Opinion of the Economic and Social Committee on 'Relations between the European Union and China` (97/C 158/08)

On 30 January 1997 the Economic and Social Committee, acting under the third paragraph of Rule 23 of its Rules of Procedure, decided to draw up an Opinion () on the 'Relations between the European Union and China`.

The Section for External Relations, Trade and Development Policy, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 11 February 1997. The rapporteur was Mr Frerichs, the co-rapporteur Mr Etty.

At its 344th plenary session (meeting of 19 March 1997), the Economic and Social Committee adopted the following opinion by 56 votes to three, with seven abstentions.

1. Introduction

1.1. On 4 September 1995 the Commission forwarded a Communication to the Council and the European Parliament on a long-term policy for China-Europe relations.

This Communication, which seeks to chart the path for long-term relations between the EU and China into the 21st century, is drawn up in the spirit of the new Asia strategy adopted by the Essen European Council.

1.2. The conclusions of the Council for General Affairs were adopted on 4 December 1995 and have become the basis for the European Union's long-term China policy.

The Council considers that the Commission Communication arrives at a very important and timely moment when China has further consolidated its role as a major economic and political power and as an important actor on the world stage and is in the process of applying for membership of international economic, security and political organizations.

1.3. The Madrid Summit took note of these conclusions and emphasized the importance of developing relations with this country.

1.4. The Economic and Social Committee likewise attaches great importance to the development of relations between the EU and China. The aim of this own-initiative opinion is to contribute to the deepening of EU-China relations and to support the EU's long-term policy on China-Europe relations.

2. Previous relations between the EU and China

2.1. The Commission states in its Communication that it is 20 years since diplomatic relations were established between the EC and China, and 10 years since the signing of the existing trade and cooperation agreement. The steady development of bilateral relations was interrupted by the 1989 Tiananmen Square events. Europe, like other major international partners of China, reacted with a range of sanctions. But the normalization of relations, particularly in the past four years, has paved the way for a renewed upsurge in bilateral trade and investment. Since 1994 there have also been major strides in bilateral cooperation.

2.2. In June 1994 an ambitious new framework for bilateral political dialogue was set up to encourage Chinese participation in global affairs in the interests of the two parties. Regular ministerial meetings between the EU troika and China, as well as high-level political consultations between the Commission and China, are continuing. But these will now be supplemented by ad hoc meetings of foreign ministers, and twice yearly meetings, both between the Chinese foreign minister and EU ambassadors in Beijing, and between the EU presidency's foreign minister and the Chinese ambassador in the EU presidency capital of the day. There will also be meetings of senior officials responsible for a range of policy areas. This dialogue should gradually develop to include all issues of common interest and global significance. By the same token, with the ban on contacts between military personnel now lifted, the People's Liberation Army should be included among potential dialogue partners in view of its political and economic influence.

2.3. Hong Kong ranks high among the EU's trading partners. Five of the EU Member States enjoy bilateral trade with Hong Kong of over ECU 2 bn. It is also a key destination for investment from across the EU Member States, with 40 EU banks and 45 insurance companies licensed in Hong Kong. More than 60 000 EU citizens are permanently resident and working in Hong Kong.

The EU's office in Hong Kong responsible for relations with Hong Kong and Macau opened in 1993, and China has agreed that the office will continue to operate as an independent entity even after the transfer of sovereignty from Hong Kong and Macau to China. Equally, there will be no change to the 1992 trade and cooperation agreement with Macau. Relations within the WTO will continue as before, as Hong Kong and Macau both participate autonomously. Cooperation is already developing bilaterally on customs, standards, university and business links.

2.4. The great changes in the Chinese economy have had a considerable impact on EU-China trade, with two-way trade exceeding ECU 30 bn in 1993, rising to an estimated ECU 35 bn in 1994 and reaching ECU 40 bn in 1995 (+ 18 %).

EU-China trade has increased fourteen-fold since the beginning of the reforms in China. But EU exports have not kept pace with imports. The EU's trade surplus of the mid 1980s has turned into a bilateral trade deficit, which has remained in the ECU 8-10 bn range over the last four years. However, this is dwarfed by the US trade deficit with China and the proportion of EU imports covered by exports (55 %) is much higher than that of the US (26 % in 1993). Moreover, the EU share in China's total imports grew from 11 % to 15 % in the first half of this decade, a better export performance than that of the US in the Chinese market (rising slowly to 12 %) but much less than the top country, the Japanese (42 %). Indeed, the EU market share in China is higher than that enjoyed by the Union in other parts of the Asian region. In 1995 the EU was China's third biggest trade partner after Japan and the USA.

