Rebalancing the Economy: Trade and Investment

Written Evidence from China-Britain Business Council

Summary

1. The China-Britain Business Council (CBBC) is the UK’s leading source of China business information, advice, consultancy and services. CBBC enjoys strong support from the UK government and industry, and has a proven track record of successfully developing British trade in China dating back to the 1950s. CBBC is recognised and respected at the highest levels of both the Chinese and British Governments. CBBC is UK Trade and Investment’s (UKTI) delivery partner in China for UKTI-branded services and works closely with UKTI in China and the UK.

2. CBBC welcomes the opportunity to give this evidence. In this memorandum we address a number of China-specific issues which we understand may be of interest to the Committee.

3. CBBC believes the government’s strategy for China remains broadly relevant although a refresh would be timely.

4. Since accession to WTO considerable progress has been made, although there is scope for more. UK businesses operating in China are generally optimistic about their prospects. The greatest concern is the availability of qualified staff, although transparency of laws and regulations, bureaucracy, IP protection and a level playing field remain concerns. There are well established government-to-government mechanisms where commercial issues are raised.

5. The transformation of the Chinese economy and the opportunities that creates needs to be far better understood by business. CBBC, in partnership with UKTI, has an extensive events programme to raise awareness and offers in-depth research on opportunities. This is in addition to tailored services for individual companies.

6. CBBC is the delivery partner for UKTI in China and approximately 80% of the work is for SMEs. However, intermediaries need to be more effectively harnessed to raise awareness of the support available.

7. A well coordinated and coherent EU-wide engagement in synch with bilateral relations would be beneficial.

8. Good political relations are an important foundation for good commercial relations. The coalition’s trade delegation to China was viewed by business as successful. The more recent visit by the Vice Premier Li Keqiang to the UK was also successful.

9. There is excellent potential to collaborate in R&D and innovation. CBBC has a specific programme ‘China Tomorrow’ in this field.

10. The scale and extent of China’s science parks is impressive. Undoubtedly there are lessons to be learned.

11. CBBC believes British companies have access to as much support as from anywhere else. Comparative trade performance relates closely to domestic industrial make-up and China’s needs.

12. Chinese companies will increasingly become players on the global stage. This is an important opportunity for the UK, although uncertainties surrounding inward investment support exist.

Is the FCO Document: The UK and China: A Framework for Engagement still relevant and fit for purpose?

13. We believe that the pillars of the FCO document "The UK and China: Framework for Engagement" remain relevant, namely:

· Getting the best for the UK from China’s growth

· Fostering China’s emergence as a responsible global player

· Promoting sustainable development, modernisation and internal reform in China.

14. Given the government’s greater focus on supporting British business overseas and somewhat improved global economic conditions the document should be refreshed.

Are the issues raised by the Trade and Industry Committee in their 2003 report still relevant? Has the environment improved since China joined WTO? Is China keeping to its commitments? If not what could the UK Government do to encourage compliance? What barriers are there to trade and investment with China? How can these be lifted?

15. Many of the issues raised in 2003 are still relevant, although there have undoubtedly been many positive developments. The continued growth and changing nature of the Chinese economy presents a wide range of exciting opportunities for UK businesses.

16. The EU Chamber of Commerce in China (EUCCC) produces a comprehensive annual ‘European Business in China Position Paper’ [1] (the latest version runs to 642 pages). The Paper is presented to the Chinese Government and EU authorities with the aim of improving the investment climate in China. It details the key concerns and recommendations in regard to WTO implementation issues, trade issues and broader policy-related issues. The 2010/2011 paper asserts that improved market access and a more level playing field are necessary to achieve China’s transition to a more balanced growth model.

17. CBBC and its partner, the British Chamber of Commerce in China, recently conducted a Business Climate Survey [2] of British companies in China. Some key headlines are as follows:

· 84% are 'positive' or 'very positive' about the outlook for 2011.

· 36% expect demand for their products/services to increase significantly. A further 44% expect a more modest increase.

· 51% reported that China was outperforming other markets and a further 25% saw China in line with other markets.

· 77% expect an increase in revenues in China in the coming 12 months.

· 68% expect to increase employment of local staff in China in the next 12 months.

· 59% expect to increase their investments in R&D in China and 40% plan to keep them at the same level.

18. The following issues ranked mostly highly as having an impact on business performance:

· retention of high quality / skilled personnel

· availability of high quality / skilled personnel

· transparency of laws and regulations

· legal and regulatory systems

· staff remuneration / pay levels

· market access.

Factors causing greatest concern are:

· pollution and the environment

· level of bureaucracy

· protection of IPR

· level playing field for foreign firms vs. domestic competitors

· transparency and legal/regulatory systems.

