Address by Bill O'Shea, Partner, Hunt & Hunt Lawyers
26 November 2002
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The Honourable Mark Vaile, Minister for Trade and Deputy Leader of the National Party, the Honourable Warwick Smith, National President Australia China Business Council, ladies & gentlemen.
I am delighted to be involved with the launch of this latest publication from the Economic Analytical Unit: "China Embraces the World Market".
1. Report welcome
On behalf of the business community and in particular those professional service firms such as mine with a passion and commitment to China, I commend EAU Executive Director Frances Perkins, Michael Growder who directed the Report and the staff of the Economic Analytical Unit for producing a clear, readable report which presents a wealth of practical information for those Australian businesses considering entry to the China market.
A report of this depth and detail could only be produced by government. It is a great example of the way in which government can add value to business in a complex and rapidly changing market such as China.
2. Will WTO Membership make it easier in China?
I am not an economist, nor a public servant skilled in diplomatic niceties of the Australia/China relationship. Rather, I am a partner in a law firm advising clients on doing business in China. That requires me to have an understanding of the legal regime in China and the local pitfalls that await unsuspecting investors entering the China market. It gives me an opportunity to see what can go wrong as well as how to structure a business proposal for success in China.
The title for this publication, China Embraces the World Market, is clearly appropriate now that China has been admitted as a fully fledged member of the World Trade Organisation.
The question for those of us advising Australian business is whether China's entry to the WTO makes any difference to the way China deals are put together or the likely success of foreign investment projects in China.
As with most things in China, there are parts that are good and other parts that are not so good. In this paper I will look at a few of these.
2.1 New Contract Law
On the positive side of the ledger, China has moved a long way in changing its laws relating to foreign investors to bring it into line with international commercial standards.
One example is China's new Contract Law. Drafted with the assistance of many western contract law experts, it is a bold attempt by China to provide greater certainty for those engaged in business dealings.
However, it is still necessary to obtain approval for licences from local authorities for a range of foreign investment projects in China, including joint ventures and wholly foreign owned enterprises.
Furthermore, China lacks a sophisticated system of administrative law to allow a challenge to government decisions made in relation to foreign investors including, for example, a decision not to approve a particular project or to refuse a licence.
2.3 Trading Projects
It is also pleasing to see from a business perspective that it is becoming easier to undertake trading activities in China. Until now, foreign firms have been severely restricted in the trading activities they are allowed to undertake.
Foreign trading activities have been limited to specific areas such as the Waigaoqiao Free Trade Zone on the outskirts of Shanghai. Whilst these zones are sophisticated and provide excellent facilities for foreign investors, they are very limited in number and not always suited to a particular project location. WTO entry is changing that restriction.
WTO entry has also seen increased access for foreign businesses involved in the services sector. However, significant barriers still remain.
One example which is close to home is the limitations imposed on foreign law firms. Not long after China's admission to the WTO, China announced even stricter regulations governing the operation of foreign law firms in China. Their Chief Representatives are now required to be present for six months in any twelve month period, a requirement that was not previously imposed. One can only conclude that such a regulation is designed to make it more difficult for foreign law firms to operate in China and to advantage Chinese firms against foreign competitors notwithstanding that foreign firms are still restricted to practising foreign law.
It is encouraging, however, to see that access for other service industries such as banking, funds management, insurance, telecommunications and advertising are gradually being relaxed even though it will take up to five years to see any significant changes.
China is the second largest Internet market in the world after the United States, with more than 60M online subscribers, representing a little more than 5% of the population.
Chinese Ministry of Information statistics show that Chinese Internet subscription rates are growing at a rate of 6% per month, making it one of the fastest growing markets in the world - from a base of just six hundred thousand in 1997.
However China still has a long way to go in implementing electronic commerce. Whilst it is true that a number of foreign businesses, including some from Australia, are pioneering e-commerce in China, Chinese law remains several laps behind advances in the technology. This provides a regulation free period for these businesses to commence operations in China. However the regulators are not far behind!
E-commerce in China is still hampered by the lack of access to the internet for ordinary Chinese families and the limited availability of credit cards for other than executives of State-owned enterprises.
