An interview with John Beyer, Director of the China-Britain Trading Group
Broadly speaking, what kind of investment and joint venture opportunities are there for western companies in China?
There are huge opportunities, and there's no surprise that China is now the major place in the world for inward investment in the developing world as a nation. That's for two reasons. It's relatively cheap, in terms of labour and so on. And it's a major market in its own right, and I think most of the companies investing have that idea in their heads.
Are British companies taking advantage of the opportunities available?
I think they are. The British companies that are interested in China are actually those companies that take a very long term commitment to a market. It's interesting to see that on direct trade, exports to China aren't as high as, say, Germany, but among European countries that invest in China, the UK is the number one. That's based on the Chinese statistics.
Foreign investment in China so far this year has significantly dropped; why do you think that is?
It's falling back a bit because there was a rush to meet a deadline last April 1996, when the Chinese government announced it would stop imports of machinery being tariff free for JV projects after that date.
I think it's also fair to say that whatever increases you see in the Chinese economy, when you draw it out it's not just an even rise, it's a bumpy graph. There is a wonderful analogy of someone working upstairs with a yo-yo. It's up and down, but the trend in China is upwards all the time.
Does the Communist Party's state planning system still present obstacles for international companies in your experience?
I think the five year plan can actually be of benefit to foreign companies because it lays out where the Chinese government will put its money. It says we will develop so many airports, so many miles of railroad, it's there chapter and verse. Of course at the same time there are lots of projects locally that don't come under the same plan and which are therefore handled by the local authorities, and it's then a question of whether it works with local priorities, or indeed whether a company has its own foreign exchange and can go and buy machinery or whatever, regardless of what the central plan is.
If you're referring to planning itself, there are problems in that sometimes there are a lot of bureaus involved in a given transaction. You may find that if you want to set up a joint venture, you have to get permission from all sorts of different bureaus. But some places have actually brought them together into one office now, so that there's an easier planning procedure in places like Shanghai. The problem is improving because the Chinese realise things need speeding up.
While some companies report success in China, others complain of inadequate returns on investment, red tape, and of being pressured by the authorities into bad partnerships. In your experience what are the pitfalls of doing business in current day China ?
Well one is identifying the right partner. For a joint venture you might find the industry in China is so spread out that you have 200 potential partners. Whittling that down to one or two really useful people is a really long process. But companies are wise to take that long process, because a lot of joint ventures fall apart from people rushing into bed together too quickly. It's better to spend some time getting to know your partner, their strengths and weaknesses, for them to understand what you're really after than rushing into a deal.
Some companies have complained of pressure from the Chinese government to hand over technology. Is this a common problem in your view?
Yes, one of the reasons they want foreign investment is of course to bring new technology into China - there's no secret in that. But the problem is there's not always adequate protection of intellectual property in China, and this is a big fear for companies going into invest. China has either passed laws or has signed up to the relevant international conventions. The problem is not really the theoretical framework. For example, the Arbitration Commission that looks at disputes in Beijing is very even handed. The problem is that you get an award from the actual authorities in Beijing, and then you find the little factory wherever which is copying your product or using your technology won't pay the fine. So it's an enforcement problem, one again which is recognised by the authorities.
That's the main part of the dispute between the US and China over the last few years - the pirating of CDs and so on. Partly it's because it's a huge country and they don't have the legal structure there in place yet in the same way they don't have the road infrastructure. Everything is half-built at the moment.
Are there signs that the legal structure is going to improve soon?
I would say so. If you talk to lawyers here they're actually pretty impressed by what the Chinese have done in only 15 years. They've tried to put in place a major commercial legal structure in a matter of less than two decades to match what the West has taken 200 to 300 years to put in place.
And what are business people asking for in terms of improving enforcement?
That's what people are concerned about, and they're asking for consistent applications of the laws. Edicts are now coming out of Beijing saying things like it's not permitted to levy extra local taxes on various investment projects.
What people tend to have to do on the enforcement side is to make sure they have good relations with local authorities, that's really the key to success. It's a twin track: you rely on the law when you have to rely on the law, but if possible rely on people you know so if there's a factory that's in dispute with you, you can talk to their supervising bureau and there may be a way of resolving the matter. That's the key - knowing the local Vice-Mayor, the bureau that supervises that particular industry.
Do strains in international relations at a political level have a knock on effect on the business level? Have, for example, British companies faced extra difficulties because of conflicts over Hong Kong?
We tried to pin down whether contracts had been lost or not, but it's difficult to quantify. A lot of companies feel they might have lost out because of that. There's no doubt that if there's the wrong political environment and you're a Chinese customer and you want to buy some equipment, and you have equal price from a company from a country with a political problem and one without, you'll go for the one without - it's human nature. So it doesn't help the atmosphere.
Will that improve after the handover?
I think in a way life may well be a lot simpler after the handover because HK will definitely have returned to Chinese rule, it will take a source of friction out of the relationship. Of course Britain will take a strong interest in HK, but that's different to actually running it.
The general consensus in British business is fairly positive, because business started making their adjustments for the handover two or three years ago. So it's not as if managers are saying 'Help, the financial market won't work anymore !' And the stock market is going up and up all the time, which shows some optimism.
The basic source of optimism is the geography and infrastructure in Hong Kong - it's a major port with a huge reserve of well educated business people. That's not going to go away, and it will still be a very good jumping point into China.
Do you see Hong Kong clashing in competition with Shanghai?
Not really, because the two are quite different and also quite far apart. To really extend business in China you're going to need a couple of anchor points as time goes on. I think they'll both work side by side, because it's a huge economy and a huge continent.
What's Britain's position on China joining the WTO?
I think we're very keen. Among Europeans were one of the keenest, and Europe's keener than the US. The main argument is that China not being in will actually be a disadvantage. Better to have them in the club where we can discuss more tariff reductions and more open trade.
The Chinese government is considering further economic reforms. Which are a priority in your view?
Further privatisation (commercialisation as they call it) is on the cards. Over half the state owned enterprises are loss making and that worsens the budget deficit. They're experimenting with foreign capital and a whole range of other ways to cut the deficit. But it's not easy, because some are so huge, or they're not producing the goods people want. If you restructure too quickly though, it could lead to a lot of unemployment.
It will take a 10-15 year process to sort out, just as the British privatisation programme took a similar amount of time.
In the area of financial services, deregulation will happen and more partners will be invited. The Chinese want it to be a step-by-step process, because if banking was opened up too widely too soon it would disrupt the economy. Britain recognises this, but we want British insurers, for example, to be in one of the early steps.
China is one of the major phenomena of the century in the world of politics and economics. It's gone from being a pretty backward country to being a world player with a seat on the security council, with a say at the heart of world politics. The country is now on the way to becoming the No1 world economy. Even conservative estimates say there will be there by the year 2020. So I think while not every business should be operating in China, anyone looking ahead should have a very good look at the possibilities.