Transcript China’s Adaptation and Transformation under Globalization

China’s Adaptation and Transformation
under Globalization
Dr Charles C L Kwong
Programme Leader, Liberal Studies
School of Arts and Social Sciences
The Open University of Hong Kong
1

After three decades of economic reforms, China has
been transformed from a closed and centrally planned
economy to a market-oriented economy integrating
into the global economy. China’s accession to the
World Trade Organization (WTO) in 2001 was one of
the major steps of strengthening its position in the
international economy. Before reaping benefits from
WTO membership, China had engaged in lengthy and
costly negotiation prior to its acquisition of formal
membership. In order to fulfill its WTO commitments,
China has to further open up its market to foreign
investors and competitors, as well as transforming its
enterprises to comply with international standards
and best practices. This paper uses the cases of
foreign trade, foreign investment and the banking
sector to illustrate the costly adaptation and
transformation of China under globalization and to
elucidate China’s eagerness of joining the WTO.
2
1. The Path of China’s Accession to
WTO


China was one of the 23 founding members
of General Agreement on Tariffs and Trade
(GATT, the predecessor of WTO) in 1948.
China lodged its application to join GATT in
1986, but failed.
3


GATT was reinstituted from a set of rules
and agreements into an international trade
organization covering not just traded goods,
but also service trade and intellectual
property rights. WTO was formally set up in
January 1995.
In December 1995, China resumed its
effort to negotiate its WTO membership.
China was formally admitted into WTO in
December 2001.
4
2. Why was China so eager to join
WTO?


Economic growth: It was estimated that
China’s GDP growth would grow by 0.5
percentage point each year after entering
WTO. The fact turns out to be an average
annual growth of 9.9 percent from 2001 to
2005.
Promote economic reform: pressure for
further institutional reform.
5


Enhance competition: exposing domestic
enterprises to foreign competitors, through
which enhancing the efficiency of domestic
industries.
Participate in formulating international rules
6
3. China’s Commitments to WTO

Dispute settlement
China has to follow WTO's dispute
settlement system in case of international
trade disputes.
7

Transparency and predictability
China is committed to provide a more
transparent and predictable system for
business dealings. Laws and regulations
including those not previously available to
the public will be regularly published. A 30day period for obtaining information and
commentary is instituted prior to the
implementation of new laws and
regulations.
8

Tariffs
China has significantly reduced its tariffs on
industrial products by January 2005 to 8.9%
(down from an average of 25%). Tariffs on
furniture, toys and beer are eliminated.
Tariffs have been significantly reduced on
medical equipment, scientific equipment,
motor vehicles, cosmetics, distilled spirits,
paper products, and textiles. Tariffs on
products (such as semi-conductors,
computers and telecom equipments) under
the Information Technology Agreement which
China joined have been eliminated by January
2005.
9

Service Commitments
Market access restrictions has been
liberalized in service sector including
telecommunications, insurance, banking,
and professional services such as
accounting, legal and management services.
10

Trading Rights and Distribution
The previous restriction on the number of
companies that have the right to import and
export goods are relaxed. All enterprises in
China are granted full trading rights (except
for limited products reserved for trade by
state enterprises). The previous prohibition
on foreign companies distributing products
through their own wholesale and retail
systems or to provide related distribution
services, such as repair and maintenance are
lifted under China’s commitments. At
accession, China also committed to allow
foreign service suppliers to distribute
chemical fertilizers, processed oil and crude
oil.
11

Import Licensing
China's import licensing system previously
posed a trade barrier. This is, to a large
extent, relaxed. In the businesses where
licensing is still in place, it must comply
with the principles of national treatment
and non-discrimination.
12

Importation and Investment Approvals
The WTO Agreement on Trade-related
Investment Measures and the TRIPS
(trade-related aspects of intellectual
property rights) Agreement will be followed
to ensure an easier application and
application procedures for importation and
investment approvals.
13

Trade-related Intellectual Property
Rights
China has to protect intellectual property
rights by full implementation of the TRIPS
Agreement.
14

Technical Barriers to Trade
China will comply with WTO Technical
Barriers to Trade (TBT) Agreement (e.g.
inspection, testing, domestic taxes, and
other measures). Technical regulations will
be based on international standards and
will be applied equally to domestic and
foreign products.
15

Taxes
China will ensure that its laws and
regulations relating to internal taxes
(national, provincial and local) and import
charges comply with WTO rules, and are
applied in a non-discriminatory way.
16

