictions on business scope apply:**
**not allowed to engage in profit-making activity**
**not allowed to directly import and distribute product**
**not allowed to service equipment or warehouse spare parts**
**Establishment of physical presence now requires only local registration. The cost to support a modest RRO $250,000-500,000 depending on location and size. **
**Registered capital in the amount of $10,000 still required.  **

## Foreign-Invested Commercial Enterprise

**Market entry vehicle for domestic wholesale and retail distribution**
**Scope of operation includes “trading rights,” meaning the right to import or export goods manufactured by third parties into or out of China.**
**Scope of operation includes “distribution rights,” meaning right to sell products for its own account on retail or wholesale basis, import for sale within China, purchase domestic products for export and perform related services. **

## Hong Kong as a Gateway

-  Ease of Doing Business
-  Rule of Law
-  Free Trade Port
-  Secure banking system

-  Strategic Asia Hub
-  Location
-  Test products for market
-  Regional HQ
-  Huge re-export market to China
-  Closer Economic Partnership Agreement (CEPA)
-  Access to Pearl River Delta – China’s manufacturing hub

**Notes:**
Ease of Doing Business
- Rule of Law & a transparent government (Chinese companies prefer to conduct arbitration in HK)
- No tariffs on most goods 
- Low taxes (17.5% on profits vs. 33% in China)
- Developed infrastructure – educated workforce
- Secure banking system – get paid faster, easier
- Can invoice in HK without goods ever going to HK

Asia Hub
Within six hours’ flying time from Hong Kong, you can sell to 2/3 of humanity!
- Test consumer products on Mainland tourists in HK & Macau
Test business products on 2100 Mainland companies operating in HK
-Almost 3,800 regional HQs in Hong Kong – 1,000 are U.S. regional and local companies
-94% of Hong Kong’s exports are re-exports of third country origin goods,   54% of these go to China
Preferential access to HK service suppliers in 26 sectors through the Closer Economic Partnership Agreement (CEPA)
- Access to Pearl River Delta – highest per capita income in China and reach 50 million people - 3.3% of China’s population
- Hong Kong is the source for 70% of PRD’s FDI

## CS China’s TOP TEN list of Essential China Advice

- Have clear contract terms
- Economic Viability
- KNOW YOUR PARTNER
- Know the Rules
- Search for Problems
- 	       before they Happen

- Thorough Risk Analysis
- Mind the Store
- Virulent Competition
- Get Paid
- Watch Your IPR

## WTO Compliance Problems

- Intellectual Property Protection
- Weak enforcement
- High thresholds for criminal prosecution
- Low administrative fines
- Transparency
- Difficulty obtaining draft laws and regulations
- Inadequate comment periods
- National Treatment
- Preferential VAT polices for domestic producers not granted to imports

**Notes:**
As to be expected, in addition to areas of progress, there are also  cross-cutting and industry-specific implementation problems.

Crosscutting issues such as weak intellectual property protection, transparency, and national treatment remain problematic.  

Weak IP Protection:  On the books China’s IP regime is WTO consistent, but in practice enforcement remains weak.  High financial and evidentiary thresholds and minimal administrative fines make criminal prosecution and enforcement difficult.

Transparency:  Although China deserves praise in improving transparency, it is difficult to obtain draft laws and regulations.  Compounding the problem of inadequate comment periods prior to the implementation of new laws.

National Treatment:  In certain sectors (i.e. semiconductors), China applies preferential Value Added Tax (VAT) policies domestically, failing to apply the same policy for imports.

## Market Developments to Watch in 2006

- 11th Five Year Plan (2006-2010) Announced at March National People’s Congress
- 3G Wireless Licenses
- Enactment of China’s Anti-Monopoly Law
- Expansion to “Second-tier” Cities
- Continuing Private Equity/VC Expansion
- December 2006---Liberalization of financial services
- Growth in Chinese Outbound FDI

## Harmonious Society

_**5 Balances---NPC March 2005**_
- Economic and human development
- Domestic and external economy
- Man and nature
- Rural and development
- Interior and coastal development

## 11th Five Year Plan2006-2010

- Double 2000 per capita GDP by 2010
- 7 % annual GDP growth target (v. 9.5%)
- Reduce Energy Intensity by 20 %
- Increase Urbanization to 48%
- Build a Socialist countryside
- Structural Upgrading Economy thru Technological Self-Innovation

## Best Export Prospects 2006

- Agrochemicals
- Air Traffic Mgt Equipment
- Safety and Security Eqpt
- Automotive Components
- Coal Mining Eqpt.
- Banking Technology
- Credit Card Market
- Medical Eqpt.

- Education and Training
- Franchising
- Semicon Industry Eqpt.
- Construction Eqpt.
- Marine Industries
- Power Gen Eqpt
- Telecom Eqpt.
- Water/Wastewater

## Economic Challenges

- Unemployment  Rural Migration
- Over supply  Bad debt  Deflation
- Poor legal environment  Corruption
- Strengthening the financial system
- Pollution control and lack of water
- Electric Power demand/supply equilibrium
- Rural Instability

**Notes:**
The view from Zhongnanhai.  

Unemployment from state owned firms has increased by 27 million from 1998.  About 80 million have been unemployed since the reforms started in 84.  

16 to 20 million Chinese enter the work force every year.  In addition, there are between 170 and 300 million peasants who have very low marginal labor productivity in the country side that are looking for opportunities to migrate to the cities.    

## Contact Us

- US Department of Commerce, Commercial Service
- 82 foreign countries, 105 U.S. Export Assistance Centers across America, 4 in Los Angeles
- _[www.buyusa.gov](http://www.buyusa.gov/)_ or _[www.export.gov](http://www.export.gov/)_
- China Business Information Center 	_[www.export.gov/china](http://www.export.gov/china)_
- Commercial Service, U.S. Embassy, Beijing
- 		www.buyusa.gov/china/en