Examination of Witnesses (Questions 1-19)
8 FEBRUARY 2005
MR RAY
BARRELL, DR
GERARD LYONS,
MR PETER
NIGHTINGALE AND
DR LINDA
YUEH
Q1 Chairman: Good morning. Can I welcome
you to the Committee and thank you for your attendance at our
first session on the impact of China on the world and UK economy.
May I ask you to introduce yourselves for the shorthand-writer,
starting with Mr Barrell, please?
Mr Barrell: I am Ray Barrell.
I am at the National Institute of Economic and Social Research
where I run the team who study the world economy.
Dr Lyons: Good morning. I am Gerard
Lyons. I am Chief Economist and Group Head of Global Research
at Standard Chartered based here in London. Standard Chartered
is a British bank that has significant operations in Asia, Africa
and the Middle East.
Dr Yueh: I am Linda Yueh. I am
an Economics Fellow at Pembroke College, University of Oxford,
and I am also appointed to the Department of Economics at the
London School of Economics. My research focuses on economic and
legal reforms and prospects for China. I also undertake teaching
on the Chinese economy at Oxford.
Mr Nightingale: My name is Peter
Nightingale. I am the Chief Executive of the China-Britain Business
Council, which is the agency set up to help British companies
do business in China.
Q2 Chairman: You are all welcome. Can
I start with some introductory questions? The UK Government has
told us in their memorandum that it expects China to account for
nearly a fifth of the world GDP within a decade. In consequence,
the share of the world economy accounted for by the current G7
is almost certain to decline, but the hope is that the emergence
of new economic powerhouses such as China will boost world growth
enough to ensure that the current G7 economies continue to see
rising prosperity in spite of the shrinking share of global GDP.
Is that a plausible assessment of the current outlook?
Dr Yueh: There are a number of
things to consider here. I think the first thing is if you take
China's current growth trajectory and you think that you can make
projections based on where it is growing at present, then I think
there is quite a lot to be said for the rapidness of its growth
given the fact that it is already larger than half of the members
of the G7, not taking into account any adjustments for purchasing
power. It is a big economy, but on the other hand the sustainability
of growth will depend on a number of factors, and it is by no
means assured. The sustainability of growth will very much depend
on how much China resolves the structural issues in its economy
which derive from its transitional path; and I would argue that,
although China has made a very good set of reforms, there is still
quite a way to go before we could make such projections.
Q3 Chairman: Any other comments?
Dr Lyons: In terms of your question,
I think a key issue is demographic factors. There is no doubt
that the shift in economic power will be to the new emerging economies,
and in particular towards Asia, and that poses challenges and
opportunities for economies in the West. In terms of the G7 you
have mentioned, I think we have already had a taste of this in
the last decade when one has looked at Japan. Admittedly, Japan
has had an economic crisis to contend with, but Japan has already
entered into a slower pace of economic growth. When one looks
at demographic trends, particularly in continental Europe as well
as in Japan, income levels are high to begin with, which helps
prosperity in terms of your question, but the future pace of economic
growth in these economies will be far slower in the future than
in the past, and that is a key issue that the G7 has to contend
with. The States and the UK are less affected by such demographic
trends. Basically the G7 will still be very important, prosperity
will rise, but the future pace of economic growth for many of
the members of the G7 will be much slower in the future than in
the past, and that is a particularly acute problem for Western
Europe and for Japan.
Q4 Chairman: You mentioned challenges
and opportunities. Many people have mentioned those to us in the
past, some saying, "Oh, no, we should embrace China",
and others saying, "Oh, it is a problem for us in the future."
Could you highlight the single key issue that advanced economies,
in your opinion, should be focusing on in terms of responding
to the emergence of China as a major economic force in the world?
Should it be a challenge? Should it be an opportunity?
Mr Barrell: Obviously, as an economy
grows and expands and penetrates markets it is a challenge for
those who are currently producing the same goods as the Chinese,
but, as we have known for at least 200 years, the extent of the
market is dependent upon the size of the economy. The division
of labour and the gains from the division of labour depend upon
the size of the economy and, as China grows, the whole world economy
can grow; everybody can gain from the fact that China is becoming
a larger economy. We gain, first, from becoming more specialised.
