Overview of China’s Economy and Market Opportunities

Craig AllenSenior Commercial Officer

U.S. Embassy, Beijing

Headline News - 2005

• China’s GDP grows 9.9 percent, surpassing USD 2 trillion• Per capita GDP up to approximately USD 1,500 • China’s banking system recapitalized with FDI • FX reserves increased USD 208.9b to 818.9 b • RMB de-pegged, but still not reflecting market forces • China’s multilateral trade surplus up to 5 percent of GDP• China plans to quadruple GDP in 20 years, which implies an

average 7.3% annual growth.

U.S. Exports to China Jan – Dec yoy

16.30 19.20 22.10

28.40

34.70

41.84

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.00

USD(b)

2000 2001 2002 2003 2004 2005

Leading U.S. Exports to China (4 digits) (Jan. - Dec. 2005)

Product Value (USD) %Change

aircraft and parts 3.84b 137.23% +digital integrated circuits 3.12b 16.98% +soybeans 2.25b 3.25% -cotton 1.40b 1.51% -ferrous metal scrap 1.26b 34.39% +auto parts / accessories 1.03b 72.04% +auto data processing equip. 0.78b 0.13% +copper scrap 0.76b 42.31% +aluminum scrap 0.72b 94.20% +Waste of paper 0.69b 42.79% +Electric Apparatus 0.57b 7.79% +Raw hides&skins of Bovine equine animal 0.56b 16.6% +

Composition of U.S.- China Trade2005 Top 12 (2 digits)

U.S. Imports (from China) %Change1. Elect. Machinery 32.09%

2. Machinery 20.29%

3. Toys/Sports equipment 11.13%

4. Furniture and bedding 18.27%

5. Footwear 12.10%

6. Plastic 27.82%

7. Knit apparel 60.26%

8. Leather Goods 9.61%

9. Iron/steel products 34.22%

10. Vehicles 24.54%

11. Optic/Medical inst. 8.95%

12. Misc Textile 29.63%

U.S. Exports (to China) %Change1. Electric.machinery 20.41%

2. Machinery 12.60%

3. Aircraft,spacecraft 124.59%

4. Optic/Medical inst. 15.03%

5. Grain,seed,fruit -3.45%

6. Plastic 25.77%

7. Iron and steel 14.37%

8. Organic chemicals -4.87%

9. Cotton+yarn,fabric -1.44%

10. Wood pulp, etc. 33.34%

11. Copper 40.02%

12. Vehicles 43.24%

U.S-China Bilateral Trade Balance

83.8 83.1103.1

124

162

201.6

0

50

100

150

200

250

2000 2001 2002 2003 2004 2005

US

Defi

cit

(U

SD

billio

n)

Chinese Trade Balances

243.6295.3

560.8

660.2

762.3

24.1 22.8 30.3 25.4 32.8102.1

225.1

413.1

249.2 266.4325.6

593.6

438.5

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2000 2001 2002 2003 2004 2005

Imports

Exports

Trade B

In USD billionIn USD billion

China’s Multilateral trade balances by industry

Trade balance composition, 1990-2005

-100.0

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-100.0

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Machinery and equipment Primary products Light industrials and intermediates Chemicals Other manufactures

Economic Snapshot of 2005

• 9.9% GDP growth in 2005: 9.9% in Q1, 10.1% in Q2, 9.8% in Q3, 9.8% in Q4

• 12.9% growth of retail sales in 2005.• 25.7 % growth in net fixed asset investment.

– 11.4% growth in industrial production (48% of GDP)– 5.2% growth in agricultural production (12% of GDP)– 9.6% growth in service growth (40% of GDP)

2000 2001 2002 2003 2004 2005

Inflation 0.4% 0.7% 0.1% 1.8% 3.9% 1.8%

Rev/gdp 15.3% 17.1% 18.5% 21.7% 19.3% -

Bud. Bal -3.6% -3.2% -3.3% -3.1% -2.5% +1%

Gov. Res.