2.5. The picture in the field of direct investment, however, is less bright for Europe. The EU share in total FDI in China (around 4 %) remains far lower than its share in other emerging markets. EU companies are lagging clearly behind not only Hong Kong and other overseas Chinese companies, but also US and Japanese companies.

EU (15) companies invested a total of US$ 3,8 bn in the 1979-1996 period (US$ 10,4 bn pledged) in some 3 900 projects. This represents less than half of the investment of either US or Japanese companies. Although the average size of EU projects tends to be bigger than that of its competitors and some of them are the undisputed leaders in key sectors of China's economy (automobiles, telecommunications, or pharmaceuticals) there is a clear perception, both within the Chinese, European and other business communities, that EU companies are being less dynamic than their competitors in the Chinese market - and are hence missing opportunities.

2.6. Bilateral trade talks since 1992 have had three interrelated objectives:

(a) promoting China's economic and trade reforms,

(b) helping China enter the multilateral trade system,

(c) achieving better market access for European goods and services.

The dialogue was institutionalized in 1993 by an economic and trade working group. 1994-1996 saw sectoral meetings on intellectual property rights, agriculture, financial services and technical barriers to trade. One possible subject of future dialogue might be competition, as cooperation in this field will enhance the effectiveness of international trade.

2.7. Government loans

Up to June 1996 EU Member States and official EU financial institutions had granted loans to China to the total value of US$ 11,9 bn, representing 49,6 % of the total value of public loans granted to the People's Republic of China over the same period.

When China's importance is taken into account, the resources allocated to cooperation schemes in China have remained small. With the improvement in cooperation since 1995, funding levels have increased each year by around ECU 50 million.

3. European Commission proposals

3.1. The Commission's Communication on a long-term policy for China-Europe relations essentially covers three main areas:

- political relations (the integration of China into the international community),

- economic and trade relations (the rise of a new economic power),

- cooperation (the new priorities).

3.2. According to the European Commission political dialogue must primarily cover all aspects of human rights. A commitment to human rights and fundamental freedoms is at the heart of EU policy worldwide. The espousal of international norms on human rights and the acceptance of political liberalization is a sine qua non for long-term social and political stability.

3.3. The EU also intends to pursue the following objectives:

- a commitment to dialogue on questions of regional and global security;

- practical support for efforts to reform public life in China and develop a civil society based on the rule of law;

- the development of a programme for purposeful and coordinated cooperation in the fields of law and justice;

- support for the principles underlying the joint declarations regulating the transfer of sovereignty from Hong Kong and Macau to China.

3.4. As far as economic and trade relations are concerned, it is clear that China's membership of the World Trade Organization (WTO) is in the interests of all trading nations. Since China's application to return to GATT in July 1986, the EU has consistently sought to accelerate progress towards a decision on Chinese membership.

The economic reform process launched eighteen years ago has dramatically changed the economic and social landscape in China. The Chinese leadership knows that reforms need to be deepened and broadened to achieve the objective, enshrined in China's Constitution, of creating a 'socialist market economy` by the turn of the century. However, China still falls well short of having a fully-fledged market economy. In working towards this goal, China must not only focus on its declared social objectives, but must further the protection and development of social rights, including the freedom to set up workers' and employers' associations. Reform of state-owned enterprises, and the creation of a social security system to cushion the consequences flowing therefrom, remain a key challenge for the future.

Over the last few years China has gradually liberalized its trade regime. Tariffs have come down, increased trading rights have been granted to firms, the dual exchange rate has been unified, foreign investment has been attracted, etc. These measures represent important steps forward, but are clearly insufficient. Thus, for example, the right to import and export goods in China remains by and large a state monopoly, with prohibitive customs duties on many consumer goods, non-tariff barriers, and licences and quotas.

3.5. There are three key areas for EC-China cooperation:

3.5.1. The Chinese Government is acutely aware of the deficiencies in the skills base in China. The EU should therefore make a concrete contribution to basic and further education. The China-Europe Business School in Shanghai already exists. One possibility would be to build on this to found a permanent centre to address skill shortages in fields from engineering to accountancy.

3.5.2. Economic and social reform should be encouraged through a more wide-ranging programme of support for reforms touching on individual Chinese in different professions and walks of life. In particular, the development of a fair and effectively working system for the administration of justice should be firmly encouraged through an EU-wide exchange programme for young lawyers, judges and law enforcement agents. Such a programme would include internships at European civil and perhaps constitutional courts, as well as selected law firms.

3.5.3. Business cooperation: this would involve support for the general development of the business environment in China (developing up-to-date skills central to the management and administration of the modern Chinese economy), as well as the provision of information and the facilitation of direct contacts between businessmen.