We specialise in things we are good at; they specialise in things
they are good at. We gain also from increased competition. Increased
competition is painful for people immediately facing it, but good
for the economy as a whole because it means resources are used
more efficiently. Those, I think, are two of the reasons why you
might expect the strong growth of China to be a positive opportunity
for the G7. China will inevitably grow relative to the rest of
the G7; it is poorer, it has a well educated population, it has
a lot of capacity over the next 20 years to grow as rapidly as
it has over the last 20 years, but over the next five years there
may or may not be crises that could hold it back.
In the absence of the Chairman, Mr Fallon
was called to the Chair
Q5 Mr Fallon: We are looking for the
single key issue. Mr Nightingale?
Mr Nightingale: I think from a
practical business point of view there is no doubt that companies
in this country should be interested in China. They need to consider
China if they have any international dimension to their business
because China is going to affect them, and I think that a large
number of companies will find probably that they have opportunities
in China which they ought to try and take.
Q6 Mr Fallon: Any of the others? You
do not all have to answer each question; it is not that kind of
exam!
Dr Yueh: If I may. I think the
single biggest challenge for the G7 and for other countries in
the light of China's ascendancy is really to take a hard look
at domestic core competencies because we know in the long run
growth and prosperity is not driven by trade, although, yes, there
are gains from trade and as the world expands the pie gets larger,
but when you look at what drives domestic competitiveness, shifting
out the growth potential of an economy, it is domestic factors.
Of course, this is taken with the caveat that when you
have a growing trading partner who is beginning to dominate markets,
one has to think hard about how to move up the value chain of
trade rather than just domestic factors. To give you an example
of where China has enhanced its neighbours despite widespread
perception, my research shows that China's rapid growth in exports,
nearly 500% in the high technology sector in terms of global market
share, has been accompanied by similar growth rates in the East
Asian high growing economies.
Dr Lyons: I would agree with much
of what has been said. Clearly it is an opportunity, the sheer
scale of the economy, but the immediate issue is also very much
linked to the competitive threat from China. It is not just a
direct threat; it is an indirect threat that the UK needs to face
up to. The Treasury has talked about it in terms of the UK needing
to be flexible, innovative, entrepreneurial, but we need to back
up those words with actions to ensure that that is the case: because
it is not just China that is becoming more competitive, China
is forcing other economies around the world to become more competitive,
India as well. There is a lot of near-term competition, but at
the same time I very much reinforce Peter Nightingale's point
about the opportunities, the sheer scale of the market. Remember
that China is already invigorating much of Asia as well, and similarly,
as India comes on stream, India will reinvigorate much of South
Asia. These are huge markets, and compared to continental Europe,
which has an ageing population, you have Asia which has a very
young, dynamic and emerging middle-class, so that is a clear opportunity
for UK companies, not just now, but in the future as well.
Q7 Mr Fallon: The evidence we have heard
so far in this inquiry has shown us that, for example, nearly
half of all UK manufacturing companies see China as the biggest
threat. The impact of China on the European chemicals industry
is described to us as "potentially catastrophic". Would
that not indicate that the official Government view of the impact
of China is perhaps is a little complacent?
Dr Lyons: The reality is that
in any industry around the world where there are not quotas China
does grab a huge market share, because it is both competitive
and innovative and it is investing very heavily in new industries;
so it is not just based on price. Thirty years ago goods produced
in Asia were cheap, low quality. The reality is that goods now
produced in Asia, particularly China, are both cheap and of increasingly
high quality. Companies in the West cannot just compete on price,
and, as Ray Barrell mentioned earlier on when he talked about
specialisation, the reality is that you have to compete in areas
where you have a competitive advantage. Clearly there is going
to be a clash as China comes into industries where in the past
it was not competing with us; so that means an immediate adjustment
phase which is very competitive.
Q8 Mr Fallon: Does anybody else think
the Government's view of the impact of China is out of line with
that of industry?
Mr Nightingale: Can I mention
one thing. The growth of the Chinese market in all these different
sectors offers opportunities for British and other western companies
that are investing in China to participate in this growth, and
in certain sectors, of course, western companies are very strong
so that the growth of China does offer an opportunity for foreign
companies, which many of them, of course, are taking up.