171b 219b 300b 403b 600b 818b

Ex. Debt 149b 164b 168b 182b 229b -

Fiscal and Monetary Policy Stability

Factors of Sustainable Growth in the future

• Demographics and work force composition• Benign geo-political environment • Stable monetary and fiscal policy• High saving and investment rates• Rapid adoption of technology• Trend toward market-oriented legislation• Booming private sector• Market depth – strategic range• Foreign Direct Investment (FDI)

Market Entry Roadmap

Direct Exports

Sales Agent / Distributor

Resident Representative Office

Wholly Foreign-Owned Enterprise

Foreign-Invested Commercial Enterprise (FICE)

Direct Exports

Evaluate Prospects– Are You China Ready?– Market Research– Regulatory Environment

Create a Marketing Plan

Develop Trade Leads – Attend a trade show in China, many supported by CS – Participate in a trade mission, organized by USDOC, state government or trade

association– Monitor the CS International Buyer Program via your USEAC– Monitor CBIC tender announcements, ADB and World Bank– Featured U.S Exporter (FUSE)– CNUSA, Chinese edition

2006 CS China Trade Show Calendar

MarMar AprApr MayMay JunJun JulJul AugAug SepSep OctOct NovNov DecDec

China China Building Building

(BJ)(BJ)

Dental Dental Expo (GZ)Expo (GZ)

SIMM 2006 SIMM 2006 (GZ)(GZ)

SEMICON SEMICON (SH)(SH)

PollutecPollutec(SH)(SH)

World World Travel Fair Travel Fair

(SH)(SH)

SINOCES SINOCES Consumer Consumer Electronic Electronic (Qingdao)(Qingdao)

China Int’l China Int’l Building Building

Decoration Decoration Fair Fair

(GZ)(GZ)

Printed Printed Circuit & Circuit &

Electronics Electronics Assembly Assembly

(GZ) (GZ)

CIPPE (BJ)CIPPE (BJ)

Water Water Expo (BJ)Expo (BJ)

NEPCON NEPCON (SH)(SH)

Hotelex Hotelex (SH)(SH)

China China Refrig (SH)Refrig (SH)

Sporting Sporting Goods Goods (CD)(CD)

Con Expo Con Expo (BJ)(BJ)

Broadcast Broadcast Network & Network &

Expo Expo Comm Comm

(GZ)(GZ)

ELE/PT ELE/PT Comm Comm

China China (SH)(SH)

Book Fair Book Fair (BJ)(BJ)

CIFTEE (BJ)CIFTEE (BJ)

Analytica Analytica China China

2006 (SH)2006 (SH)

CIEME CIEME Equip Equip

(Shenyang) (Shenyang)

Security Security China China (BJ)(BJ)

EP China EP China (BJ)(BJ)

PTC Asia/ PTC Asia/ Metal Metal

Working Working (SH)(SH)

Zhuhai Zhuhai Air Show Air Show

(GZ)(GZ)

CCFA CCFA Franchising Franchising

(SH)(SH)

SITL SITL Logistics Logistics

(GZ)(GZ)

MEDTEC MEDTEC China (SH)China (SH)

MEDTEC MEDTEC China (GZ)China (GZ)

Sales Agent / Distributor ( I )

Advantages– no investment in office overhead– no registration requirements, no physical presence– lower likelihood of non-payment– no responsibility for customs clearance

Responsibilities– Comply with safety and quality certifications, China Compulsory Certification, other

standards requirements– Comply with the U.S. Foreign Corrupt Practices Act– Comply with U.S. Export Control regulations– Prepare a contract that protects your legal interests, see a local attorney– Closely monitor the agent / distributor’s activity

Sales Agent / Distributor ( II )

Manage Expectations

– use worldwide selection criteria, then evaluate skill sets

– explore their view of market prospects, approach to business development

– ask to see a prior marketing plan and market research report

– discuss cost sharing for Chinese language brochures, participation in trade shows, demonstration equipment, training in the U.S.