3.6. Two areas of particular potential for future development are the environment and scientific and technological cooperation:

The problems faced by China in the environmental field are partly systemic (a low awareness of the long-term consequences of inaction), partly technological, and partly a question of China believing that it cannot afford the costs of high environmental standards. The EU must therefore make optimum use of expertise in environmental policy-making and technology, including clean energy technology and in particular clean coal combustion technologies. It is therefore essential that full use be made of the willingness of European business to commit itself to a long-term technological partnership with China. Scientific and technological cooperation would help in the search for science-based solutions to common global problems.

4. ESC comments on the guidelines for future relations between the EU and China

4.1. Human rights

4.1.1. The ESC fully supports the 'commitment to human rights and fundamental freedoms`, which is at the heart of EU policy worldwide. China has a considerable record of violations of political and civil as well as of economic, social and cultural rights. While it is obvious that the country is facing enormous problems of economic development, that cannot legitimize ongoing infringements of fundamental human rights. The EU is concerned about violations of human rights not only because it regards them as a form of injustice but because it is convinced that the upholding of international norms on human rights and the acceptance of political liberalization is essential to long-term social and political stability.

4.1.2. The EU intends to pursue the issue of human rights through action on three levels. First of all it will support efforts in China to open up and liberalize all areas of Chinese life, in different sections of society as well as different parts of the economy. These trends will inevitably reinforce moves towards the development of a civil society based on the rule of law. Second, it will systematically and regularly continue to raise human rights issues in bilateral dialogue with China. Third, it will bring the international community into the debate through multilateral fora such as the United Nations. The framework for all these activities is clearly delineated by the common acceptance of the declaration () and the Programme of Action of the World Conference on Human Rights held in Vienna in June 1993 ().

4.1.3. While the Committee thinks that in discussions with China the EU should be receptive to the specific problems and conditions prevailing in China, including those in the cultural field, it is not acceptable that the Chinese authorities should use these as an argument to provide their own interpretation of universal human rights. Such rights are only open to 'flexible interpretation` if flexibility is provided for explicitly in the texts concerned.

4.2. Economic and social cooperation

4.2.1. The ESC warmly welcomes the Council's and Commission's policy of medium and long-term support for reforms in a country with the World's largest population (1,21 billion), an area of 9,6 million km² and a thousand-year old culture.

4.2.2. The industrious people of China now stand on the brink of rapid, large-scale political and economic developments which will be felt not only in the USA and Asia, but will also be of growing importance to Europe.

4.2.3. Consistent support for the difficult process of economic and social reform now underway thus lies wholly in Europe's interest so that, through cooperation and mutual trust, the many common medium- and long-term tasks that lie ahead can all be accomplished.

4.3. The ESC believes that, to achieve this, cooperation needs to be stepped up in practical ways whilst frank, open dialogue on all questions of common interest needs to be expanded, notably by involving existing social organizations, as well as organizations changing under the pressure of the reform process, even if these are based on differing political, economic and social principles.

4.3.1. The ESC is of the opinion that on-going dialogue between socio-economic groups in both the EU and China requires an institutional framework if there are to be vigorous, practical discussions as well as fine-sounding declarations.

On the Chinese side the obvious dialogue partner for this major task is the National Committee of the Chinese People's Political Consultative Conference (CPPCC) ().

4.4. Proposals on improving cooperation

4.4.1. The comments that follow are designed to secure an improvement and furtherance of economic and social cooperation (including cooperation between socio-economic organizations) in the widest sense and in a wide range of fields. The ESC has received a large number of proposals but there is room here to mention only a few of the main ones. The list is therefore not exhaustive.

They include:

4.4.2. The harmonization of trade relations which are currently distorted on both sides by major differences, along with the introduction of confidence-building measures between the two trading partners to consolidate traditional trade relations between Europe and China.

4.4.3. China's gradual integration into the world economy and efforts to promote China's rapid entry into the WTO. Such admittance must go hand in hand with guarantees that the WTO system will not be weakened and that China will be able to fulfil the comprehensive array of WTO entrance requirements. Cooperation and technical assistance from the EU can help China's preparations to fulfil its WTO obligations.

4.4.4. The protection of human rights, by China's implementing, in law and in practice, the UN Charters on political and civil rights and on economic, social and cultural rights, as well the basic ILO human rights conventions on freedom of association and the right to organize, on collective bargaining, on forced labour, and on discrimination in labour and employment.

4.4.5. Workers' and employers' organizations should be allowed to operate autonomously in line with the relevant ILO conventions.