Dr Yueh: I think to the extent
that the British Government needs to take a more proactive stance,
it is to help industries gain or increase their productivity.
If you look at the composition of world trade, a quarter of it
happens intra-industry. That means that there is quite a lot of
product differentiation, and to the extent that we have a skills
deficit or that there are reasons why R&D investment is not
taking place those are the things and those are the reasons why
the Chinese are becoming competitive, then we need to look hard
at what kinds of policies can stimulate the kind of higher quality
product differentiation that is going to mark certain sectors
of the economy in the future.
Mr Nightingale: May I add one
thing to that, and that is that it is early days yet, but, of
course, China is beginning to invest outside China in the West
and in other parts of Asia. As China's capacity for doing business
outside China grows, I think that trend for investment outside
China will also grow.
Q9 Mr Fallon: Finally from the Chair,
could I ask you, Dr Yueh, about the Chinese model, if you like?
The approach of China to economic liberalisation has often been
described as gradualist compared to, for example, the "shock
therapy" recommended by the IMF in other developing countries.
Do you think there is a model that can be usefully applied to
other developing countries, for example in Africa?
Dr Yueh: I think in China's success
there are traits which would be useful for other developing and
transitioning economies, but I do not think it is a model which
can be applied wholesale because the particular prototype is very
much dependent on its initial conditions and its institutional
and political structures. For instance, a gradualist type approach
was tried in the former Soviet Union before 1989, but it was not
successful. For China it was successful because of a number of
key features. One is that on the eve of transition the state sector
was not as much in decline, therefore you could have a gradualist
or dual-track approach in which you create a market alongside
a non-market sector. Imagine if you tried to do that and you had
no control over the market so therefore everybody goes into the
market and sells their goods at market prices, that lack of control
has defeated many other economies which have tried to phase in
reforms. Also China has a semi-federal structure, meaning that
it allows experimentation in areas along the coast, and even as
early as 1978 it created a Special Economic Zone. So, if you think
about an experiment in policy happening in one area, it becomes
self-contained and, if it is successful, it is rolled out; if
it is not, it is self-contained. There are a number of features
along these lines. Finally, China's goal has never been straightforward.
There was not an aim of becoming a certain economy; there was
no rush. Therefore China has always crossed the stream while feeling
the stones, because they are not in a hurry to get anywhere; they
are simply reforming and reviewing what works and what does not
work. That being said, the trait which I think other economies
ought to take notice of is the success of the particular sequence
of reforms in China. I think that is the current debate. How do
you sequence reforms if we reject a wholesale approach? There
are no clear-cut answers, but I think there are a lot of features
which are worth looking at.
Q10 Angela Eagle: I wonder if the success
of that gradualist approach has relied upon a very centralised
state power which has been able to almost keep a handle on things
until it gradually loosens the reins. There are not many governments
around the world that I can think of that match the structure
of the Chinese Communist Party. How important have the political
institutions been in attempting this gradualist transition?
Dr Yueh: It is quite important
in the sense of maintaining stability. Gradualism relies on the
ability of the state sector to control the two sectors of the
economy until convergence occurs, and when that convergence occurs,
for instance, food prices were liberalised and converged in 1992,
even though there is a huge differential between the state prices
and the market prices, the sector converged without a shock; the
same thing in the forex market by 1994. This very much depends
on the Government being able to maintain the state sector alongside
the non-state sector. I think that does not necessarily mean you
need a particular political system to do that. It essentially
means you need stability in order to control the direction of
the economy. In the examples of the other East Asian economies
which have often been characterised as one-party or soft-authoritarian,
they were able to direct their industrial and FDI policy along
the same lines; and, yes, I do agree with you: I would find it
difficult to see how economies, developing countries which have
weak states, would be able to undertake a dual-track approach.
I do not think that particular strand of gradualism is widely
applicable. What I think is applicable is the way in which China
sequenced its reforms, because even in a shock therapy approach
you have to sequence your reforms implicitly, but in gradualism
you have to sequence it with time bands, with a longer period,
and where China has been successful, I think, has been in the
type of reforms that it has sequenced not necessarily in the type
of regime that has brought about the reforms.