– contract should contain clear reporting requirements and performance goals to monitor whether the Chinese company can do what it purports to be able to do

– evaluate capacity to stock and warehouse

Sales Agent / Distributor ( III )

Due Diligence

– Many exaggerate trade experience, check trade references

– Ask for a copy of the firm’s business license, SAIC inspection, trading rights license, visit business premises

– Triangular debt common for entities lacking trading rights and foreign exchange

– Obtain a DD report through local service providers or CS.

China lacks a corporate credit rating system

– Government system for verification of business registration on line is emerging – SAIC Red Shield (Hong Dun) Program

Sales Agent / Distributor ( IV )

Contract Terms

– seek professional legal advice before contracting, do not rely upon your Chinese business partner

– ensure the dispute resolution clause limits time for “friendly discussion or mediation”

– do not accept obligations outside of your control: visas, export licenses

– do not export on open account or D/P terms

– ensure contract has non-competition and non-disclosure clauses to protect trade secrets, in the event the relationship ends badly

Resident Representative Office

RRO may perform a useful government liaison and marketing function, contract implementation. Useful for getting into government procurement projects.

Restrictions on business scope apply:– not allowed to engage in profit-making activity– not allowed to directly import and distribute product– not allowed to service equipment or warehouse spare parts

Establishment of physical presence now requires only local registration. The cost to support a modest RRO $250,000-500,000 depending on location and size.

Registered capital in the amount of $10,000 still required.

Foreign-Invested Commercial Enterprise

Market entry vehicle for domestic wholesale and retail distribution

Scope of operation includes “trading rights,” meaning the right to import or export goods manufactured by third parties into or out of China.

Scope of operation includes “distribution rights,” meaning right to sell products for its own account on retail or wholesale basis, import for sale within China, purchase domestic products for export and perform related services.

Hong Kong as a Gateway

Ease of Doing Business Rule of Law Free Trade Port Secure banking system

Strategic Asia Hub Location Test products for market Regional HQ Huge re-export market to China Closer Economic Partnership Agreement (CEPA) Access to Pearl River Delta – China’s manufacturing hub

Anticipate Problems - Macro

• Intellectual Property Rights– Patent - Trade Secrets– Copyright - Trade Mark

• Industrial Standards and Certification Problems• Transparency/Corruption• Payment issues• Dispute Resolution• Price Competition

Anticipate Problems - micro

• Management-level human resources• Bureaucracy• Unclear Regulations• Lack of Transparency• Inconsistent Regulatory interpretation• Corruption• Contract Enforcement• Local protectionism

U.S. Companies Profit/Risk in China - 2005

• 72% U.S. firms increased product offering in China • 86% increased revenue substantially• 63% increased profitability• 34% have higher margins than global averages• 92% are optimistic

Find the right markets and partners with our products and services

CNUSA – Chinese edition

Featured U.S. Exporter

International Partner Search

Customized Market Research

Gold Key Service

International Company Profile

Single Company Promotions

Trade Missions, Trade Fairs and Catalog Exhibitions

American Trading Centers:

• Harbin Nanjing• Dalian Ningbo• Qiangdao Chongqing• Tianjin Kunming• Xiamen Zhuhai• Wuhan Shenzhen• Hangzhou Xiamen

ATC Program Coordinators

Beijing Shanghai Guangzhou

Ms. Julie Jiang Ms. Cindy Qian Mr. Barry Zhang

Julie.jiang@mail.doc.gov

Cindy.qian@mail.doc.gov

Barry.zhang@mail.doc.gov

(86 10)8529-6655* 809

(86 21) 6279-7630*6145

(86 20)8667-4011*22

China in a Time of Transitions

• China is simultaneously undergoing a series of dramatic transitions:– Confucian to modern– Communist to market-driven (not capitalist)– Rural and agrarian to urban and industrial– Economic Autarchy to global integration