Preparation of Manufacturing Sectors for SACU-India and SACU-China trade negotiations

China - Cross Cutting Aspects

State

• China is the world's third largest country (9.6 km square) and consists of
• 23 provinces,
• 5 autonomous regions,
• 4 municipalities, and
• 2 special administration regions

Governance

The State Council (CCP) is:

1. responsible for exercising unified leadership over the local state administrative bodies; and
2. regulates the division of power and the functions of the state administrative organs at the central level and the provincial, regional and municipal levels

Economy

• Population is 1.3 billion 28 times South Africa's
• GDP is 9 times South Africa's
• Per capita gdp is a third South Africa's
• China's economy is the 7th largest in the world
• It can be 4th soon
• Growth is 8%+ pa fired by exports/FDI.
• A consuming middle class is emerging  

Capacity Accummulation

• China sustains an extremely high rate of capital formation equal to 40% of gdp
• A high proportion of rapid growing student numbers is enrolled in engineering and business sciences.
•  Expansion of  infrastructure is a priority especially transport
• Urbanisation is equal to a city of 20 million p.a.  

Reforms

Market orientated reforms started in the 1980's

• To reduce the constraints on growth of the rigid communist economy.
• The reforms that drive economic transformation in China are
  • the rationalisation of the State Owned Enterprises (SOE's);
  • the reform of the regulatory framework of markets; and
  • the internationalisation of the economy.

State owned enterprises

• Aggressive strategies iro of SOE's include: closures, mergers, sale of ownership and permission to SOE's to shed redundant labour.
• The advent of private enterprise reduced the importance of SOE's  from more than 80% of  output pre-1980 to 37% in 2003.
• The inefficient SOE-sector poses a threat to the banking sector.
• Job losses by SOE's caused serious social problems calling for alternative social security approaches.

Private enterprise

• Reforms allowed the entry of new enterprises mainly:
  • collective enterprises;
  • private entrepreneurs; and
  • foreign investors.
• Especially foreign investors targeted China's comparative advantage in labour intensive light industries.
• SOE's are mainly found in heavy industry.
• Foreign investors came from Hong Kong, Taiwan and Korea with extensive foreign marketing expertise.

State support

China has relied on six types of industrial policy tools and incentives:

• central government financing and planning;
• empowering key industries with direct financing;
• preferential interest and tax rates
•  favourable financing for target industries;
• infant industry (trade) protection;
• pricing policies; and administrative means.
• In addition there are:
  • the systematic guidelines to channel FDI into desired industries through the granting of licenses and approval of investment projects.
  • The various restrictions imposed on foreign ownership, business ranges, and geographic scope of foreign-funded enterprises.
  • Artificially low real interest rates
  • Undervaluation of the Yuan
  • Active competition between and provision of incentives by state and municipal governments.
• Incentives focus exclusively on investment
• State owned Banks are forced to finance mostly SOE's in a non-sustainable manner
• Severe excess capacity is installed because of lucrative incentives
• Centre aware of risks but not always able to discipline development ambitions of provincial governments
• Huge potential for moral hazard but government willing  to bail out those in distress.

Internationalisation

• Foreign companies were the main vehicle for China's outstanding export growth.
• FIE's increased their share of Chinese exports from 20% in 1992 to 54.8% in 2003.
• The share of SOE's in exports fell from 46.7% in 2000 to 31.5% in 2003.
• The FIE's transformed the export structure from primary to manufactured goods. In 1985 primary exports was 50% of merchandise exports. In  2003 manufactured goods accounted for 92% thereof.
• China is challenged to develop high-technology products locally and is heavily reliant on imported technologies.
• It is promoting the development of its high-technology sectors. 
• China is moving to a position where it will potentially be able to supply the developed world with  high-technology goods and services,
• It will also meet all their all the low-technology needs
• China may soon monopolise the entire supply chain, from basic manufacturing to the provision of post-industrial services.
• Achievement of membership of the WTO is an important step towards integration into the global economy.
• Market entry is also enhanced by China's predilection for  bi-lateral agreements with countries and trading blocks.
• China favours Asia in the conclusion of trade agreements
• China shows a special interest in Africa in its quest to procure raw materials .
• A byproduct of China's export competition is the marginalisation of industrial development of African countries 

WTO Membership

• Membership of the WTO imposed a number of requirements:
  • Tax reforms to eliminate incentives and subsidies
  • Strengthened and amended IPR laws and regulations
  • Removal  of price control of imports through licensing and quota restrictions 

Taxes

• Tax reforms to eliminate incentives (WTO) are expected not to come into force before 2007.
• The flat tax rate on profits is 33%  but is reduced by concessions:
  •  15%  in SEZ's, ETDZ's, EPZ'S and the western region.
  • 15% may also apply to transport-infrastructure/some others
  • refunds, tax holidays and allowances apply to targeted activities.
• A capital gains tax is in force.
• South Africa and China agreed on avoidance of double taxation.
• Uniform personal income taxes on locals and foreigners apply ranging from zero to 30% differentiated over nine levels.

