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Finding the Gateways in China

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A dozen participants in the Alliance’s Business & Cultural Mission to China this morning met at the American Chamber of Commerce in Shanghai to learn about the intricacies of doing business in China.

One facet we keep hearing about is the growth of technology parks throughout China. They are designed to attract investment and spark innovation. We can’t help but think of the Technology, Research & Education Park in South Charleston.

“Every locality has their research and technology parks,” said Kim Woodard, CEO of Technonic, which helps guide foreign businesses in a complicated Chinese economic system.

Woodard spoke about the “two sets of codes” related to doing business in China – those for domestic companies and those for foreign companies.

“The rules are different,” he said.

China wants to attract foreign investment, so some rules might be less stringent for those investors.

“The gateways have widened,” explained Victor Ho, partner with Allen & Overy in Shanghai. “Keep in mind,” however, “China remains a centrally-controlled economy. There has been a huge explosion of laws and regulations over the past 25 years.”

Some sectors, such as financial, mining and media, are restricted and have a tougher time breaking into the Chinese economy.

Also, laws are designed to protect the power of bureaucrats, and appeals processes might not be in place. In addition, local governments and the central government differ in many respects. Local bureaucrats are beholden to their local governments. More and more discretion goes to those local governments because the country is so big.

Hence, foreign companies must know the details of doing business in specific regions. That’s why it’s important to set up inside China to invest and sell in China, Ho said.

Furthermore, “do not check your basic business sense at the door,” Ho added. Some companies have a tendency to make moves in China they would never consider in their home nations. Sticking to missions and principles is important.

“Take it one step at a time at the beginning,” Woodard said. “Have one person here to get your feet on the street.”

Woodard offered further insight and some caution.

The outlook for China’s GDP growth for the first quarter of 2010 was 10.4 percent. But in reality, it was 11.9 percent.

“Where is that growth coming from?” Woodard said.

The answer is new bank lending. More than 50 percent of China’s GDP is investment. That’s an astronomical number.

“This pattern has been around a long time,” Woodard said. “Is that healthy? It’s creating a massive distortion in the economy. Is it sustainable over time? When you consider your sector, you have to ask what is going to happen to your customer base.”

Some sectors, including steel and chemicals, are operating at overcapacity in China. Steel is 100 percent overcapacity, which, from the outside, is seen as economically absurd.

In addition, China’s housing costs are skyrocketing. Prices are up 12 percent. High-end housing costs have increased 60 percent, and some homes in Beijing have increased by 100 percent.

Is this sustainable?

Probably not. This year, China is “pushing down hard on the brake,” Woodard said. “We’re talking volatility. We see huge surges, then they hit the brake. China is not consumption driven, not yet.”

While housing sits on a huge bubble, the auto industry sits on a smaller one. In 2009, China exceeded the U.S. for the first time in passenger vehicles sold: 10 million, up 52 percent. That equates to big money, as well as big problems, including massive traffic congestion and thick air pollution.

China’s economy faces a bevy of challenges: inflation, falling housing prices, rising housing prices, local government debt defaults, overcapacity, labor shortages, rising manufacturing costs and tightening enforcement of anti-dumping rules by the U.S. and European Union.

Foreign investors will feel the policy changes first. Regulations will be designed to protect domestic industry and consolidate economic gains.

Still, China is close to passing Japan as the world’s second largest economy. And in a global economy, the U.S. can’t ignore that.

“You need representatives here,” said Carlisle Davis, vice consul with the U.S. Consulate General in Shanghai. Davis offered tips about nurturing a presence in China, as well as finding ways to attract Chinese investment to the U.S.

“This is not West Virginia, and this is not Texas,” he said. “Things change very quickly. You renegotiate again and again.

“People are doing some really interesting work here,” Davis said. “With every business relationship and student exchange, the U.S.-China relationship is more fortified.”

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admin in Economic Development on April 23 2010 » Comments are closed.