No Shocks in Farm Products Market

The market in farm products was expected to be the one most challenged by foreign imports following WTO entry. But the 2002 figures are turning out to be more favorable than estimated.

The customs service reports imports of wheat and rice down on the corresponding period last year. Although imports of palm oil, sugar and wool have seen increases they are actually struggling to reach their quotas.

Sufficiency of local supplies has combined with level prices to cushion the domestic market from any real shock to the system brought on by an influx of foreign produce.

The release of import quotas for 2002 saw a narrowing of price differentials between domestic and imported produce. Imports were of course further inhibited where domestic production was actually cheaper than the foreign competition.

Meanwhile substantial technological advances in domestic agriculture continue to make their mark. High quality wheat now grows in a full 25 percent of China’s cornfields, so damping down imports.

All in all the position is one of only modest increases in agricultural imports.

Growth in Heavy Manufacturing

Increased imports of iron and steel have followed China’s commitment to reduce both tariff and non-tariff barriers. Thanks to robust demand, these increases do not appear to be causing any real difficulties for domestic producers who have actually shown substantial growth in output.

However China’s tariff reductions and easing of non-tariff barriers may well turn out to have a negative effect on the restructuring of the domestic iron and steel industry.

The most notable tariff reductions impact on two broad areas. One is in hi-tech and high value-added goods such as cold-rolled plates, hot-rolled plates, stainless steel plates, cold-rolled magnetic silicon steel and the special seamless pipeline required by the petroleum industry. The other is in high volume steel products like deformed steel bar and wire rod. In the immediate future domestic manufacturers will not find it easy to compete with the imports on either quality or cost. China will act here to nurture the fledgling domestic industries through temporary protectionist measures to limit imports of certain iron and steel products.

Auto imports have surged by no less than 55 percent between January and September 2002. Within this overall figure, imports of sedan cars are up 37 percent. The corresponding increases for 4-wheel drive light cross-country vehicles, minibuses and trucks are some 146, 130 and 108 percent respectively. However the influence of strict import quotas has mitigated any serious adverse impact on the domestic auto industry as only part of the US$8 billion quota is earmarked for the import of completed vehicles.

As lowered tariffs stimulate demand they will also drive domestic auto manufacturers down the road of price reductions to be achieved through increased productivity. Up to now auto imports have won a mere 3 percent share of the market and the domestic industry could hardly fail to thrive in such a favorable trading environment. But the halcyon days cannot last forever.

China’s WTO entry brought with it a commitment to increase import quotas by 15 percent each year. The total value of auto imports is set to exceed US$9 billion in 2003. The bulk of this figure is earmarked for the import of sedans and these increasingly competitively-priced incomers are expected to have quite an impact on the market for medium and high-grade sedans next year.

A substantial number of surplus imported sedans are now waiting, poised in bonded areas. Once released onto the market they will soon make their presence felt.

Light Industries Benefit Most

The textile and garment manufacture sectors are thought likely to benefit most from WTO entry. They have a competitive edge and a strong share of both the medium and the low-end of the market.

With tariffs now set aside or at least lowered, foreign markets are opening up to Chinese exports. Of course it is a two way process and China has also had to lower its tariffs on imports. Here the small trickle of imports poses little threat in China’s domestic market with its huge demand.

There may have been a little impact at the top end of the ready-made clothes market, but the market is still unaffected in the mainstream, middle and low-end. Robust growth in exports coupled with a lack of impact from imports has made this a very good year for the textile sector.

Analysts however are still skeptical as to whether the textiles can maintain the momentum. They point to the developed countries failing to live up to spirit of the Agreement on Textiles and Clothing. Though they should have abolished their quota restrictions on 33 percent of products, only a small percentage has actually been freed up.

Thus though China’s textile and clothing manufacturers may well see their exports increasing, this is taking place in the shadow of a continuing tariff ceiling which will impose a cap on the present growth.

Enterprises engaged in the manufacture of household electrical appliances have made good use of the business opportunity brought by WTO membership and have been expanding into international markets. This is particularly important for them due to current oversupply affecting the domestic market.

Improvements in product mix, technical improvements and enhanced core competitiveness have all combined to produce strong sales of Chinese products in international markets.

Thus WTO membership has started a trend for China’s manufacturers of household electrical appliances to branch out from the constraints of price competition in their home market and onto the more profitable, international-standard world stage.

IT Production Moves to China

In recent years more and more international IT companies have been choosing to locate their production base in China. More stable trading conditions and an improved environment for capital investment have accompanied China’s WTO entry and confidence has soared among foreign investors.

Joint ventures in China now have well-developed, mass-production capacity for many IT products. China is already the world leader in the production of desktop PCs, mobile and fixed telephones, CD-ROMs, computer monitors, printers and the like.

Integrated circuit (IC), core product of electronic and information technology, is developing rapidly as some of the world giants in the field set up manufacturing facilities in China.

China has become both an internationally important production and distribution base for IT products. Overall WTO entry has brought more benefits than challenges to the domestic IT sector.

Some products are subject to tariffs in international markets or are made under license. Typically these would include monitors, displays and some of the newer products in the digital and electronic components fields. Inevitably they will be challenged by imports.

Most domestic medium and low-end products have long faced fierce competition from the international giants. Through a mix of cooperation and competition, domestic IT manufacturers have shown themselves ready to rise to the challenge and have seized the opportunities as they came along. In the mobile phone market, domestic brands like Bird, Kejian, Panda, TCL, Capital have achieved rapid growth in production and sales in recent years. This is a market no longer monopolized by foreign brands.

Financial and Retail Services

Foreign investors are showing increasing interest in entering the retail market. Though the overall volume of inward investment in retail is much the same as in the corresponding period in 2001, some of this year’s trends are worthy of attention.

Foreign investors are taking larger and larger stakes in local retail joint ventures. This is especially the case with some of the large profitable supermarket operations. They have set an excellent example in the pace of opening-up. French retailing giant Carrefour has a full 100 percent stake in its Shenyang Carrefour and Dalian Carrefour supermarkets.

Domestic retailers are responding with homegrown alliances and other measures aimed at enhancing their competitive edge to contend with their new foreign rivals.

And now foreign banks have been allowed to engage in foreign currency business across China as a whole and in Renminbi business in some big cities like Shanghai, Shenzhen, Tianjin and Dalian.

A trade war has broken out between the foreign and domestic banks as they compete to attract clients.

The domestic banks are not unprepared. In particular those that are listed on the stock exchange have achieved the most far-reaching, systemic reforms and the greatest flexibility in their business operations.

The banks that have proven their worth through successful public share issues are thought most likely to become the major players in the growing competition with the foreign financial giants.

(china.org.cn December 11, 2002)