4.4.6. Improvement of the climate for the rapid expansion of medium- and long-term investment in the People's Republic of China and the promotion of joint ventures, particularly with small and medium-sized enterprises (SMEs), bringing into play rural provinces and peripheral areas.

4.4.7. The intensification of scientific and technical cooperation via educational and training schemes involving universities, other higher educational establishments and language schools, alongside the carefully-controlled exchange of professors and students, young technicians and craftsmen.

4.4.8. Offering China help and encouragement to take urgently required action in the fields of environmental protection, the development of infrastructure and the improvement of energy supplies.

4.4.9. Priority support for measures to promote the interests of women, protect children and young people and combat poverty, within the context of economic and social reforms.

4.4.10. A general, all-round expansion of information to bring China closer to Europeans as well as to improve knowledge and views among the Chinese people about Europe.

5. Specific ESC comments on guidelines for future relations between the EU and China

5.1. The ESC realizes that in the short term the admittance of China to the WTO will not be possible. Provided a number of measures however are taken beforehand, eventual membership should be possible.

In this context the ESC would like to see:

5.1.1. greater and rapid liberalization on both sides, as well as a revision of dumping procedures, in order to free trade from restrictive protectionism and make it possible for both partners to pursue a customs policy permitting smooth and secure long-term trading,

5.1.2. the improvement of information on trading conditions - to be achieved by setting up an up-to-date, on-line data bank,

5.1.3. the negotiation of legislative provisions as part of the development of trading rights in order to a) regulate the right of establishment in China, b) regulate product marketing more clearly, and c) grant freedom of establishment to lawyers, banks, insurance companies, shipping agencies and company auditors,

5.1.4. the rapid setting of deadlines to be incorporated in the September 1995 amendments to the arbitration system of the China International Arbitration Commission (CIETAC),

5.1.5. the EU Commission is asked to insist during negotiations that enterprises with foreign capital (joint ventures) be allowed to import goods and market them in the People's Republic of China to build up a full range of products,

5.1.6. in view of expanding trade, the People's Republic of China should publish a permanently updated list of current import restrictions (import licenses, quotas or import controls) and be in a position to be able to say which provisions have been adopted or revoked without being made public; despite assurances to the contrary, this sorry state of affairs is still a source of complaints in trade circles,

5.1.7. the problem of restrictions on the establishment of offices representing foreign firms and on their staff recruitment needs to be solved satisfactorily and rapidly on the basis of the principle of absolute reciprocity; the same applies to restrictions on the employment of foreigners in joint venture enterprises,

5.1.8. in this connection, the Economic and Social Committee, being the assembly of socio-economic interest groups in the EU member countries, has a special interest in fundamental international labour standards; it hopes that China will be able to ratify the ILO convention on the right to organize, on the right to bargain collectively, on forced labour, and on discrimination in labour and employment, and in particular that it will take urgent measures to overcome the major difficulties currently faced in implementing fundamental trade union rights,

China, as the ILO's largest member country, should be encouraged to ratify and implement ILO Conventions 87 and 98 on freedom of association and the right to organize since the overwhelming majority of ILO members, including most developing countries, have already done so.

5.2. The changes in foreign trading practices introduced on 1 April 1996 represent the biggest liberalization package since 1979 and open up new improved opportunities for China's integration into the world trading system. Import duties on more than 4 000 tariff headings have been lowered by an average of more than 30 %.

With customs duties now down from an average of 35,9 % to 23 %, the result clearly fails to come up to the expectations generated by China's announcement in 1994 that customs duties would be lowered to an average of 17 %. The 17 % offer is linked to WTO accession and so would not yet come into force.

China announced at the APEC Conference in Manila in November 1996 that customs duties were to be reduced to an average of 15 % by the year 2000.

5.3. A second set of revised provisions, which likewise came into force on 1 April 1996, concerns foreign investors. These investors must, from this date, pay import duties and VAT on imports of machinery and raw materials. Exemptions will only cover companies authorized to set up in China before 1 April 1996. The Chinese government had paved the way for the removal of customs concessions for joint ventures in drawing up the new five-year plan, foreigners being put on the same footing as national operators.

Foreign investors are also disadvantaged not only by non-tariff investment and trade barriers but also by the fact that Chinese enterprises are frequently able to circumvent taxes.

5.4. Effective cooperation within the broad field of environmental policy with a view to approximating environmental standards requires not only the opening up of the Chinese market but also the transparency of China's environmental policy for Europe.

The exchange of information might be intensified and institutionalized. Europe's industries and specialists should all be involved in the dialogue on environmental issues. European know-how on environmental policy-making and environmental technologies (e.g. energy sector) should be passed on and steps taken to ensure that it can be successfully implemented on the ground in China.