It is interesting to see that just last week, Visa has announced that it is increasing its outlets in China from 3000 to 30,000 with more outlets to follow. Given the geographic size and population of China, it is essential that China embrace technology and in particular e-commerce despite the fact that it might be difficult for the Chinese Government to regulate it in the same way it has traditionally regulated business.
2.6 Intellectual Property
WTO membership has seen a significant improvement in all China's intellectual property laws. There have been important amendments and new laws drafted in relation to patents, copyrights and trademarks and a much greater emphasis on the remedies available for infringement of intellectual property rights.
Problems remain however as Chinese businesses and government officials, particularly at the local level, seek to catch up with these new laws. Chinese businesses and indeed many Chinese provincial and township governments still lack respect for intellectual property rights.
The old Marxist theory - that intellectual property rights belong to the people and not to any individual - persist in many parts of China.
Whilst the pedalling of counterfeit CD ROMs and pirated software ceased during the 16th National Congress of the CPC held in Beijing earlier this month, it is significant to note that the day the Congress wound up its deliberations, pirated electronic software and CDs flooded back onto the street markets in the capital.
The problem in China has been and remains not its legislative framework for the protection of intellectual property but the reluctance of officials to crack down hard on intellectual property infringers and the equally lenient view taken by local Chinese courts when cases are brought before them. The expanded enforcement powers set out in the new legislation and the increased range of remedies available to counter infringement could be of considerable assistance if the authorities in China embraced them.
Potential foreign investors with technology suitable for modernising China's economy are carefully watching the performance of Chinese enforcement officials over the next few years before deciding whether to run the risk of a China project. If it's not fixed, China will be the long term loser and inferior, shoddy goods will result.
3. The Australia-China Relationship
3.1 Australia - still a top location
Many Australian companies are stepping up their level of co-operation with China. It is interesting to note that Macquarie Bank recently conducted an investment seminar over one week in Shanghai for its clients in China, flying in institutional fund managers from Australia, Singapore and the United States and even bringing along the foreign print media. I understand that this was to ensure that there was balanced press coverage of the business opportunities that China has to offer.
Major Australian companies such as Macquarie Bank have much to gain from a stronger presence in China. China's opening up following WTO admission will see such approaches welcome and will enable those in first to gain the benefits.
Australia remains an attractive location for Chinese investors. One example is the use of Australian expertise to test and accredit Chinese herbal medicines. We have first-hand experience of Chinese pharmaceutical manufacturers shopping around for countries with the scientific know how needed to test and obtain accreditation for their Chinese herbal medicines. They find that Australia is the best location. We have world class scientists, a strong biotechnology industry, excellent testing laboratories, a favourable exchange rate and of course a convenient time zone for Chinese clients. And we have a friendly non-threatening style that appeals to the Chinese.
We can also offer Chinese companies - such as the emerging multi-national Chinese white goods manufacturers - technical services to help them enter overseas markets. I refer particularly to innovation in design and specialisation in retailing - skills we have in abundance.
Last year was tough for China's air conditioning manufacturers - the number of brands dropped from 200 to 30 - in just one year! Only the best will survive a shark infested market such as that. And Australia has much to offer.
We can also offer these Chinese companies a relatively low cost base for marketing and sales into Oceania.
3.2 Frustration still abounds - the deal always changes when you arrive in China
Chinese partners continue to frustrate their Australian counterparts by changing the basis of a deal agreed by fax or e-mail after the Australian party arrives in China. This is too common to be an accident - it's clearly a well used Chinese negotiating trick to seize the home ground advantage and use up the Australian party's most precious commodity while in China - time. Time means much less to a Chinese negotiating team than to an Australian investor. While "forewarned is forearmed", it is still a cause of much wasted time and expense in establishing a project in China. It is over optimistic to expect any let up in this frustrating tactic.
3.3 Environmental services exports to China - a major opportunity going begging
China has major environmental problems. This is in large part due to its past dependence on coal for fuel - a situation that is being gradually relieved by the increased use of LPG and soon Australian LNG. However there are many opportunities for water and air purification where Australian businesses have world class technology.
The problem - as with exporting our health technology to China - is how to get paid. With environmental projects there is an answer. Carbon credits are the missing link which enable third world countries to fund desperately needed environmental projects.