Subsidies
All subsidies on industrial goods prohibited
under WTO rules are not allowed.
Source:
http://www.agrifoodasia.com/English/acc_C
N/cn_wto.htm
17
4. China’s Adaptation and
Transformation after WTO Accession
4.1 Foreign Trade

Dramatic drop in tariff (Table 1) – China
becomes one of the countries with
lowest tariffs.
18
Table 1: China’s Average Legal Tariffs (1992
- 2006)
All products
Year
Primary products
Simple
Weighted
Manufactures
Simple
Weighted
Simple
Weighted
1992
42.9
40.6
36.2
22.3
44.9
46.5
1993
39.9
38.4
33.3
20.9
41.8
44.0
1994
36.3
35.5
32.1
19.6
37.6
40.6
1996
23.6
22.6
25.4
20.0
23.1
23.2
1997
17.6
18.2
17.9
20.0
17.5
17.8
1998
17.5
18.7
17.9
20.0
17.4
18.5
1999
17.2
14.2
21.8
21.8
16.8
13.4
2000
17.0
14.1
22.4
19.5
16.6
13.3
2001
16.6
12.0
21.6
17.7
16.2
13.0
After WTO
accession (2006)
9.8
6.8
13.2
3.6
9.5
6.9
Source: Ianchovichina, Elena, and Martin, Will (2004: 188); Wu (2007: 21)
19


China has reduced the coverage of import
licenses from 1,247 in 1992 to 261 items in
1999. In terms of import volume, about 50
percent of imports were subject to import
licenses at the end of 1980s while such
figures declined to 5 percent in 2001.
To align China’s laws and regulations with
those of the WTO, China has revised about
3,000 laws, regulations and sectoral rules
since its accession to WTO and China enacted
the Foreign Trade Law in 2004 to
institutionalized the business practices
corresponding to WTO principles (Wu 2007:
6).
20

Though China has lowered its tariffs
substantially, its trade volume continues to
grow after 2000 (Table 2).
21
Table 2: China’s Imports and Exports
1990-2005 (billion US$)
Year
Exports
Imports
Trade
Surplus
1990
62.09
53.35
8.74
1995
148.88
132.08
16.70
2000
249.20
225.09
24.11
2003
438.23
412.76
25.47
2004
593.32
561.23
32.09
2005
761.95
659.95
102.0
Source: China Statistical Abstract (2006: 168)
22

China became the 2nd largest exporting
country and the first importing country in
the world in 2005 (Table 3).
23
Table 3: Contributions of China, USA, Germany and
Japan to the Growth of World Export and Import Trade
Export
Import
1994-2005 1994-2000 2000-2005 1994-2005 1994-2000 2000-2005
USA
6.34
12.68
11.36
16.50
24.91
9.58
Germany
10.05
5.88
13.33
6.62
5.06
7.90
China
9.79
6.04
12.73
8.79
4.78
12.09
Japan
3.50
3.87
3.20
3.54
4.56
2.70
Total
29.68
28.48
30.62
35.45
39.30
32.27
World
100.00
100.00
100.00
100.00
100.00
100.00
Source: Wu (2007: 23)
24

China became the second largest
manufactures exporting countries in the
world in 2005 (Table 4). It indicates that
China maintains its comparative
advantages of producing manufacturing
products, in particular those labourintensive products.
25
Table 4: China’s Manufactures Exports in
World Total (percent)
2000
2005
2000-05 Average
Annual Growth
World
100
100
9
China
4.7
9.6
26
Japan
9.6
7.5
4
US
13.8
10
2
EU (25 members)
42.7
44.3
10
Source: Wu (2007: 26)
26
4.2 Foreign Investment
Table 5 China’s WTO Commitments in
Service Sector
 Telecommunications Services
China must permit foreign suppliers to
establish joint ventures (with no more than
50% foreign equity) with no geographic
restrictions. Apart from basic
telecommunications services, other valueadded services such as e-mail, voice mail,
online information, electronic data
interchange and enhanced facsimile are
also permitted.
27

Advertising
Within two years after China’s accession,
foreign majority ownership will be
permitted.
28

Financial Services Life/Non-life
Insurance
China must allow foreign life and non-life
insurers and brokers to operate in the
Chinese cities of Beijing, Chengdu,
Chongqing, Fuzhou, Ningbo, Shenyang,
Suzhou, Tianjin, Xiamen, and Wuhan.
29

Banking
China must gradually allow foreign banks to
provide local currency services with a fiveyear phase-in period.

