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.