Q11 Angela Eagle: Is the paradox that
you need a strong central power to devolve economic decision-making?
Mr Barrell: Bringing up the point
Dr Yueh has said—
Q12 Mr Fallon: Almost like planning.
Mr Barrell: Yes. China is actually
quite a federal country. It is not a deeply centralised country.
It is not like the Soviet Union. The power that resided in the
regions was much greater and, although there was a central party,
the local parties were running their regions, their own economies.
I think that decentralisation was a very important part of the
early flexibility in Chinese development. We look at a strong
party, but the fact is it is a very decentralised economy compared
to most. It is more decentralised than the UK in many ways. The
other thing that comes with that decentralisation, the very federal
structure from the commune upwards, is that agricultural reform
could come in very early so that food production and incomes for
peasants were dealt with relatively early in the process, whereas
if we look at many African countries, reform of the agricultural
sector is the last thing on their agenda. One of the major lessons
I would learn from the development of China is food production
is the first thing one addresses and decentralisation in food
production.
Q13 Angela Eagle: There have been some
extraordinary successes in some of the economic areas, particularly
along the coast, and from evidence we have received there seem
to be some difficulties developing, particularly in the old state-owned
enterprises where clearly they are not as competitive as some
of the new dynamic organisations, and we are now seeing the emergence
of urban unemployment as those state-owned enterprises shed jobs,
quite similar to some extent to the transformation of East Germany
after the reunification. What kind of tensions and problems in
your assessment do you think this poses and is this a really difficult
part of the gradualist transition, a danger time?
Dr Yueh: It is. The gradualist
transition is premised on essentially an easy to hard sequence
because it does not maximise efficiency, it minimises implementation
costs. The hardest issues tend to be left for later. This includes
the fact that urban unemployment did not exist in China until
the mid 1990s. The five year plan, which started in 1997, actually
implemented a large scale lay-off programme; that plus culmination
of an urban bias in industrialisation, meaning that it has always
been the case that in the agricultural or the rural economy, which
used to comprise three-quarters of China's population and now
is about two-thirds, food prices were kept artificially low while
industrial goods' prices were kept relatively high, and that kind
of industrialisation has meant the rural-urban income gap had
been growing over the past 25 years; that plus the increase in
lack of competitiveness of state-owned enterprises due to
increasing competition but also due to the limitations of lack
of productivity advances and the limitations of growth being driven
by factor reallocation, has meant that we are now looking at urban
unemployment which well exceeds the past rate of 2-3% and a significant
amount of people who are considered to be laid off. We also learned
there is a whole category of people who are not working or who
are simply "not in post". This figure can be staggering
if you add it together; it could range up to 10%—some would
argue higher, some would argue a bit lower. That, plus the inward
migration of rural/urban migrants, because of the income gap that
I have discussed, has meant that you are looking at urban poverty
for the first time in China, and that is something which can potentially
be destabilising and warrants attention. The Chinese Government
is taking a serious look at the issue, and I think it is well
worth it.
Q14 Angela Eagle: The party in China
now talks about five balances, and some of those are between rural
and urban, as well as geographically. How important are they in
trying to stabilise the growth so that the world does not come
to rely on China's fantastic contribution to keep the world economy
going only to see that perhaps, if there is a sudden shock, it
disappears?
Dr Lyons: Chinese economic policy-making
has been phenomenally successful. I do not think anyone 25 or
even 10 years ago would have anticipated China being as powerful
or as successful as it is now. One of the successes has been the
way in which policy has evolved, not just in terms of the regions
but also at the centre. You mentioned the five balances. Last
March at the National People's Congress there was a phenomenal
shift, or a very significant shift rather, in terms away from
growth at all costs to ensure that growth was more sustainable,
and that is likely to be reinforced by the similar Congress this
year with the focus on rural areas. The Chinese have highlighted
the issues; the key test is in a transition economy to ensure
that they can continue to get the balance right. I think the trend
clearly will be up for the Chinese economy, but we should expect
increased volatility around that upward trend. In terms of your
last couple of questions, in terms of the economic success two
factors that are very important are, first, the way in which the
price mechanism has started to take hold in China—the private
sector is very evident—and the second is the way in which
the Chinese economy has become more open. Trade now accounts for
roughly 70% of the economy. China is becoming more interlinked
with the rest of the world, is having a phenomenal boost on Africa,
Asia and also the Middle East; so it is having a big plus on all
these regions. It poses greater challenges for the policy-makers
to get things right, but the macro-economic environment externally
now is relatively favourable in terms of low inflation. Clearly
in China they have greater challenges ahead especially in the
regions. The way I would say it is that if we think of Continental
Europe we try to have a one-size-fits-all monetary policy for
Continental Europe. That does not work. China has to have a one-size-fits-all
policy for an economy that has greater diversity, greater differences.