Securities
China must allow foreign providers to
establish fund management joint ventures
limited to a maximum 33 per cent equity
stake (49 per cent by the end of 2004).
30

Wholesale and Commission
Agents’ Services
China must permit foreign distributors of
most products to establish majority-owned
enterprises with no geographic restrictions.
31

Retailing Services
China must permit foreign retailers of most
products to establish majority-owned
enterprises in all provincial capitals.
Source: Funken and Bachmann (2004: 3-4)
32

Foreign direct investment (FDI) from
abroad rose to USD45.5 billion in 1998
from USD11 billion in 1992, representing
an annual increase of 26.7%. It declined in
1999, but then picked up afterwards by an
average growth of 10.6% for the period of
2000 to 2007, reaching USD82.7 billion in
2007.
33

After China’s accession to WTO, contrary to
conventional wisdom, the shares of FDI
from major developed region/countries
such as Hong Kong, U.K. and the U.S.
demonstrate a gradual decline while
respective share of Taiwan indicates a rise
from 8.8% in 1997 to 11.2% in 2006 (Table
6).
34
Table 6: Source of Utilized FDI
Inflows (share, %)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total(USD
bn)a
45.3
45.5
40.3
40.7
46.9
52.7
53.5
60.6
60.3
63.0
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Asia
79.5
77.5
73.3
72.4
74.9
74.2
74.9
75.1
75.6
74.7
Hong
Kongb
47.8
45.8
44.6
43.9
42.6
41.2
39.7
39.0
39.4
43.3
Japan
9.6
7.5
7.4
7.2
9.3
7.9
9.4
9.0
10.8
7.3
Singapore
5.8
7.5
6.6
5.3
4.6
4.4
3.8
3.3
3.7
3.6
South
Korea
4.7
4.0
3.2
3.7
4.6
5.2
8.4
10.3
8.6
6.2
Thailand
0.4
0.5
0.4
0.5
0.4
0.4
0.3
0.3
0.2
0.2
Taiwanb
8.8
10.0
9.2
9.7
11.2
12.6
10.9
10.5
10.3
11.2
Africa
0.2
0.3
0.5
0.7
0.7
1.1
1.2
1.3
1.8
1.9
Europe
9.8
9.5
11.9
11.7
9.6
7.7
8.0
7.9
9.4
9.1
United
Kingdom
4.1
2.6
2.6
2.9
2.2
1.7
1.4
1.3
1.6
1.2
35
Germany
2.2
1.6
3.4
2.6
2.6
1.8
1.6
1.7
2.5
3.1
France
1.0
1.6
2.2
2.1
1.1
1.1
1.1
1.1
1.0
0.6
Latin
America
0.6
1.4
1.2
1.5
1.7
1.9
1.7
1.9
2.4
3.4
Cayman
Islandsb
0.0
0.1
0.1
0.2
0.2
0.2
0.2
0.3
0.3
0.3
Virgin
Islandsb
0.4
0.9
0.7
0.9
1.1
1.2
1.1
1.1
1.5
1.8
North
America
8.1
9.5
11.4
11.8
10.9
12.3
9.6
8.2
6.2
5.9
United
States
7.2
8.6
10.5
10.8
9.5
10.3
7.8
6.5
5.1
4.5
Australia
0.7
0.6
0.7
0.8
0.7
0.7
1.1
1.1
0.7
0.9
Others
1.1
1.1
1.0
1.2
1.5
2.2
3.5
4.5
4.1
4.1
Source: China Statistical Yearbook (various issues); Shik, Thomas and Yim, Joanne (2008: 3)
Note (a): The total amount represents FDI inflows to non-financial sectors only.
Note (b): Cayman Islands and British Virgin Islands are leading offshore financial centers. Based on our
estimation, about 53% of the total funds from these centers originated from Hong Kong whereas about 37% from
Taiwan. Adjustments were made to present a clear picture of the source of the Mainland’s FDI inflows. The
respective amounts of Cayman Islands and Virgin Islands on the table represent the remaining 10%, which
originated mainly from the US, Singapore, E.U., and South Korea.
36

