Memorandum submitted by the Confederation
of British Industry (CBI)
1. CBI welcomes the inquiry undertaken by
the House of Commons Treasury Committee into the impact of China
on the world and UK economy and for the opportunity to comment.
2. As the UK's leading business organisation,
CBI speaks for some 240,000 businesses that together employ around
a third of the private sector workforce and covering the full
spectrum of business interests both by sector and by size.
3. China is making rapid progress in both
economic and political terms and CBI seeks to provide assistance
to those member companies who are already operating there and
to those who are contemplating doing so.
TRENDS IN
THE CHINESE
ECONOMY AND
POLICIES GOVERNING
THE ECONOMY,
INCLUDING EXCHANGE
RATE POLICY
4. For business, there are a number of key
issues relating to the development of the economy in China. CBI
sees the following trends as being of fundamental importance:
— Uneven growth. Growth has been confined
to the eastern seaboard and its immediate hinterland. The central
and western interior has been mostly excluded. The Chinese Government
has been trying to manage this to prevent mass migration and the
resultant pressure on resources.
— Reform of state-owned enterprises.
There is still widespread inefficiency and low profitability in
the state sector. As long as resources continue to be diverted
here, the development of a more dynamic private sector will be
hampered.
— Reform of the banking system. The
stock of non-performing loans is by some accounts almost half
of GDP. The dysfunction of the banking system stunts the development
of a real credit culture and holds back an efficient allocation
of resources. Concerns have been raised by firms operating in
the sector over local currency requirements.
5. CBI has identified the priority issues
for business and would like to take this opportunity to elaborate
on them. These relate to establishing a competitive business environment
in China, namely intellectual property rights (IPR), red tape
and transparency.
6. Intellectual property protection is of
particular concern—this is the single most important issue
for CBI members. Whereas large firms may have the resources to
try to protect their IP, this is often very difficult in practice.
It becomes a virtual impossibility for SMEs. Investment by SMEs
is often held back by their perception that IP will be a problem.
CBI has often made this point to Chinese interlocutors who have
acknowledged the issue. However, enforcement remains extremely
patchy. CBI will continue to lobby for concerted efforts to address
this issue. Chinese business itself should be encouraged to recognise
the value of IP protection. China produces over 2 million graduates
a year, 30% of whom are in science, engineering and technology-related
disciplines. As Chinese firms move up the technology ladder, we
hope they will begin to understand the need for protection of
their own IP and that this will lead to internal pressures for
better enforcement of IPR.
7. Red tape is one of the most formidable
obstacles to foreign companies in China, where the bureaucracy
can be massive and over-arching. Foreign companies encounter rigid
bureaucracy at every level, from the national level, through provincial
governments and down to city authorities. There can be problems
with joint ventures. Some 3,000 UK companies are involved in joint
ventures with Chinese partners yet it can be difficult for foreign
investors involved in disputes with joint venture partners to
seek recompense or resolution of any problems that may arise.
Procedures and effectiveness of the arbitration authority or local
courts and officials can hamper the process. A further problem
is the issue of licences which are required to operate and often
involve protracted processes.
8. Businesses also need a transparent environment
in which to operate. CBI member companies have suggested that
they sometimes face discrimination or unjustified restrictions
with regard to the inequitable enforcement of environmental and
health and safety legislation, for example. In addition, company
law and international accounting standards need to be effectively
enforced in order to provide the necessary transparency to economic
operators and the adequate protection of, and information for,
investors and shareholders, as well as to enable the self-regulatory
mechanisms of the market to operate.
9. One further issue which needs to be mentioned
is the value of the renminbi. There is debate, particularly in
the USA, over the current peg to the dollar and the fact that
it has become undervalued. At this moment, CBI does not believe
that the peg is a major issue for British exporters.
THE IMPACT
OF DEVELOPMENTS
IN THE
CHINESE ECONOMY
ON THE
WORLD ECONOMY,
INCLUDING DEMAND
FOR RESOURCES
10. Chinese economic growth has averaged
10% over the last 20 years, and the statistics for its manufacturing
are staggering. For example, 75% of the world's toys, and 58%
of the world's clothes are produced in China. Driving this is
massive import and export activity, which has a significant impact
on the world economy.