Financial System

• The Chinese financial system is highly regulated and relatively underdeveloped.
• The People's Bank of China is the largest bank in the PRC and acts as the Treasury.
• The China Investment Bank distributes foreign capital from a variety of sources.
• The China International Trust and Investment Corporation (CITIC) operates similar to  Bank of China.
• The People's Construction Bank finances capital construction projects from the state budget.
• The Agricultural Bank of China functions as a lending and deposit taking institution for the agricultural sector.
• A number of international banks have been permitted to open branches in China .
• Participation in the financial sector has been minimal.
• As part of China's WTO commitments all remaining restrictions on local currency transactions will have to be removed and foreign banks will be able to conduct transactions in yuan renminbi with both Chinese companies and individuals.
• Financial sector reform is ongoing, having being identified as a key area for promoting economic growth and attracting FDI.
• The rate of reform is slow.
• The banking sector suffers from non-performing loans and government strives to improve the situation in order to avoid a banking crisis.
• The Chinese stock markets have been described as relatively underdeveloped and in need of internal reform. 

Infrastructure

• The transport infrastructure in China is undergoing improvement, particularly with regards to port development and capacity and the improvement of road and rail networks.
•  Infrastructure development favours the inland provinces to support investment in the Western regions. Eight arterial highways are expected to be completed by 2010 linking the region with the coastal areas.
• China has embarked on several power generation and hydro electric projects and has also urged foreign companies to become involved in the infrastructure development process in the country.

Foreign Direct Investment

• China's relies heavily on foreign investment.
• There is a wide range of constantly changing incentives offered by the Chinese governments designed to attract foreign capital and technology to their particular areas or regions.
• Special preferences are granted to the following foreign investment enterprises:
• production mainly for export
• production enterprises possessing advanced technology
• investment in the central and western regions..
• Restrictions apply to foreign investment in some industries and sectors.

Foreign Direct Investment

• Hong Kong, Korea, and Taiwan are important investors.  .
• Administration poses a bureaucratic hurdle to foreign investors.
• This is acute when it comes to:
  • starting a business,
  • licensing applications and
  • applying for credit.
• Foreign investors are also wary of a lack of transparency and high levels of corruption.

Threats

1. China in transition to a social market economy.
2.  Pockets of the economy are "marketised" but state intervention apply in many others esp. SOE's.
3. Intensive involvement by the state (central, provincial and local) empower industries with direct financing, preferential interest and tax rates, subsidies contingent on exports and favourable financing of target industries.
4. Banks are state controlled and they are bailed out when bad debts become a burden.
5. Intervention by government officials in a way inconsistent with market principles lead to irrational investment  and excess capacity.
6. While pricing becomes non-transparent and divorced from market discipline because of interventions.
7. Although China is obliged to do away with trade related investment measures, progress seems to be slow.
8. The undervalued Chinese currency contributes considerably to competitiveness in international markets.
9. Non tariff barriers and bureaucracy prevail that discourages trade 
10. Contravention of intellectual property rights remain a huge problem.
11. Penetration of Chinese exports into the South African market is rapid. Why bi-lateral preferences?
12. The Chinese economy is 9 times South Africa's and its population 28 times. The difference in capacity to trade is to China's advantage.
13. NAMA introduces a degree of uncertainty with respect to future MNF tariff levels that may render bi-lateral concessions pre-mature.

Threats Conclusion

The cross cutting threats are sufficient grounds to resist the negotiation of a trade agreement with China at least until such time:

• as it fully complies with WTO obligations, and
• a market determined exchange rate did away with a undervalued Yuan.

Opportunities

• Sustained high growth makes China a prominent modern day wealth creator. Will soon advance from the 7th to the fourth 4th largest market in the world.
• South Africa is to share  in the prosperity that is generated by the Chinese economy.
• Rapid growth gives rise to supply shortages that can be taken advantage of by South African exporters.
• Bureaucracy and NTB's make it essential that the Chinese market be entered with suitable Chinese partners.