5.5. The Committee fully shares the view of the European Commission that the two-way flow of relevant commercial information should be promoted through the establishment of a network of Business Information Centres, whilst direct business-to-business contacts should be facilitated through a coordinated cooperation programme involving trade and investment seminars for businessmen in Europe and China. SMEs in particular stand to possibly benefit from such action.

5.6. Tax arrangements for foreign companies pose major problems. There does not seem to be a clear set of rules in place concerning profit or turn-over taxes.

Negotiations with the tax authorities are often fraught and may sometimes appear to be discriminatory, i.e. dependent on nationality or the perceived usefulness of the investment. Clarification is accordingly of vital importance.

5.7. Education and training

The ESC considers the development of human resources to be extremely important. Assistance should therefore be given to education and training in China. The ESC thus welcomes the EU proposals to set up new schemes once the Shanghai Business School has got off the ground. New schemes would include a programme for building up relations and networks between individual higher-education establishments in China and the EU, facilities for Chinese students to share European know-how and experiences, and a programme of vocational and specialist training geared to China's needs, as identified by market participants.

Conversely, it will no doubt also be necessary to intensify the training of the next generation of European managers. A concrete example of areas where this would be possible would be expansion in the training of more sinologists combined with economics and Chinese cultural studies.

Economic and social reforms should be further underpinned by training and technical assistance in key sectors of the reform process. New areas such as copyright, as well as quality control, standardization, and public procurement, should all be addressed. In the current absence of a modern legal framework, the vital development of legal and judicial professions must be encouraged.

5.8. Hong Kong and Macau

The transfer of both territories to Chinese sovereignty is being followed by the EU with great interest. The high degree of autonomy guaranteed to the two Special Administrative Regions under the Declarations is of great importance for future developments. Both territories have important roles to play as gateways to other regions of China, and can act as key facilitators for increased European trade and investment with China.

Hong Kong in particular will undoubtedly provide a clear test of China's willingness to accept certain democratic institutions that make up Hong Kong's civil society and to guarantee the autonomy promised in a number of areas (one country, two systems). In this connection, the Committee expresses its concern about China's announcement in March last year that it would replace Hong Kong's legislative Council (LegCo) with a provisional legislature which will be elected by a body appointed by China. China has said that the legislature would repeal Hong Kong's Bill of Rights.

Against this background, the Committee welcomes the conclusions of the European Council in Dublin on 13 and 14 December 1996, underlining the European Union's full support for the specific status of the Hong Kong Special Administrative Region (SAR) and its citizens in all respects, including their right to representative democratic institutions as already established and calling for the smooth transfer of government in Macao in December 1999. The Committee awaits the Commission communication on economic cooperation with the SAR Hong Kong with great interest.

China has firmly stated that after 1 July 1997 diplomatic missions in Hong Kong will have jurisdiction for Hong Kong and Macao alone. At present a number of missions have staff accredited to and allowed to operate in China. China's policy is to encourage Member States to open up consulates in Guangzhou. This policy might raise some difficulties, particularly for the smaller Member States.

The EU should pursue the line taken in the declaration on political relations in the Commission Communication on a long-term policy for China-Europe relations (COM(95) 279 final), keeping a permanent watch on future developments in Hong Kong and entering into an on-going dialogue with China. The Committee will follow with particular interest developments with respect to freedom of association and the right of workers and employers to organize themselves and engage in free collective bargaining. It will include this in its on-going dialogue with the CPPCC of China.

5.9. NGOs

There are no NGOs in China along the lines understood by the west.

The agencies like Save the Children, Oxfam and Médecins sans Frontières, who have had a presence in China for many years, have been successful by building up trust and understanding, establishing local credibility and proven commitment. They have started with small projects and work with joint financial help from the EU or UNESCO.

Save the Children have, for example, had very successful kindergarten projects and are seen as an instrument of development. Although appreciated rather more, there is no national Chinese policy to establish NGOs or offices for them.

The ESC would regard it as a sign of growing mutual openness and understanding if China were to adopt legislation on freedom of association to pave the way for the creation of genuinely independent NGOs and so facilitate their useful, charitable work.

5.10. Women

The All China Women's Association is a huge quasi-governmental association with apparently wide-ranging responsibilities and resources. It is financed by the government and acts as an umbrella organization, with 500 groups and a newly-established China Women's College aimed at training female administrative personnel.

Its stated aim is to protect women's rights and promote equality and it claims that the 1995 UN conference and the 12 critical areas of action identified have fostered and strengthened their work. The government is paying a great deal of attention to women's affairs with a new 1995-2000 programme involving 11 focal points.