19. In relation to specific market access issues, companies can engage with CBBC and UKTI to assist with lobbying. On a regular basis, CBBC and UKTI consult companies to identify specific market access issues. These issues are taken up as part of the regular Joint Economic and Trade Commission dialogues or during ministerial visits. Cases are also taken up with the Ministry of Commerce or at a municipal/provincial level or with the Commercial Team at the Chinese Embassy in London. Other government-to-government mechanisms exist, including the Economic and Financial Dialogue, as well as a number of sector-based working groups. Similar dialogues also exist at the EU level.

20. In 2003 the Committee identified breaches of IPR as a specific barrier. There have been material improvements in the last decade. The commitment of the Chinese government cannot be underestimated and it has recognised that a full IP system – from efficient and effective trade mark and patent examination to high quality judges sitting in dedicated IP chambers – is not only necessary but critical for China’s own development. So whilst IP protection is still an important consideration and companies need to develop a strategy to manage it, the picture is not as bleak as it was.

How can UK improve trade and investment with China? Should the Government have a greater role?

21. The level of understanding and awareness of modern China in the UK is not as good as it needs to be. The way China is portrayed in the media tends to be quite negative, and little is taught throughout our education system. This needs addressing.

22. Improved trade and investment relations require, inter alia, a much enhanced understanding of China today amongst the British business community. CBBC’s remit includes helping UK companies understand the opportunity. Each year we offer more than 200 events across the country to help companies understand opportunities in specific sectors or regions, as well as understand key business issues. We also host around 80 inward delegations from China each year, introducing them to UK companies.

23. CBBC, together with UKTI, has published a range of informative reports over the last two years that provide companies with a wealth of information about the changing shape of the Chinese economy and the opportunities arising therefrom. CBBC/UKTI offer a range of tailored services to help individual companies succeed in China.

24. China’s fast growing regional cities present exciting opportunities for UK companies. In 2008 UKTI commissioned CBBC and the University of Leeds to prepare a report "Opportunities for UK Businesses in China’s Regional Cities" [3] . Of 274 cities with a population of more than 1 million, 35 cities were identified as having the best business prospects for UK business. These cities account for approximately 16% of China’s population and 36% of GDP.

25. More recent research [4] available to all UK companies includes:

· Creative Industries in China: Opportunities for business

· Software Industries in China: Opportunities for business

· Financial Services in China: Opportunities for business

· Opportunities in Shandong.

26. UKTI has also led a successful "Doing Business in Asia" series of events across the UK under the auspices of the Asia Task Force. CBBC has actively contributed to these.

27. The fact remains that only a small proportion of the UK business base attends these events and/or accesses the research. Further enhanced partnership working can help widen dissemination and for this reason CBBC works closely with the CBI, BCC, IoD and Trade Associations and a wide range of professional advisers. It is also why CBBC wrote to all MPs.

Is UKTI set up to help small businessman to do business in China? Are UKTI mechanisms to support SMEs fit for purpose? Is it easy for SME’s to access support from UKTI?

28. CBBC is the delivery partner for UKTI for the majority of UKTI’s business-to-business services in China. The vast majority of the work we undertake (ca. 80%) is for SMEs.

29. Accessing UKTI’s services for China is no different to accessing them for any other market. In addition, CBBC’s nine offices in the UK offer additional entry points and we actively seek to engage with companies.

30. UKTI and CBBC seek to leverage the networks of other intermediaries. Despite these efforts, anecdotally, many companies still find it hard to know where to go to find support. A search on a number of popular search engines of "China Business" and "business in China" at the time of writing placed CBBC in the first, second or third slots.

31. UKTI and CBBC have recently both re-launched their websites to make information about doing business with China more readily accessible. On the ground in China, the UK has one of the largest support networks in China of any of its major competitors. With 11 CBBC offices and 4 UKTI teams across China (5 including Hong Kong) the UK is well placed to make the necessary contacts for the benefit of UK business.

32. It is of some concern that the restructuring of the UK regional landscape (i.e. closure of RDAs and Government Offices) is leading to a reduction in the number of international trade advisers at a time when increased trade and investment targets have been agreed by both governments.

Should UK be approaching China alone or as part of the EU?

33. CBBC believes that the UK and all member states would benefit from a more coordinated and coherent EU-wide approach to China.

34. EUCCC’s annual position paper states ‘EU and Member State China policies are still fragmented and uncoordinated to the detriment of European business….. A more coherent approach would avoid mixed messages and misunderstandings’.

How successful was the coalition’s trade delegation to China?

35. CBBC and its members consider the visit a success. Good political relations are an important foundation for good commercial relations. The visit built upon an already sound political relationship forged by the previous government. It is up to individual businesses to make the most of these good relations, accessing support from government and organisations like CBBC.

36. This visit was swiftly followed by a visit to the UK of Executive Vice Premier Li Keqiang, widely expected to become China’s next Premier. This visit went very well and had a major commercial focus.