That is clearly a huge challenge. Up to now they have got it right.
I would imagine it is going to become more difficult in the future,
therefore we should expect increased volatility, but so far so
good.
Mr Nightingale: May I add one
point, and that is that there is no doubt that China's Government
is encouraging the growth of the non-state sector, what we would
call the private sector. It is quite difficult sometimes in China
to tell what is privately owned and what is not privately owned.
Nevertheless, there is a great emphasis on developing the non-state
sector, which, of course, it is hoped will absorb the people who
are being laid off in the state-owned sector.
Q15 Angela Eagle: Again, taking this
example of the German reunification, that has been managed with
high levels of unemployment in making a transition by having an
extremely expensive and generous welfare system which has enabled
many to look forward to a fruitful life without working again
if they are in their fifties, it has ensured that there is not
social unrest and it has cost a lot of money. What is the Chinese
answer to the social problems which may come about as a result
of massive restructuring and unemployment, because they simply
do not have a kind of German model of welfare?
Dr Yueh: It is actually a good
question, because it touches on why it is so difficult to restructure
the state-owned enterprises. The state-owned enterprises in China,
the work unit, or the danwei, is the provider of social
security, everything from housing, to health insurance, to unemployment
benefits, to pensions, and the "iron rice bowl", which
is a permanent lifetime job for a worker and then his or her offspring
and that is the system that has been in place. And when the SOEs
became less competitive and are no longer able to operate then
they cannot pay out the kind of social securities which have been
expected in the economy. Essentially the Chinese Government is
faced with a very difficult task of uncompetitive SOEs, which,
if they were to be reformed and downsized, they shed the social
security provisions that they have always historically undertaken
and, most importantly, is expected in a socialist economy. What
they have done is they have done it, not surprisingly, gradually.
Housing was reformed at the end of 1998 and by 2001 housing had
been sold off and essentially privatised and no longer allocated
along with your job. In terms of pensions, health and unemployment,
each of these have been tackled in a slightly different way, but
essentially they have looked at combining federal or central government
resources or local resources and, by experimenting as to which
kind of system works. They will roll out, for instance, the minimum
income guarantee scheme from the north-east and then downwards.
The same applies for the unemployment system, which is a three-in-one
system, where the state, plus the local government, plus the SOE
ought to contribute to a particular pot, and they have developled
re-employment centres. They are also beginning to dismantle the
household registration system, which has traditionally impeded
labour mobility, which, of course, does not help when you have
misallocated resources. I think it is that difficulty of reforming
the state-owned enterprises whilst providing a social safety-net
that is, indeed, one of China's major challenges today and could
potentially be destabilising. To go back to your earlier question,
I sort of see the destabilising factor in terms of two sets, domestic
and foreign. In terms of domestic factors, it is the growing rural/urban
divide, it is the inability to resolve the close relationship
between the state-owned enterprises and the state-owned banks
which have generated non-performing loans; it is the increasing
awareness of a lack of social security provision and the growing
inequalities as measured by the Gini coefficient. The coastal
provinces are getting quite a lot richer than the interior, despite
the policies as early as in the past 20 years to try to divert
foreign investment, and so on, into the interior. Then I think
externally, China did not suffer very much from the Asian financial
crisis because they simply did not have the traits associated
with the third generation financial crises models, but as they
loosen capital controls and begin to extend credit into its private
sector, without sufficient corporate government structures in
place it will begin to take on the traits associated with devastating
macro-economic instability, and I think it is those two sets of
factors which are worth watching.