Projects exist to counter illiteracy, which is said to be 14 % in China, with women making up 70 % of the 14 %. The government has stated that its objective is to decrease the number of illiterate women by 3 million a year. To do this, they have been mobilizing women to use their spare time to become 'teachers`, and their new methods of teaching - essential literacy through skill training - has been praised by the UN.

The law stipulates that, given problems of resources and population, birth control must be practiced. There is no doubt that policies and practices vary, as is the case with disadvantaged women in ethnic minorities, but the state's policy is to achieve equality, and a commission for women's and children's affairs.

There is a network of 136 women's associations, including specialist ones like 'science` and 'family`, and they are very worried about the 'spoil-one-child` syndrome. A total of 74 different magazines exist as a means of boosting communications with literate women.

The 1995-2000 programme, the first comprehensive programme relating to women's development, is designed to safeguard women's legal rights, address the problems women face in education and health, expand channels of employment for women, improve working conditions and provide some social security to cover childbearing expenditure and inoculations, and even to advocate the sharing of housework between men and women.

But the basic priority is the need to identify the 10 million women in poverty-stricken areas and to teach them at least one skill.

5.11. Labour and trade union problems

5.11.1. The economic reform process has created, and still continues to create, enormous social, labour and industrial relations problems. Some of these are new, others existed before 1979 and have manifested themselves more clearly or have been aggravated.

5.11.2. The social and human costs of coping with these problems are enormous too. Major examples are mass unemployment, labour mobility and lack of social security.

5.11.3. Tackling these problems is very much a Government and a Party responsibility. There are no independent organizations of workers and employers to play a role in this respect. On the employers' side, very little has changed since the first phase of the economic reform process. The trade unions are still firmly under the control of the Government and the Party. The Government has created a trade union monopoly for the All China Federation of Trade Unions (ACFTU). Unions set up without their approval are illegal. This is flagrantly in contradiction with the ILO Convention on the right to organize. Efforts of workers to set up independent trade unions have been brutally repressed. In recent years, the ACFTU has started organizational campaigns among workers of (partly) foreign owned enterprises, and shown an increased interest in collective bargaining in both these enterprises and in purely Chinese firms.

5.11.4. As regards the other fundamental human rights' Conventions of the ILO, there is also a major problem with forced labour in China. The majority of people sentenced to prison or forced labour camps, including political prisoners, usually work for little or no pay. There are credible reports by human rights' organizations of cases of prisoners in pre-trial detention who are victims of forced labour.

Some penal institutions have contracts with enterprises whereby prisoners perform manufacturing and assembly work. There have been conflicts between China and some of its trading partners on the export of prison labour products. In 1991, the Chinese Government reiterated its earlier rulings banning the export of such goods.

5.12. Strategic cooperation

China is and will become increasingly important in maintaining global equilibrium. Cooperation between the EU and China must accordingly have a strategic dimension. The aim should be the establishment of an effective and democratic international legal order within the framework of the UN and international organizations.

Institutionalized cultural dialogue between the EU and China is also becoming more and more important with time. Given the possibility of cultural confrontation in the next century, we have to develop alternative scenarios and situations where such pessimistic forecasts cannot become reality. The institutionalized cultural dialogue established with China might therefore be based on a multicultural model for worldwide cultural development in the next century.

Brussels, 19 March 1997.

The President of the Economic and Social Committee

Tom JENKINS

() Modifying its decision of 22/23 November 1995 concerning an information report.

() Cf. Commission Communication of 5 July 1995 (COM(95) 279 final, p. 7).

() Cf. Resolution of the General Assembly of the United Nations.

() The CPPCC was establishing in 1949 and is composed of representatives of the Communist Party of China (CPC), democratic parties, persons without party affiliation, mass organizations, ethnic minorities and various sectors of society, as well as public figures and returned overseas Chinese. The CPPCC has 2 099 members and a Standing Committee of 315 members. The main functions of the CPPCC are to conduct political consultation and democratic supervision, to participate in government policy and to discuss political, economic, cultural and social questions, including those of concern to regional and local authorities.

APPENDIX to the opinion of the Economic and Social Committee

The economic situation in China

1.1. The 9th Five-Year Plan (1996-2000)

The 9th Five-Year Plan provides for an average annual growth rate of 8-9 %, with inflation running at 7-8 %. The volume of investments should increase by 30 %.

To stabilize the economy and so also prevent social unrest, greater investment should be made primarily in agriculture. More rural industries should also be created to offer jobs to ex-agricultural workers. The building of new towns plays an important role in this respect. In the last ten years alone more than 300 new towns have been built in China.