How can UK tap into Chinese innovation? What can UK learn from Chinese growth?

37. CBBC believes there is great scope for collaboration in innovation and R&D, so much so that CBBC instigated a specific programme. CBBC’s China Tomorrow initiative is a programme to encourage UK organisations to work more closely with their counterparts in China to promote:

· Joint technology development between the UK and China

· Opportunities for technology exchange

· The commercialisation of scientific knowledge.

38. The main aims of China Tomorrow to better equip UK & Chinese organisations with the ‘tools’ to work together effectively; and to bring new products and services to market.

39. So far a series of events has been organised in the UK focusing on:

· Best practice / dos & don'ts

· The cross-cultural issues of collaboration

· IPR and legal considerations

· Funding opportunities, finding partners & routes to commercialisation

· Case studies.

40. Over 350 senior representatives from business, academic institutions and UK & Chinese Government departments have participated at these events with speakers from a wide range of Chinese organisations.

41. For the next phase, CBBC will work with its members and partners to:

· Secure formal support for the initiative from the Chinese Ministry of Science & Technology at the national level

· Engage with provincial and regional authorities to establish local, pilot China Tomorrow programmes and events.

42. Subject to funding being secured, CBBC would like to establish a database of expertise and contact details of CBBC members qualified to provide advice in this field – e.g. IP & patent attorneys, VCs etc. This database could be expanded to include:

· Details of IP available for licensing.

· The capabilities & technological strengths of Chinese universities, research institutes etc.

· Information on existing collaborations with UK counterparts.

· IP currently protected.

43. Research Councils UK is also actively tapping into Chinese innovation, opening its China Office in Beijing in 2007. Key elements of it’s strategy are to align the research funding systems in both countries to facilitate joint research activities; to explore research priorities in both countries, so opportunities can be developed for collaboration on topics important to both China and the UK; and to provide information about the research systems of both countries and policies, up to date information about UK-China collaborative activities and funding opportunities.

44. On a more practical level, if we are to realise the potential of Chinese inventions/innovations we need a mechanism to identify them. At present there is no coordinated mechanism for capturing these inventions and publicising them to potential UK partners. What would be useful would be a portal whereby both UK and Chinese organisations can market their inventions in a benefit sharing way. CBBC could deliver this, if resources were made available.

Can UK innovation, research and development make us more competitive with China?

45. Innovation, research & development in the UK should make us competitive with all countries, not just China.

What can UK learn from Chinese science parks?

46. It is not yet easy to get a clear picture of real, substantive benefits to the economy from the Chinese government’s huge investment in a network of science parks and high-tech industrial zones around the country.  However, the scale of the programme and its scope are undoubtedly impressive. There are certainly lessons that can and should be learned.

47. A major goal of this programme was to redesign the economic architecture by creating institutions that would improve China's innovation system. Establishing science parks with on site business incubators, following the western model, were considered an appropriate way to do this.

48. According to the Ministry of Science and Technology now has 56 leading high-tech industrial zones that are home to more than 50 percent of China's high-tech firms and provide jobs for more than 8 million people. With more than 700 research centres and laboratories, R&D expenditure at the zones was more than one-third of the national budget for R&D. About 16,000 patents were granted to companies in the zones in 2009, accounting for nearly half of all patents registered to enterprises that year. The high-tech zones' overall output reached 6.7% of 2009 GDP.

Chinese inward investment to the UK. How can this be encouraged and increased?

49. CBBC plays a supporting role in attracting inward investment from China. It is widely anticipated that there will be a surge in such investment given the strong encouragement and support of the Chinese government to encourage Chinese companies to ‘go global’. The UK Government’s role is critically important in this regard. The closure of the RDAs without an immediate replacement mechanism is cause for concern and is likely to result in some disruption. Concern also exists if LEPs and cities decide to ‘go it alone’ and cause confusion and fragmentation of the UK’s marketing message.

What can the UK learn from other countries such as Germany who have a higher level of trade with China?

50. The UK can and does learn from the experience of other countries. There are many factors that impact upon the relative performance of countries. Germany, for instance, has benefitted from the stage of China’s development and need for the goods that Germany excels in as China has built its industrial capacity. Whilst Germany exports more to China, the UK and Germany are neck-to-neck in terms of investing in China, which means comparatively the UK out-performs Germany. CBBC also notes that bi-lateral trade statistics in a globalised world have limitations. What should be most important is the contribution that China activity of British firms makes their overall performance.

51. CBBC seeks to learn through its engagement in two initiatives:

· leading a consortium for a newly established EU-funded SME centre in Beijing. CBBC is working with analogous organisations from other member states; and

· as a leading member of the EU China Business Association. Through this work, which includes the sharing of best (and ineffective) practice, it is evident that the size, scope and nature of support available to British companies is more extensive than for most other EU countries.

2 February 2011