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Overview of China’s Economy and Market Opportunities

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Presentation on theme: "Overview of China’s Economy and Market Opportunities"— Presentation transcript:

1 Overview of China’s Economy and Market Opportunities
Craig Allen Senior Commercial Officer U.S. Embassy, Beijing

2 Headline News 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 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. - 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.

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

4 Leading U.S. Exports to China (4 digits) (Jan. - Dec. 2005)
Product Value (USD) %Change aircraft and parts b % + digital integrated circuits b 16.98% + soybeans b 3.25% - cotton b 1.51% - ferrous metal scrap b 34.39% + auto parts / accessories b 72.04% + auto data processing equip b 0.13% + copper scrap b 42.31% + aluminum scrap b 94.20% + Waste of paper b 42.79% + Electric Apparatus b 7.79% + Raw hides&skins of Bovine equine animal b 16.6% + Five of our top exports are high technology categories, three are agricultural commodities and four are scrap items.

5 Composition of U.S.- China Trade 2005 Top 12 (2 digits)
U.S. Imports (from China) %Change Elect. Machinery % Machinery % Toys/Sports equipment % Furniture and bedding % Footwear % Plastic % Knit apparel % Leather Goods % Iron/steel products % Vehicles % Optic/Medical inst % Misc Textile % U.S. Exports (to China) %Change Electric.machinery % Machinery % Aircraft,spacecraft % Optic/Medical inst % Grain,seed,fruit % Plastic % Iron and steel % Organic chemicals % Cotton+yarn,fabric % Wood pulp, etc % Copper % Vehicles % 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.

6 U.S-China Bilateral Trade Balance
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 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.

7 Chinese Trade Balances
In USD billion 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 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

8 China’s Multilateral trade balances by industry
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.

9 12.9% growth of retail sales in 2005.
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) 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?

10 Fiscal and Monetary Policy Stability
2000 2001 2002 2003 2004 2005 Inflation 0.4% 0.7% 0.1% 1.8% 3.9% Rev/gdp 15.3% 17.1% 18.5% 21.7% 19.3% - Bud. Bal -3.6% -3.2% -3.3% -3.1% -2.5% +1% Gov. Res. 171b 219b 300b 403b 600b 818b Ex. Debt 149b 164b 168b 182b 229b Let’s look at fiscal and monetary policy indicators. All of these measurements taken together suggest that the Chinese economy, from a macro perspective, has been managed extremely well. If this were a race car, the dashboard is showing you that all systems are working well. Regarding government expenses, revenue up 12.7 % o 03 and expenses up 13.4%. Total domestic government debt is about 24 percent.

11 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) 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.

12 Market Entry Roadmap Direct Exports Sales Agent / Distributor
Resident Representative Office Wholly Foreign-Owned Enterprise Foreign-Invested Commercial Enterprise (FICE) Those with a legal entity established in 2005: 11 percent joint venture 33 percent representative office 49 percent WFOE or FICE

13 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

14 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) 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) SITL Logistics (GZ) MEDTEC China (SH) SINOCES Consumer Electronic (Qingdao) China Int’l Building Decoration Fair (GZ) CCFA Franchising (SH) Book Fair (BJ) CIFTEE (BJ) Analytica China (SH) CIEME Equip (Shenyang) Security China (BJ) EP China (BJ) PTC Asia/ Metal Working (SH) Zhuhai Air Show (GZ) MEDTEC China (GZ) Printed Circuit & Electronics Assembly (GZ) 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.

15 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

16 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

17 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

18 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

19 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 depending on location and size. Registered capital in the amount of $10,000 still required.

20 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.

21 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 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

22 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

23 Anticipate Problems - micro
Management-level human resources Bureaucracy Unclear Regulations Lack of Transparency Inconsistent Regulatory interpretation Corruption Contract Enforcement Local protectionism As ranked by the members of the American chamber of commerce

24 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 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

25 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

26 American Trading Centers:
Harbin Nanjing Dalian Ningbo Qiangdao Chongqing Tianjin Kunming Xiamen Zhuhai Wuhan Shenzhen Hangzhou Xiamen

27 ATC Program Coordinators
Beijing Shanghai Guangzhou Ms. Julie Jiang Ms. Cindy Qian Mr. Barry Zhang (86 10) * 809 (86 21) *6145 (86 20) *22

28 China in a Time of Transitions
China is simultaneously undergoing a series of dramatic transitions: Confucian to modern Communist to market-driven (not capitalist) Rural and agrarian to urban and industrial Economic Autarchy to global integration China is presently undergoing huge transformations. SLIDE It would be foolish to say that any of these transitions will be easy. Moreover, when you put them all together it seems clear that they doing business in China will be extremely difficult – but potentially very rewarding. As my formal Ambassador once said, “if you want a quiet life study Liechtenstein – don’t study China.” But, if you do decide that you wish to come to China, as part of the Department of Commerce, FCS would like to assist you with smooth market entry.

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