Ministry of change
Ministry of change
The prospect that China will soon become a market of 200 million relatively prosperous consumers is attracting many foreign investors and businessmen. And trade liberalisation measures and improved negotiating terms for foreign companies are a further encouragement.
Yet the task of establishing a presence on the mainland has not eased. Simply keeping track of evolving trade requirements and ministry responsibilities is a task in itself. But adopting a fully-fledged, multi-market approach that the market now deserves requires even more commitment.
In the absence of legal redress and growing corruption, negotiating skills must also be sharpened. The delegation of negotiating authority and greater independence for government-affiliated companies has created a more balanced though complex network of influence. Previously, central government dictated the terms. Now, a variety of local government and Chinese partners can help foreign companies forge a deal with the relevant central government bodies.
The Ministry of Foreign Economic Relations and Trade (Mofert) is the vehicle for implementing much of China's foreign business policy. It was established in 1982 to carry out policy on foreign trade and investment as part of the State Plan.
Mofert has equal status to other ministries, like those for tourism and textiles. Each operates according to a blueprint laid down by the Planning Commission and reports to the State Council. Responsibilities inevitably overlap and are now evolving rapidly thanks to the transformation to market economy.
The biggest changes are yet to come. The state cutbacks announced by the National Congress in March are the start of a massive reduction in the influence of the Planning Commission and individual ministries and departments.
And just as the war on bureaucracy is being waged on all fronts, the specific changes to Mofert that will emerge from the current negotiations with central government must be put in the context of an opening up of trade over the past decade. In other words, Mofert must adapt to reflect an economy that allows joint venture companies and foreign investors to re-export.
In this sense, Mofert is a victim of its own success. In 1978 China's exports stood at US$8.75bn, accounting for 4.7 per cent of GNP. By 1991 the total had risen to US$71.9bn or 19.5 per cent of GNP, making China the world's 13th largest exporter by volume.
Foreign investment projects have also shown recent improvements, totalling 80,000 in 1991 and 1992, with a total investment value of US$30bn.
But Mofert can only take small credit for the fruits of open policy. If anything, the bureaucratic weight and slowness of trade reforms have put a brake on exports. And in investment, the level and quality of Western involvement has disappointed. Trading conditions imposed by Mofert have deterred the large, high-tech companies most in demand. The state requirement for joint ventures to re-export in order to generate foreign currency has proved especially onerous and this is now set to be readjusted.
Li Lanqing, who became head of Mofert in December 1990 favours a gradual liberalisation of trade that will not necessarily reduce his ministry's size and influence. The deputy director-general of the Foreign Investment Administration of Mofert concurs: "We are ready to give the green light to big companies so they are able to conduct business in China as anywhere else in the world."
Li would like Mofert to do more to assist foreign business. A year ago, he promised to publish once secret legislation and policies concerning the country's foreign trade management system. But little has since happened and Stephen Shaw, a principle of McKinsey & Co. in Hong Kong, is sceptical that we will see Mofert assume a more dynamic, promotional role. `Old habits die hard," he said. "Because state departments don't operate a policy of rotating staff, we will be left with the same personnel."
Mofert was created as a result of the merger of several trade bodies, including the Foreign Investment Commission, the State Import and Export Control Commission, the Ministry of Foreign Trade and the Ministry of Economic Relations with Foreign Countries. It remains an amorphous body, with a multi-layered and unwieldy structure. Twenty specialist department focus on different aspects of foreign trade and investment. From high level MFN and GATT negotiations to overseeing individual projects, little has moved in overseas trade matters without Mofert getting involved.
Primed for overhaul, Mofert's future has been clouded ever since the creation of the State Council Economic and Trade Office (SCETO) last year. Tasked with economic cooperation, many believed SCETO would force the merger of Mofert with the Ministry of Materials or Ministry of Commerce. Strong denials were is-sued to the effect that SCETO was now in charge of overall economic planning, while Mofert administered the functional aspects of foreign trade. With foreign trade set to increase in importance, so the argument ran, Mofert's role could only strengthen. But Li was later forced to concede that it would have to streamline departments and reduce staff numbers.
Previous attempts at reform proved premature. Its centralised control over trade were lifted in 1984 but had to be re-imposed due to the flood in foreign imports. In 1987, local authorities took responsibility for delivering foreign exchange to central government. But again policy had to be reversed due to corruption among the 6,000 corporations allowed to take part in overseas trade. Nearly a quarter were shut down as a result.
Despite these setbacks the reform process has continued, reflecting the overall shift from central planning to socialist market economy. Reduced state interference and protectionism are an integral part of this shift and have been given extra impetus by China's desire to rejoin GATT. "The central government would like to use Mofert's changed role as a major signal of its opening the economy as per GATT standards," says Shaw.