In terms of geographical distribution, FDI
still concentrates in eastern region, in
particular the Pearl River Delta in the
1990’s and the Yangtze River Delta (Table
7). It reflects that the business
environment, including human capital and
infrastructure, of cities in middle and
western regions still lag behind their
eastern counterparts.
37
Table 7: Utilized FDI Inflows by Locations (share, %)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Eastern
Region
83.3
84.9
85.4
85.7
86.1
86.2
84.8
85.9
90.8
81.9
Beijing
3.5
4.8
4.9
4.1
3.8
3.3
4.1
4.2
4.9
-
Tianjin
5.5
4.6
4.4
2.9
4.6
3.0
2.9
2.8
3.1
-
Hebei
2.4
3.1
2.6
1.7
1.4
1.5
1.8
1.2
2.6
-
Liaoning
4.9
4.8
2.6
5.0
5.4
6.5
5.3
8.9
5.0
-
Shanghai
9.3
7.9
7.0
7.8
9.2
8.1
10.2
10.4
9.5
-
Jiangsu
12.0
14.6
15.1
15.8
14.8
19.3
19.7
14.8
18.2
-
Zhejiang
3.3
2.9
3.1
4.0
4.7
5.8
9.3
9.5
10.7
-
Fujian
9.3
9.3
10.0
8.4
8.4
7.3
4.9
3.2
3.6
-
Shandong
5.5
4.8
5.6
7.3
7.5
9.0
11.2
14.3
15.2
-
Hainan
1.6
1.6
1.2
1.1
1.0
1.0
0.8
0.2
0.9
-
Guangdong
25.9
26.4
28.9
27.7
25.5
21.5
14.6
16.5
17.1
-
Other
Regions
16.7
15.1
14.6
14.3
13.9
13.8
15.2
14.1
9.2
18.1
Source: Shik, Thomas and Yim, Joanne (2008: 3)
38

Noticeable changes are observed in the
rising share of FDI in service sector (Table
8). Due to the relaxation of the investment
restrictions, the ownership form has shifted
from joint venture to foreign-owned
enterprises (Table 9).
39
Table 8: Utilized FDI Inflows by Sector (share, %)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Agriculture
3.46
2.64
3.14
3.09
3.65
3.05
2.50
2.73
1.78
1.68
Manufacturing
65.31
60.81
58.34
65.70
67.65
71.12
70.18
72.22
71.19
64.68
Services
31.22
36.54
38.52
32.21
28.70
25.83
27.32
25.05
27.03
33.63
Share(%)
Total
Source: China Statistical Yearbook (various issues); Shik, Thomas and Yim, Joanne (2008: 4)
40
Table 9: Utilized FDI Inflows by Type (share, %)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Joint ventures
43.1
40.4
39.2
35.8
33.6
28.4
28.8
27.0
24.2
22.8
Cooperative
Operations
19.7
21.4
20.3
15.9
13.3
9.6
7.2
5.1
3.0
3.1
Foreign-owned
Enterprises
35.8
36.2
38.7
46.9
50.9
60.2
62.4
66.3
71.2
73.4
Cooperative
Developments
0.8
0.4
1.0
1.1
1.1
0.5
0.1
0.2
-
-
Others
0.6
1.6
0.8
0.3
1.2
1.3
1.6
1.3
1.5
0.7
Total
Source: China Statistical Yearbook (various issues); Shik, Thomas and Yim, Joanne (2008: 4)
Notes: Cooperative Developments mainly refers to an enterprise with developments in the field of natural resources.
41
4.3 Banking Sector

The central government recognised that the
financial conditions of the state owned
commercial banks (SOCBs) must be
improved substantially before formally
admitted into the WTO.
42

In addition, the Asian financial crisis in
1997-98 alarmed the central leaders that
the fragility of the financial sector can bring
about severe macroeconomic instability and
enormous difficulties in the economy.
Decisive steps were implemented to
improve the balance sheets and corporate
governance of the state banks.
43

To speed up the pace of relieving the nonperforming loans (NPLs) of the SOCBs, the
Ministry of Finance (MOF) injected US$34
billion into the Big Four in 1998. The
recapitalization was supposed to alleviate
the financial burden of the SOCBs arising
from the past policy lending. Such
recapitalization by the central coffer was
planned to be ‘first and final’ (Anderson
2007: 172).
44

However, the subsequent establishment of
four asset management companies (AMCs)
in 1999 to absorb 1.4 trillion yuan of NPLs
from the Big Four and the further
recapitalization, amounted to US$75 billion,
of the SOCBs in 2003-06 defeated the initial
design of an ‘once-and-for-all’ relief plan for
China’s debt-ridden state banking system.
Table 10 shows that official financial
support rendered to the state banking
sector reached an amount of US$402 billion,
which was about 16 percent of China’s GDP
in 2006 (Kwong 2008: 8)
45