Q16 Mr Beard: The Treasury view that
has been expressed to us is that China's labour force "remains
characterised by low skills and productivity levels and western
economies generally seem to hope they remain competitive by raising
skills". On the other hand, the European Union Commission
has warned that China is increasingly competing in high skills
areas and China is now educating two million graduates annually
and producing three or four times more engineers here than the
United States. Are we in a position to win a skills race with
China?
Dr Yueh: The answer is, yes, because
the tertiary education enrolment is still low in China, and so,
depending on the slice of the population that you are looking
at, it is only recently that there have been returns to human
capital. My research in the labour market has looked at returns
to human capital, the degree of skill accumulation, and you do
not usually accumulate skills unless there are returns in the
labour market. China is still labour abundant, it is still deficient
in tertiary education, although it has a very solid primary and
secondary level of enrolment in education. If we recall the experience
of the East Asian economies, it is actually primary and secondary
education that is important at that level of development, which
is fairly important for developing an industrialised set of core
competences, but what we also know, as I mentioned a bit earlier,
even though China's growth is very fast across many sectors, it
is actually the high-tech goods which are growing the fastest
albeit from a lower level, but the debate there is unresolved.
If you produce high technology goods mostly with foreign invested
enterprises and technology and capital and managerial skills,
is that the same thing as domestic productivity advances? Very
well known economists would say it is not. Others would say it
is; that it indicates that even assembly of things like semi-conductors
is important and the increasing transfer of knowledge from foreign
invested enterprises means that the catch-up rate will be quite
fast, especially as China teaches English in the coastal regions
in order to allow its labour force to absorb the foreign technologies.
Q17 Mr Beard: So the conclusion is that
it is going to be a dead heat, is that it?
Dr Lyons: It is not just China.
China is already indirectly forcing other countries to move up
the value curve. China itself, as the answer to your questions
has indicated, is moving up the value curve. One only needs to
visit the Pearl River Delta bordering on Hong Kong, the Yangtze
River Delta bordering on Shanghai to see that China is benefiting
not just from abundant low-cost labour but increasingly highly
skilled labour, and the key aspect is not only the individuals
themselves learning more, but there is huge investment, both domestic
and foreign direct investment, into China. They are not only having
better skills themselves but the equipment they are using is the
newest, the modern versions, so the total factor productivity
is incredibly high in China across the coastal areas. That in
itself is an opportunity for those firms involved in those industries.
As we are seeing, over 50% of the firms who export from China
are foreign; three-quarters of the exports from China are produced
by foreign companies, many American; so foreign firms are already
benefiting from that and labour forces around the world have been
able to consume very cheap goods, but also there is a very indirect
impact we are seeing already in India. India is starting to move
up the value curve, not just into the immediate threat, as people
talk about, from India in call centres. You are seeing other countries,
such as India, responding to the challenge from China by moving
into higher value-added sectors, across the service sector as
well. The issue, therefore, for the UK is to make sure we are
not only good in the areas in which we specialise but that we
are increasingly moving up the value curve as well. Education,
as well as encouraging more firms to invest in the UK. There is
a direct challenge and opportunity from China, but there is also
the indirect one as other countries respond as well, particularly
India.
Mr Barrell: It is partly a response
on knowledge and information, partly on the UK's position. One
of the things I found interesting when recently doing work on
China was to discover it is now the third largest investor in
research and development. It is well ahead of the UK. Although
China may not be catching up Japan and the US in those stakes,
it is clearly in some ways advancing on the UK, and that research
and development is liable to be productive. Not all R&D is
productive. In certain areas I think the Chinese are beginning
to make big moves towards increasing the intellectual input into
their production, but there is also a comparison to make on education
that one has to be careful about. When we saw the liberalisation
of Eastern Europe, many of us thought there would be very rapid
growth in countries like East Germany, the Czech Republic and
others because the workforce had very high levels of formal education.