The 100 000 or so medium- and large-scale firms currently in state ownership should be slimmed down by investing in production and management.

Economic experts in Beijing reckon that in the long term only 1 000 of the 100 000 medium- and large-scale firms will survive. The others will either 'sink or swim` in the market place.

This rationalization process will take a long time since manpower can only be made redundant insofar as new jobs are created. A government study has calculated that 30 years will be necessary to complete this process.

Another problem that will not go away is the fact that around 48 % of enterprises in public ownership are running at a loss, a trend which is becoming more and more pronounced.

In 1994 the foreign trade of the People's Republic of China amounted to US$ 236,7 bn.; this should rise to US$ 400 bn. by the end of the next five-year plan.

This increase in foreign trade should be made possible first and foremost by industries - particularly in the electronics and engineering fields - pressing on with modernization and so becoming internationally competitive.

China is thus rapidly developing into a supplier of products on which Europeans used to pride themselves.

The solution for Europeans is twofold: first of all they must maintain their technological advance through investment; secondly European firms must invest in China today so that they can have a stake in China's economic success tomorrow.

1.2. Economic situation in 1995/1996

China's STATE PLANNING COMMISSION has estimated that the national economy will grow in real terms by an average of 8-9 % per annum in the next five years after average growth of 11,7 % per annum in the years 1991-95. Beijing intends to bring inflation - running at about 11,6 % per annum in the previous 1991-1995 Five Year Plan - down to 8-9 %. The austerity policy will be continued even if there are increasing expectations of, and political pressure for, a relaxation of monetary policy; some slight easing cannot however be excluded.

Despite pressing problems - the unsatisfactory development of agriculture, increasing disparities between the rapidly growing eastern part of the country and the backward interior and the declining state sector - Beijing is optimistic about further economic development.

State industry remains a problem child of the reform policy. China is currently hemmed in between rising inflation and higher unemployment. But pursuing an austerity policy means more redundancies - something which is not acceptable from the point of view of social policy.

If China wishes to halt the growing migration from the interior to the rich coastal provinces and guarantee more balanced economic development, more efforts are needed than ever before. The one-sided preference given in the past to the eastern provinces meant that 18 out of 100 renmimbi fixed investments were from abroad as opposed to only two out of 100 in the interior.

In 1995 real gross domestic product rose by 10,2 % in real terms, thereby paving the way for a 'soft landing ` of the economy. This compares with the dangers of overheating in 1994 (GNP up 11,8 %) and 1993 (GNP up by 13,4 %).

The present austerity policy is showing the first signs of success in fighting inflation, with 1995 inflation levels at 14,8 %.

Private savings in banks and rural credit cooperatives also grew steadily in 1995. Total private assets amounted to renmimbi 3 550 bn. in 1995, which meant that they had risen by 40 % since the beginning of the year.

In both 1995 and 1996 foreign investments have continued to be biased heavily in favour of the rich eastern provinces. More than 70 % of these have been concentrated in the provinces and towns of Guangdong, Fujian, Shanghai, etc. Tibet and Inner Mongolia have come away completely empty-handed.

The displeasure of internal and 'Hinterland` provinces with this discriminatory treatment is likely to increase further. But for a long time now Beijing has done nothing but pay lip service to the problem. Hence the increasingly explosive consequences of one-sided development, reflected in under-employment in rural areas and a growing exodus to towns.

Foreign investment appears at first sight to be more unproblematic. In 1995 foreign capital invested in completed projects amounted to US$ 37,7 bn., 11,7 % more than in the previous year. Together with a healthy foreign trade balance, foreign investment left Chinese foreign exchange reserves at US$ 73,6 bn. in 1995, with the total value of all previously invested foreign capital rising to US$ 133,4 bn. At the same time however the growth rate of new investments secured by contractual provisions fell by almost 20 % to 10,9 % in 1995.

One reason for the decline in foreign investment projects can be attributed to a tight government monetary policy so that local banks are not in a position to be able to underpin the financial contribution of the Chinese partner in a joint venture scheme.

The structure of investment projects has however improved. Speculative investments, particularly in the property market, previously accounted for about one third of all foreign investment and originated mainly from Hong Kong, Taiwan and Singapore. Nowadays a greater proportion of investment is made in the manufacturing sector, with a notable increase in particular in the number of joint ventures specializing in the production of heavy machinery, electronic goods, infrastructure equipment and the forwarding and processing of raw materials.

1.2.1. China's foreign trade grew in 1995 by 26,3 %. As a result, the trade surplus came to US$ 1 bn: exports US$ 126,0 bn; imports US$ 106,3 bn.