Central government’s ongoing financial
support has successfully lifted the
capital adequacy ratio (CAR) of the
SOCBs to a level higher than the
international standard of 8 percent[i]
and reduced the NPL ratio to an official
figure of 7.83 percent in 2007 (Q3).[ii]
[i] At end-2005, the CARs of BOC, CCB and ICBC was
10.42%, 13.75%, and 10.26% respectively (see
Deutsche Bank research 2006: 4).
[ii]http://www.cbrc.gov.cn/english/home/jsp/docView.jsp
?docID=2007051774830DBD1F20010BFFD7F4A6791F
6F00 (accessed on 7 January 2008)
46
The rapid drop in NPL ratio was also attributable
to the double-digit credit growth since 2000.
However, from a comparative perspective, even
after many years’ government support, China’s
NPL ratio is still higher than other Asian
developing countries such as Indonesia,
Thailand, and Malaysia in 2007. The NPL ratio of
the SOCBs has consistently higher than the
joint-stock commercial banks (JSCBs) in recent
years. [iii]
[iii] [1] The NPL ratios of SOCBs and JSCBs in 2007 (Q3) were 7.83
and 2.41, respectively. The year end figures in 2006 were 9.22
and 2.81 for SOCBs and JSCBs, respectively. Further details, see
http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=200
7051774830DBD1F20010BFFD7F4A6791F6F00 (accessed on 9
January 2008)
47
From 2005 to 2006, the smaller city
commercial banks, such as the Zhuzhou
City Commercial Bank and the Bank of
Dalian, achieved a much faster growth of
profitability than that of the SOCBs
(KPMG 2007: 4, 27).
48
Table 10 Official Financial Support to SOCBs since 1998
Item
Date
Amount (US$ billion)
Source
Capital injection
to Big Four
1998
34
Ministry of Finance
AMC carve-out
1999
5
Ministry of Finance
AMC carve-out
1999
48
People’s Bank of
China
AMC carve-out
1999
120
People’s Bank of
China
Capital injection
to Big Four
2003-06
75
People’s Bank of
China
Subsidized NPL
carve-out
2004-06
100
People’s Bank of
China
Tax relief for NPL
write down
2004-06
20
Ministry of Finance
TOTAL
402
Source: Anderson 2007: 173
49
5. Conclusion

Before China’s accession to WTO, many
China specialists predicted that Chinese
enterprises might face tremendous
pressure, or even bankruptcy, after opening
up its economy to foreign competition,
which would lead to a rise in
unemployment rate. Though employment
rate had risen gradually from 3.1 percent in
2000 to 4.2 percent in 2004, it remained at
a stable level of 4.2 percent in 2005.
50

China incurred substantial negotiation and
adaptation costs before and after entering
the WTO respectively. However, such costs
have been compensated by the rising trade
surplus and FDI flowing in China.

The decline in tariffs and elimination of
subsidies has certainly reduced the
competitiveness of domestic enterprises in
short term. However, the tariff reduction and
the removal of subsidies reduce market
distortions, which will enhance the efficiency
of the domestic enterprises and the economy
as a whole.
51


The opening up of China’s market enlarges
the range of choices of goods and services
available to consumers.
To converge with global trading rules and
best practices, China has been pushed to
revise its laws and regulations and to speed
up its legal reform. It shapes China to be
governed more by law than by people, at
least in the domain of foreign trade and
investment.
52
References


Anderson, Jonathan (2008), ‘China’s New
Banking System,’ in Hoffmann, W. John and
Michael J. Enright (eds.) China into the
Future: Making Sense of the World’s Most
Dynamic Economy, Singapore: Wiley, pp.
163-212.
Funken, Fritz and Bachmann, Paul, (2004)
‘China’s Third Year in WTO with all Major
Commitments on Track?: A critical review
comprising the results of the latest survey
amongst German companies in China’,
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Commerce, Shanghai.
53
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
Ianchovichina, Elena, and Martin, Will (2004)
‘Economic Impact of China’s Accession to the
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Will Martin (eds.) China and WTO-WTO
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Kwong, C. C. L. (2008) ‘Mission Completed or
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Banking Reform’, Paper presented at the 19th
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2008.
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
Shik, Thomas and Yim, Joanne (2008)
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For China’s WTO commitments, see
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n_wto.htm (accessed on 31 October 2008)
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