If Australia acceded to the Kyoto Protocol, the trade in carbon credits from China environmental projects would provide the necessary funding. Until then, it is an opportunity going begging.
There are companies in Australia with world class environmental technologies which would make a difference in China. However while we follow the US line on Kyoto we will remain locked out of what could be one of our major exports in services.
4. Jiang Zemin's speech to the CPC Congress
This month's 16th National Congress of the Chinese Communist Party held in the Great Hall of the People was of great significance. There has been a peaceful and smooth transition of power to a new leadership most of whom are in their mid fifties - and thus regarded in the bloom of youth by Chinese leadership standards.
4.1 Building a well-off society
What was of even greater significance, given the title of the EAU Report we are launching today, was the title of President Jiang's report:
"Build a well-off society in an all round way and create a new situation in building socialism with Chinese characteristics".
This clearly indicated the willingness of the outgoing Chinese leadership (and therefore the incoming leadership!) to embrace the principle of xiaokang - that is, producing a "well-off, high standard society in an all round way over the first 20 years of this century."
China's Minister for Agriculture noted that for farmers to be well off, it was essential that more farmers be encouraged to move to non-agricultural industries in cities and towns. Incredibly, he noted that 100 million farmers had been shifted to the non-farming sector in 2001, resulting in an increase in their income and that of farmers by just over 1000 Yuan.
4.2 The Three Represents
The outgoing President stressed the need to fully act on Deng Xiaoping's "Three Represents". That is, the CPC must represent:
- the development trend of China's advanced productive forces;
- the orientation of China's advanced culture; and
- the fundamental interests of the overwhelming majority of the Chinese people.
4.3 Private Property
Staggeringly for many traditional Marxists, Jiang went on to say that
"all legitimate income, from work or otherwise, should be protected...... it is improper to judge whether people are politically progressive or backward simply by whether they own property or how much property they own."
Not quite "to get rich is glorious" but not far short!
Following Jiang Zemin's speech, the boss of a privately owned sewing machine company (and interestingly a delegate to the Congress) was quoted in China Daily as exclaiming:
"The springtime of private business has come..... the speech has given confidence to people like me...... as long as we private businessmen work honestly and legally, we are acknowledged as builders of socialism."
It should not be forgotten that this was a speech for which Jiang Zemin will want to be remembered - it was a grand set piece where he reviewed the achievements of his term and set the parameters for his successor. It establishes a new type of Chinese hero - the individual who creates wealth for the country. Gone are the hard line days of 1950s Maoist doctrinaire theory. This is 21st century political pragmatism at its best.
5. Whereto from here?
The outgoing leadership in China has stated in the clearest terms that it embraces the world market. It is a country which wants economic prosperity for its people within a global community - and hence its acceptance of the rules for membership of the World Trade Organisation.
China has embraced the world market with the initiatives it has taken to reform its laws as a condition of WTO entry. It has even been prepared to reverse its former ideological distaste for wealth, private property and individual entrepreneurs.
Of course it's far from perfect. But the standard of living it is providing for one quarter of the world's population is light years away from the few remaining communist regimes of the world such as Cuba and North Korea. It is now up to the West to return that embrace and seize the opportunities presented.
Hunt & Hunt is one of only a handful of Australian law firms licensed by the Chinese government to practice foreign law in China. It has operated an office in Shanghai since 1999.
Bill O'Shea was President of the Victorian branch of the Australia China Business Council from 1990 to 2000 and was made a life member in 2001. In February 2001 he was appointed by the Commonwealth Attorney General as a member of ILSAC, the International Legal Services Advisory Council, which advises the Commonwealth Government on the export of Australian legal services.
Hunt & Hunt has produced two major publications for foreign investors entering the China market: "Doing Business in China" and "The Hunt & Hunt China Legal Compliance Manual". Copies are available through the firm's website at www.hunthunt.com.au or by contacting Bill O'Shea on firstname.lastname@example.org.
For further information contact Bill O'Shea on (03) 8602 9200 (work), (03) 9572 2431 (home) or 0412 14 34 76 (mobile).
This page last modified: Tuesday, 10 December 2002 02:28:49 PM
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