The Sino-US agreement on terms for China's entry into the World Trade Organisation has sparked a major review of corporate strategy in China. Some policymakers and corporate strategists are not greeting the dawn of a new trade and investment era with urgency. Nevertheless, there are signs of renewed activity, as government and corporations alike get on with the job of preparing for an uncertain future.
China's WTO entry terms have a lot to say about the future of big industries. Telecoms is a fast developing, high value sector, where technology is new enough for officials to believe that domestic industry can hold its own. The government knows that the financial sector must be modernised fast if the market is to function effectively – foreign institutions have a role to play, but sound regulation and caution are essential. The automotive and textile sectors are deemed strategic industries by the government, the former a ?pillar industry,' the latter a major exporter.
More broadly, WTO conditions impact on all areas involved in foreign trade but particularly services such as distribution, wholesaling and retail, along with other sectors that are heavily protected. WTO membership also has political implications, not least in agriculture, which underpins the livelihood of hundreds of millions of Chinese.
Each industry is addressing the challenges arising from WTO membership. However, several common trends can be discerned.
Urgency in the reform process
-Sectors were opening slowly in anticipation of membership well before the November deal with the US. Momentum is now building. In financial services, there has been much recent activity, including the prospect of bank mergers and acquisitions and public issues, the commitment to freer interest rates over the next two years, more domestic securities firms licensed in the inter-bank market, and the expansion strategies of forward-looking state commercial banks.
Two monoliths were broken up early in 1999 – China Telecom and the People's Insurance Company of China (PICC). More new companies may be on the way to break up oligopolies and inject competition. The China Insurance Regulatory Commission (CIRC) wants the State Council to approve six new companies in the sector and bring an end to the China Reinsurance Company's monopoly in reinsurance.
-Operations are being reassigned and consolidated among China Telecom's four offspring, and rivals China Unicom and the Ministry of Railways' telecoms interests. Insurance companies' life and property businesses are being separated.
-Companies are being singled out for priority attention. There are now, for example, nine state-designated mobile phone makers and three favoured auto manufacturers – Shanghai Auto, First Auto Works and the government may reinforce favoured state web sites by designating which internet con-tent providers handle domestic news and information.
-Mergers and acquisitions are mooted in banking, for example between Citic, Citic Development Bank and Shenzhen Development Bank.
-At the provincial level, Hubei will restructure about 500 automotive companies, merging 200 and closing about one fifth. Capacity is to be capped or cut back in vehicle production, textiles and elsewhere.
-China's WTO accession terms provide a breathing space for the government to protect strategic industries. But there are fears that restrictions will survive WTO deadlines. Foreign bankers, for example, suspect a cap on the volume of yuan trade they will be allowed to conduct when new licences are issued in compliance with WTO opening. Foreign-owned petrol stations have also been mentioned as a possible target, where a limit on numbers and fuel import controls would help to protect domestic oil companies' market shares.
-The language of recent press reports from China is oblique, leaving the door open for interpretation by Beijing at some later date. Telecoms is dominated by a select few state industries close to an all-powerful bureaucracy and to the country's political and economic masters, for whom strong state industries still underpin a socialist ideology.
-China is expected to protect its domestic oil and natural gas majors after accession, although the State Bureau of the Petroleum and Chemical Industries acknowledges that tariffs will come down on crude oil and natural gas, processed fuels and plastics.
-Approvals processes and fees may be employed as non-tariff barriers to control imports. The central government is clamping down on foreign penetration of the mobile phone market with a moratorium on joint venture approvals, a review of locally-approved ventures and strict enforcement of quotas and export requirements. The authorities are tightening inspections of imported cars with new regulations, effective from January, at point of entry and point of sale. These will cover paperwork, quality and safety. Regulators such as the CIRC retain important rights of examination and review.
-The PICC, for one, wants protective regulations, claiming an emerging industry.
-There is speculation that foreigners will be, banned from internet service provider areas even after accession to the WTO. Government pronouncements on future foreign involvement in this sector have been confusing and contradictory.
-As sectors open to foreign competition, the fight for market share will intensify. On its recent record of intervention in the television and mobile phone markets, the authorities will step in to protect domestic company revenues, setting price floors.
The government will continue to subsidise certain activities – domestic mobile phone makers received Yn1.4bn in 1999. Over the coming five years, 5 percent of installation charges has been earmarked for mobile phone research and development.
The State Textile Bureau says that textiles will remain a pillar industry after WTO accession. The wool and silk industries will be the focus of reform in 2000.