11. China is the world's fourth largest
exporter with a 6% market share of global exports totalling $38
billion in 2003 as well as accounting for over 10% of world imports
in a range of commodities from crude rubber to electrical machinery.
Fifty to 60% of China's imports are materials used to produce
exports. Some commentators have calculated that more than $1 billion
in foreign direct investment arrives every week. In addition,
Chinese outward FDI reached $2.9 billion in 2003, moving it, for
the first time, among the top five leading sources.
12. Many British companies are taking advantage
of Chinese economic activity. A 2004 CBI survey showed that China
is now the preferred offshoring destination in Asia for UK companies,
attracted by cheap labour, a skilled workforce, and large markets.
As a result both light and heavy manufacturing continue to boom,
accounting for 74% of FDI flows in 2003.
13. Opportunities for British companies
will increase as the service sector develops. According to the
United Nations Conference on Trade and Development, services are
expected to be the major beneficiary of FDI in the period 2004-07.
In accordance with its WTO commitments, China is removing restrictions
on service industries such as banking and finance, telecommunications,
logistics and distribution, transportation, retail and wholesale
trade, and other professional services. As the service sector
becomes increasingly important, China is likely to play an increasing
role in the WTO GATS negotiations.
14. CBI believes that a third area of opportunity
is likely to be in the hi-tech and knowledge sectors. Inward foreign
direct investment (FDI) established by multinational companies
has allowed high technology industries such as telecommunications
equipment, automatic data-processing machines and computer parts
and accessories, to grow. There are now over 100 R&D centres,
mostly in Shanghai and Beijing. The growth of these industries
will increase significantly in the future. CBI sees British companies
as especially well placed to take advantage of this growth given
their leadership in these areas.
15. Against this background, CBI members
have highlighted a number of key issues. The first of these relates
to the impact of the abolition of textile quotas from 1 January
2005. As China is predicted to flood key markets like the US and
EU with cheap low value added goods, vulnerable economies such
as Bangladesh, Sri Lanka and Nepal, which have developed on the
back of quotas and tariff preferences, could be put at risk. The
textiles and clothing sectors accounted for 14% and 16% respectively
of total imports to the USA in 2002 and 11% and 22% of total imports
to the EU. In December 2004, the Chinese Government introduced
export tariffs at around 2 to 6 cents a garment, rather than as
a percentage of the total value of the goods. This should provide
valuable revenue to the Chinese Government and may lessen some
of the impact of quota removal.
16. Imports of textiles and clothing from
China will increase after elimination of quotas and prices fall.
An increasing and overwhelming surge of imports into the EU and
slashed prices will produce a reaction from both EU industry and
some Member States for the use of trade defence measures. CBI
supports the UK Government in working to ensure that safeguard
measures are only considered where they clearly meet relevant
objective criteria and where there is a clear restructuring plan
in place for the domestic European industry. Supply chains will
also be affected. British companies have traditionally invested
in sourcing materials from other countries such as Sri Lanka and
have developed their patterns of supply through investment in
both people and production techniques. Concerns exist about possible
disruption to well-established supply-chains with the advent of
cheaper sources in China.
17. The second issue is related to China's
demand for resources. There is anecdotal evidence that shortages
on the world market are related to Chinese consumption of such
things as steel, concrete and oil, but CBI has no hard evidence
that consistently supports this.
18. A major issue for some of our members
is the supply of coke. China is the largest exporter of coke.
In 2003, Chinese coke exports fell due to a fundamental shift
in Chinese capacity and domestic demand. This has led to a critical
supply situation for coke. EU steel producers have been faced
with having to cut production because of supply shortages and
uneconomic coke costs. CBI played a crucial role by lobbying to
ensure a mutually acceptable agreement on the management of Chinese
coke exports in 2004.
19. Finally, any squeeze on UK sector-specific
production and employment as a result of genuine competitive global
market forces should be seen as a potential opportunity for the
economy as a whole. In principle, UK consumers should benefit
from lower prices and UK investors from improved returns on their
investments. Jobs lost in the affected industries should be supplanted
by newly—created jobs in other sectors—sectors where
the UK has a comparative advantage.