The thing that we had not really observed, which has become very
clear from studies of East Germany, is that the problem that the
workforce had was not that they were uneducated but that they
were unused to working practices outside the state sector, and
one has to ask and not only watch the level of education that
one formally has, but what is one's ability to operate in the
market economy? The Chinese do have the advantage over many central
Europeans of having had a market economy longer, but the problem
for the Chinese State sector, which is very much smaller than
the German state sector was, is that the people who worked in
it are not always used to market incentives when they move into
the market, so it is very difficult. Knowledge is both the skills
you acquire in the institution as you do in your education and
the knowledge you pick up when you are working. The knowledge
you pick up when you are working is probably at least as important
for growth as the knowledge you pick up at schools, and the Chinese
are doing well at both, but we should be seeing more the growth
of the market as the growth of knowledge than the growth of education.
It is still a largely uneducated population but much more highly
literate than many African populations.
Q18 Mr Beard: What indicators are there
of the quality of the research and development that you are referring
to?
Mr Barrell: That is very hard,
because their growth of research and development is relatively
new. One of the things that one would use outside countries like
China is what proportion of it is in the private sector, because
there is a degree of evidence that public sector R&D, which
is mainly research-based, is not necessarily productive. In China
the division public/private is harder. It is not so far clear
that they are gaining market share because of the R&D they
do. The Germans gain market share because they do a lot of R&D.
It is not yet clear that that is true in China. There are two
faces to R&D. They are very important faces. One is creating
new things, and the other one is to have the capacity to understand
the new things other people have created; and a lot of Chinese
R&D will be understanding the new things other people have
created. It is the second face, the face that is not grand but
the face that is important. It is the ability to absorb the technology
from Japan and from the US.
Mr Nightingale: Could I add one
thing to that? Gerard Lyons has already referred to the important
part that foreign investor firms in China are playing in terms
of export, market share and so forth, and that is true, but the
majority of people working in those firms are Chinese people learning
new skills, learning new technologies, and so on and so forth,
and of course a number of western companies are putting R&D
into China so that they can develop products specifically for
the Chinese market and then export them, if that is also appropriate,
but I think that from a business point of view in the UK we should
not be complacent because we do need more business people here
who understand what is going on in China, who speak Chinese. Again,
Gerard Lyons referred to the number of people who are learning
English, particularly in Eastern China, but not only in Eastern
China, all over China, in order to be able to participate in the
global economy. I think that we are rather slow, as very often
we are in the UK, in learning foreign languages and so forth,
but I do think we should be paying more attention to this aspect
of learning or teaching future business people about what the
opportunities are in China, and how to get at them.
Dr Yueh: May I add one thing on
R&D. R&D became the focus in China only in 1995. If you
look at the opening of China, starting really with Deng Xiaoping's
southern tour in 1992, in 1995 China developed what are known
as high technology development zones (HTDZs). They now exist in
all but three provinces. These are specific zones which are like
science and industrial parks, and they have a "three-in-one"
system which essentially takes a research facility and attaches
it to a production facility and attaches that to a marketing facility.
It is less than 10 years old, so it is difficult to assess real
productivity advances, but we know that since the creation of
these zones patents have actually increased rapidly in terms of
both patents filed both by domestic Chinese but also by foreigners.
Since WTO accession and the eventual acceptance of the TRIPS agreement,
which is part of the WTO which governs intellectual property rights,
patents filed by foreigners have actually shot up by 33% over
the past three years within China, and I think that is a trend
that we ought to be following.
Q19 Mr Beard: This question of patents
was one of the things that held a lot of high-tech companies back
from exploiting opportunities in China. Are you satisfied that
that has now been solved, not just in legislation, which is there
to do with patents, but in the actual enforcement of it?
Dr Yueh: I think patent enforcement
as well as copyright and trademark is a huge problem in China.
It is a problem which is more general in that contract enforcement
is difficult in China because it has an incomplete legal system.
Legal reforms are happening very quickly, and, as you mentioned,
the first patent law actually came into effect in 1985, but the
Company Law, the mainstay of the corporate law, came into existence
in 1995, and other laws are coming onto the books, but in this
kind of common law type regime what you really need is reforms
of the legal system so that enforcement can then create the case
laws by which future actions can be judged. This is an area for
which China still has quite a lot of reforms to do, but I should
add that international economic law with WTO accession will speed
up and improve the standards of such laws, and also China has
always been open to fairly good arbitration within China as well
as internationally.
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