The Ministry of Science and Technology has pledged that the government would support vehicle manufacturers, saying that to do otherwise would be to hand this market to foreigners. Computer manufacturers are also to be protected to help them achieve economies of scale.
New and revised regulations
Government departments have already made submissions to the State Council.
Some are issuing new rules (for example, on web site content), implementing recent rules (on the mandatory registration of encryption technology) or enforcing existing ones (the continued unwinding of China Unicom's 'China-China-foreign' joint ventures, a backdoor for foreign investment in the pro-tected telecoms services sector, which is now prohibited). The CIRC has submitted revised regulations on foreign-funded insurance companies to the State Council, prompted by WTO considerations.
Industrial standards are being defined to rationalise development (as with the trial telecoms standards, for implementation on July 1) and improve domestic product quality.
The tax regime will be standardised to eliminate preferential taxation treatment for foreign-invested companies.
Some companies are setting ambitious targets, especially in telecoms. China Mobile Telecommunications, for example, wants to lift revenue by 25 percent to Ynl04bn this year, to add 20m subscribers and to improve roaming capabilities at home and overseas, adding 18 countries to make 65 in total. China Telecom wants to lift fixed-line penetration from 13 percent to 16 percent, as well as diversify into advanced technologies. China Unicom wants to secure 30 percent of the mobile phone and internet services markets within five years, and significant expansion of long-distance fixed-line capabilities.
Manufacturers are also becoming more focused. Konka is targeting the markets of Motorola, Nokia and Ericsson, and budgeting Yn500m for research and development over the next three to five years. Equipment manufacturers Huawei, Julong and Zhongxin, in line with processors in many sectors, are planning for improved competitiveness as component costs drop with tariffs and overseas markets open. Computer manufacturer Legend is planning domestic and foreign acquisitions of internet content providers, and diversification from personal computer production and retail. It has a merger, purchase and collaboration strategy in place. Legend is understood to be pushing ahead of regulations in areas such as online stock investment and cable services.
In the banking sector, the Industrial and Commercial Bank of China intends building its overseas branch network and expanding international business operations. The Agricultural Bank of China sees home advantage in the west of the country.
The hunt for capital
A host of Chinese companies are looking to list in Shanghai and Shenzhen, or over-seas. They include giants like PetroChina (a unit of China National Petroleum Corporation), Sinopec and the China Offshore Oil Corporation. Bank hopefuls include the Bank of Communications, Bank of Shanghai, Minsheng and China Merchants Bank (which would like its online banking system on Nasdaq). China Pacific Insurance wants its property spin-off to go public. New rules on insurance companies are due to be implemented on March 1, allowing insurers to list A-shares. Among internet content providers, Beijing Kunpeng Technology Development wants a 2001 overseas listing for its Kunpeng web site. China Unicom and Chinanet (China Telecom's internet service provider) want to issue abroad for expansion capital.
The Sino-foreign joint venture route, which also brings expertise to underdeveloped sectors, is being pursued, for example, by China Pacific Insurance's life interests.
In banking, debate centres on how best to equip Chinese institutions for the future. Proposals on the status of the big four state commercial banks include conversion to policy banks, public listing, asset sales and full separation from the state. The government wants small and medium-sized banks to flourish alongside these large banks, but WTO accession represents a serious competitive challenge. The desirability of a strict separation of trust, banking, securities and other business is another issue. The merits of accession and the outlook for domestic companies and Sino-foreign joint ventures are also being debated in pharmaceuticals, audio-visual and entertainment industries and light industries.
Opinion is divided on the impact that accession will have on agriculture. The many subsistence farmers should be unaffected, as should small producers who sell into local markets away from established distribution corridors. But large concerns, for example in the northeast, face tough competition and considerable pressure on domestic prices.
The State Council has established a WTO Work Group. New work groups are to provide a formal arena for assessment of the impact of membership and the training of officials, beginning this year.
China Unicom and China Telecom are linking networks. China's mini-vehicle producers are responding to the advent of WTO membership by forming an alliance.
Computer leaders Legend and Founder consider themselves tested in the rigours of competition and equipped to withstand additional pressure. Agricultural machinery producers are regarded as uniquely suited to their local markets, compared with the large overseas suppliers that deal in products tailored for different conditions. They see opportunities for small-scale equipment in most world markets. Some of China's many low-cost light industrial goods consumers may claim to be similarly advantaged.
The government is generally upbeat about China's listed textile companies' export prospects as tariffs come down and quotas rise in the years to 2005.