20. However, in the face of these global
competitive pressures, it is all the more important that:
— the squeeze on the competitiveness
of the affected UK sectors is not compounded by additional, unfair
policy-related impositions—whether high taxation, regulatory
costs, an uneven global playing field in terms of quotas and tariffs
or an exchange rate that is overvalued;
— the regulatory environment facing
business is flexible enough—and the tax burden light enough—to
allow sufficient expansion of new industries, so that jobs in
the declining sectors can be replaced by new jobs in expanding
industries;
— active labour market polices, lifelong
learning and the taxation system allow individuals who lose their
jobs as a result of global competition to move relatively easily
into the newly-created ones.
THE POSITION
OF CHINA
IN INTERNATIONAL
ECONOMIC FORA
21. China is playing an increasingly significant
role in a number of international economic fora. China hosted
summits of APEC (Asia-Pacific Economic Co-operation) and ASEM
(Asia-Europe Meeting) in 2001, and is active within the ASEAN
Plus Three (China, South Korea and Japan) grouping. The OECD has
also involved China in a constructive programme of development
and co-operation on issues such as tax, corporate finance, environment
and IP.
22. CBI welcomed China's accession to the
WTO in 2001, coinciding with the launch of the Doha Development
Agenda. The value of bringing a country representing over a sixth
of the world's population and a rapidly increasing share of world
trade into the multilateral rules-based system—which CBI
supports—should not be underestimated. Accession also coincided
with a shift in the balance of power inside the WTO. China chose
to join the G20 at Cancun in 2003. However, vocal leadership is
provided by Brazil, South Africa and India. CBI sees a key role
for China in the WTO as a member of the G20 and as a proponent
of progressively freer trade.
23. During its membership there has been
one official complaint brought against China at the WTO. However,
businesses are now raising concerns about China's failure to comply
with its WTO commitments and a number of cases are likely to emerge
in the near future.
24. During CBI's visit to China in 2004,
the issue of achieving Market Economy Status (MES) was raised
frequently in high level discussions with Chinese officials. MES
is a technical assessment relating to trade defence investigations
and is not a judgement on the economy as a whole. CBI welcomes
progress being made on this issue and the establishment of the
EU-China working group but remains in favour of China obtaining
MES only when it is ready and satisfies the five core criteria
as set out by the European Commission.
UK-CHINA TRADE
RELATIONS AND
CHINA AS
AN EXPORT
MARKET FOR
THE UK, AND
COMPARATIVE PRODUCTIVITY
ISSUES
25. The UK is the sixth largest provider
of foreign direct investment in China, and the largest from the
EU, with an accumulated stock of $18.5 billion. UK companies exported
around £1.94 billion in 2003, an increase of 28% over 2002.
UK export performance trails its competitors, ranking fourth amongst
EU exporters after Germany, France and Italy. UK Government figures
show that our direct visible trade deficit with China grew from
£32 million in 1988 to £4.24 billion in 2001. CBI would
like to see our ranking increase significantly over the next few
years.
26. In the opposite direction, more than
200 companies from the People's Republic of China have invested
in the UK. The majority are in the banking, consultancy and trading
sectors, but more companies are now looking at the UK's R&D
capabilities and service sector. CBI will continue to promote
the opportunities and expertise of British business, both when
meeting potential Chinese investors in the UK and when visiting
the market.
27. China remains a difficult market for
all companies large and small. The importance of developing longer-term
relationships at all levels and extending UK Government help to
SMEs cannot be overemphasised. CBI is developing closer relations
with individual businesses and federations across the market to
help persuade the Chinese that many of the things CBI values highly,
such as IPR protection and a level and transparent playing field
for all businesses, are the very basis of greater wealth creation.
CBI is committed to developing as many opportunities for our members
as possible.
28. As a significant business player, CBI
has a close interest in the approach being adopted by the UK Government
to enhance opportunities for business with China. CBI is pleased
that the Government has been developing a coherent and long term
commitment at all levels with the Chinese and welcomes their efforts
to provide practical support for UK firms. The annual meeting
of Heads of Government and the activities of the Joint Economic
and Trade Committee are welcome developments. Given the fact that
there are a number of players all working on the relationship
with China we would like to see better evidence that the various
activities of all actors are joined up effectively. At present
there may be too many initiatives from too many Departments which
could create the impression of poor co-ordination. CBI is ready
to play a role in helping to ensure that all UK players pull in
the same direction.
January 2005
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