In the course of 1995 the EU lost ground to the Pacific Rim nations as a trading partner and its share in China's imports dropped to 15 %. France (currently ranked 13th among China's importers) has been overtaken by Canada and Malaysia whilst the United Kingdom (currently ranked 15th) has also been left behind by Indonesia. Of China's ten most important importing nations, only two (Germany and Italy) still come from Europe.

Generally speaking the highest growth rates in Chinese trade have been achieved with countries of the Far East. Trade with ASEAN countries has increased by 50,5 %, followed immediately by Korea (+ 47,1 %), Japan (+ 26,9 %), Hong Kong (+ 20,1 %) and Taiwan (+ 16,8 %).

In 1995 the structure of Chinese exports continued to shift in favour of manufactured goods, which accounted for 86,5 % of the total volume. Exports in machinery and vehicles were particularly lively, rising by 61,3 %, whilst the traditionally most important export sector, clothes, only managed to expand by 8 %.

By contrast, imports of manufactures rose by only 8,1 %, i.e. below average. The Chinese government's current policy of austerity has even led to the traditionally key import sector (machinery and vehicles) falling, for the first time, by 1.4 % since the beginning of the reform policy.

Electro-technical and electronic products (+ 34,9 %), as well as chemical products (+ 49,4 %) continued to be in demand in 1995. This trend is continuing in 1996. The EU is the chief supplier of state-of-the-art technology (e.g. glass-fibre networks used in telecommunications). By June 1996 China had signed 3 297 technology-import contracts with the EU worth US$ 26,5 bn, and accounting for 48,6 % of total imports of technology products.

Imports from the European Union rose altogether by 7,3 %, with imports from Italy expanding by 0,7 %, France 10,6 %, the United Kingdom 7,6 % and Germany 5,9 %. However, they rose considerably faster among the EU's most important competitors (Japan + 11,3 %, USA + 14,3 %, Taiwan + 11,0 % and Korea + 40,9 %).

If China's economic growth is as sustained as expected, there are likely to be long-term implications for the world's commodity and foodstuff markets.

In this connection it is worth remembering that China accounts for 22 % of the world's population, 7 % of its utilized agricultural area, 7 % of its fresh water resources, 2 % of its oil reserves and 11 % of its coal reserves. China's future is therefore of great and significant importance to EU long-term economic policy planning.

1.3. Latest figures and developments 1996 ()

On 19 January 1997 the minister for the state planning commission, Chen Jinhua, announced the latest statistics for 1996. He said that the Chinese economy had achieved a 'soft landing` in 1996 with the economic growth rate rising to 9,7 % (instead of the planned 8 %) and inflation held at 6,1 % (instead of the planned 10 %). In December 1996 price rises were running at only 4,2 %.

Investments had risen in nominal terms by 18,9 %, in real terms by 12,5 %. Sales of consumer goods had increased by 19,3 %, in real terms by 12 %.

Exports in 1996 had been worth $151,1 bn., a rise of 1,5 %.

Imports had risen by 5,1 % to $138,3 bn.

Foreign investment was running at $40 bn. and hard currency reserves amounted to $105 bn.

Minister Chen Jinhua said that China's economic growth would continue in the second year of the ninth five-year plan. With reference to the stabilization policy launched in 1993, the minister praised the Deng-Xiaping Theory which aimed to develop a Chinese version of the 'Socialist Market Economy`. He then said that macro-economic controls would also have to be imposed in the future to check the market economy's tendency to look for short-term profits.

The minister also acknowledged that there were economic difficulties. China's oil refineries were only working to 70 % capacity. There were too many textile factories and polyester plants. 45 % of state-owned enterprises were running at a loss. Official figures for 1996 put corporate losses at yuan 69 bn. (about $8,32 bn.), a rise of 45 % compared with 1995. The total accumulated indebtedness of state-owned enterprises amounted to yuan 3,36 trn (approx. $405 bn.).

Savings deposits in all Chinese banks came to yuan 3,85 trn (approximately $464 bn.) on 31 December 1996. The Chinese government had earmarked yuan 30 bn. (approx. $3,6 bn.) to offset the fall in bank credit resulting from corporate bankruptcies.

Moves were afoot to save ailing state enterprises not only by collective redundancies but also tax reduction schemes and a moratorium on interest payments to banks.

All in all the Chinese state leadership remained optimistic about 1997, not least because of the recovery of sovereignty over Hong Kong.

() Source: 'Frankfurter Allgemeine Zeitung` of 20. 1. 1997; the figures are from official Chinese sources.