Protective measures are now being dismantled in a bid to attract advanced technology products and industries, retain MFN status and comply with GATT. Three rounds of tariff cuts in 1992 have helped to pave the way for an early re-entry to GATT. Categories targeted were raw materials, including crude oil, advanced technological products, certain products made in developing countries and garments and shoes.
But much remains to be done. Tariff levels remain higher than other developing countries and Mofert is committed to gradual, but substantial cuts. Reforms to controls on import and exports have also been introduced along with a policy of decentralised and reduced administrative interference.
All this means a scaling down of Mofert's role. Li calls it a change in emphasis from 'macro' to 'micro'. Previously, Mofert investigated at individual project level ? something that increased the power of the individual. Now, the focus will be on legislation, policy and economic management ? the framework that allows business to prosper.
According to Stephen Shaw, "Mofert's role with respect to foreign ventures and foreign trade with Chinese enterprises will shift from one of a 'driver' to one of a 'traffic cop'. Mofert will stop being principle, agent and licenser for Chinese producers. Instead, in conjunction with SCETO, Mofert will gather data, monitor developments and basically rubber stamp all but the biggest and most strategic deals such as semiconductors or defence industries ? where there should be a national master plan. In addition, Mofert will try to figure out a way to be a 'guiding hand' in the development of priority industries, but it is unclear to me how they will do that in a way that is not clearly interventionist."
The best advice for Western companies looking to assess investment opportunities in the current climate is to approach a management consultant or legal firm with local expertise. Little published information is adequate or up-to-date and Mofert is not geared up to respond o direct enquiries. This is perhaps understandable given the vacuum prior to National Congress, but it is the sort of dilemma that Mofert must resolve if it is to succeed in its new role.
The changes in detail
On their own the administrative reforms being undertaken could threaten national industries and create balance of payment strains. To balance this effect, other measures will be employed. "The gist of the regulations is to decentralise the state's control on imports and reduce tariffs, taxes and exchange rates that will act as major levers to guide imports," said Mofert's vice-minister, Tong Zhiguang. These are some of the main elements:
A series of possible measures were announced by Mofert in January designed to attract investment and high technology. China is in talks with many big Western companies in relatively high-tech sectors, such as automobiles, electronics and petrochemicals.
But Tong Y1zhong is also trying to stoke smaller-scale overseas investment, having agreed in principle to allow private enterprises in China to set up joint ventures with foreign firm. Tentative reformist steps in agriculture and services were also discussed.
? Export reforms
1991 reforms abolished state export subsidies to foreign trade enterprises and forced them to become responsible for their own profitability.
In December 1992 Mofert announced the removal of any export items from central licence and quota control. However, the list remains quite extensive and diverse: steel and steel products, for example, line up with TV sets, salted mushrooms and stockings.
The commodities are classified into four categories:
* Natural Resources and Traditional Export Items: 38 commodities whose export volumes are decided by the state.
* Important Foreign Exchange Earners Whose Export Volume are Requested to be Capped by Importing Nations: 49 commodities with export volumes decided by Mofert.
* Famous Trademark or Big Foreign Exchange Export Items: 21 commodities whose volumes are not restricted by the state.
* Exports Subject to Quotas Imposed by Importing Nations: 23 commodities whose export volumes are decided according to bilateral country agreements.
Only 16 commodities, all from category A, are to be managed by the state (including soya beans, rice, crude oil, cotton, coal and certain minerals); the rest are traded by foreign trade enterprises, approved by local authorities. Certain products remain prohibited from being exported altogether, such as protected animals and plants, copper, copper alloy and platinum.
Foreign trade enterprises have no restrictions in trading 'non-controlled' commodities. The restriction on foreign-funded enterprises only being able to export their own products is under review. In a move to attract foreign manufacturers to China, Tong Yizhong said "We're planning to allow these companies to sell their high-tech products in China a and buy certain products locally for exports to balance their foreign exchange."
Import reform has dragged compared to exports. This has impacted on growth in foreign trade and hindered progress in carving out deals with Foreign countries. But new measures include:
* cutting import subsidies to a core of largely agricultural products, such as chemical fertilisers and grain
* cutting tax on imported commodities to the level of developing countries set by GATT
* cutting the number of commodities subject to import licence by two thirds over the next two years (currently accounting for around 30 per cent of total import value)
* speeding up the processing of import licence; and opening more markets to overseas investors
* introducing a floating exchange rate system, simultaneous to economic and price reform
* operating a more open, informative policy. Internal documents were sorted out in 1992 ? the valid have and will be published, the rest will be abolished. *
The Ministry of Foreign Relations and Trade of the People's Republic of China, 2 Dongchangan Street, Beijing, China 100731. Tel; 5198114. Li Langing, minister, Wu Yi, vice minister
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