Letter from Beijing

Uncertainty

by Robert Poole

In many ways, the uncertainty surrounding expected developments in 2008 makes it more difficult than usual to look ahead. These developments include China's domestic economic conditions and linkage to a shaky global economy, political changes following the 17th Chinese Communist Party Congress, and the entirely unprecedented hosting of the summer Olympic Games. One local US-China Business Council (USCBC) member company neatly summarizes the PRC government's priorities for the year: first, inflation; second, the Olympics; and third, government reform. There is, of course, a great deal more to the story, but companies would do well to bear in mind the bigger picture—making life easier for foreign companies is not among the PRC government's top priorities for the year.

Economic outlook

Companies would do well to bear in mind the bigger picture—making life easier for foreign companies is not among the PRC government's top priorities for the year.

Uncertainty was the theme sounded by Professor Wang Luolin, former vice president of the Chinese Academy of Social Sciences, at a recent economic forecasting conference in Beijing. His assessment included a large number of uncertainties: the effect of US economic conditions on China; the effect of administrative measures to rein in prices and investment in China; the harvest (after four successive good years, China is due for a weak year), and more. Ultimately, his forecast was nonetheless for another year of 10.5 percent economic growth, a fraction less investment growth than in 2007, and one certainty: China's State Council will act to ensure a stable economy in this year of the Beijing Olympics.

Western economists have moderated their forecasts but expect solid growth in China, despite inflation worries. From Beijing, it is easy to see that inflation will indeed be the government's number-one target because of its possible effect on social stability.

Government reform continues

The major event of 2007 in China was certainly the party congress in October, and the subsequent government changes that will take place at the upcoming National People's Congress session in March will dominate developments in 2008. Already, ministries, agencies, companies, and others have held numerous meetings and released revised work priorities based on the proclamations of the party congress.

At the local level, officials also campaign vigorously for promotion and new positions in party congress years. Historically, fixed-asset investment rises after each congress, as officials bolster support by priming economic performance with projects. This phenomenon may hinder the central government's ability to keep investment within target limits.

Many observers expect China to undertake few, if any, major economic reforms this year, as the desire for stability will keep policymakers using marginal administrative adjustments, rather than major change in financial markets, energy prices, or some of the other awaited areas. Though the chance of significant economic reform this year is slight, the government will likely undergo some reorganization, as it has after every congress since 1983. Topping the list of possible changes is the reorganization of the 28 government ministries into a configuration that combines some of them into "grand ministries." Along with this organizational change, personnel changes will occur at all levels, from top positions down to the lowest level of local government. Efforts to address social issues such as healthcare, social security, and the environment should also make progress, as they fit within both national and local priorities and the main themes of the congress.

What it means for business

For foreign business, most of the underlying trends from recent years look set to continue. Prominent among them are China's drive for indigenous innovation, desire to build national champion companies and brands, and support for outbound investment. These nationalistic objectives suit party congress themes such as "scientific development" and "good and fast" (modified from "fast and good") development, and it seems likely that they will persist, if not intensify, in this important political year. The trends or goals are, however, sometimes seen as protectionist, or are adopted by those in China with protectionist views, and have given rise to difficulty for US companies in mergers and acquisitions, standards setting, and other areas.

Financial reform might be a good example. Though international trading partners believe China will benefit from greater competition, more market access for foreign firms, more open markets, and faster reform, China's reform efforts are largely directed at building domestic capacity and improving the technical capabilities of Chinese financial institutions. (For example, China is trying to build a capacity for international leasing and domestic private equity, and to create a framework for universal banks, which would allow cross ownership and involvement in banking and insurance, rather than embracing some of the changes long advocated by the US financial industry.) Some foreign companies hoping for market access say that if change hasn't happened by now, it won't until some time after the Olympics, as Beijing seeks to avoid upsetting any applecarts.

Olympian challenges

The summer Olympic Games indeed loom large. We often remind visitors that Beijing represents only 3.5 percent of China's GDP, and that USCBC is interested in 100 percent of China's economic development, but there is little doubt that the 17 days from August 8 to 24 will set the standard by which the year is judged and that much will be calibrated by the PRC government to ensure a successful event for host nation and city.

Here in Beijing, the logistical challenges seem great. The city announced in January that its population has reached 16.33 million—two years ahead of an expected 16 million by 2010—and migrants may make the actual figure larger. More than 1,000 new cars appear on Beijing roads each day, and the total on the capital's crowded streets exceeded 3 million sometime in the middle of last year. Estimates for the Olympics themselves include some impressive numbers as well: 7 million spectators, and possibly more than 60 visiting foreign heads of state, to name but two. These are formidable numbers, but, as Professor Wang suggests, we can expect extraordinary measures to ensure the success of the games.

International relations will be especially important to China this year, particularly with the world's cameras coming to Beijing. Some predict trade frictions, as China's trade surpluses engender resentment amid politically charged election cycles and economic woes in the United States, the European Union, or elsewhere. The United States will be preoccupied with congressional and presidential elections, and the European Union is less likely to be aggressive during Slovenia's seat in the presidency—but could pay greater attention to China when France assumes the EU lead in the fall.

Companies coping

In Beijing, it is difficult to be too optimistic or too worried—there is too much we cannot know, or predict, with more elements at play than simple dollars and cents this year. Several things seem fairly clear, however, based on our work with member companies.

Meticulous attention to the environment, employment, product quality, and other operational areas will be essential this year, as accidents or failures in compliance will draw more attention. China's media and an increasing number of domestic nongovernmental organizations and interest groups are quick to criticize foreign companies, and global media are watching more closely than ever.
Taking care of short-term business challenges (though easier said than done, of course) is probably the best positioning for the long term. Some rather significant developments are working their way through the income statement, as materials and labor prices adjust, new tax and customs rules evolve, and labor and employment laws enter force—all of which deserve careful attention. At the same time, however, rising incomes and market demand continue to spread across China, making companies' hard work worthwhile. It is easier to be confident that the long-term outlook remains good for companies that manage well this year—after all, China has been through inflationary cycles before (last in 1992-96) and emerged as a strong and growing economy.
Alignment with China's domestic initiatives is often discussed by companies in our Beijing office, and it means everything from corporate social responsibility programs, to seeking domestic status for foreign-invested enterprises when facing domestic content purchasing rules, to partnerships in China's standards setting, and more. As US business operations in China grow more complex, mature, and active, their interactions with regulators at all levels proliferate. From high-level seminars on energy policy with key PRC academics to working-level training sessions on responding to chemical spills for local-level environmental protection bureau personnel, US business is increasingly active—and increasingly interacting with the government—in many positive ways. In a year in which domestic politics dominate, this kind of local engagement and alignment will remain a key.

Uncertain though the outlook for the rest of the year may be, one thing is sure: USCBC will celebrate its 35th anniversary this year, reminding us of the remarkable developments since 1973. Many of its members have been doing business with China for most or all of those years. Uncertainty has been a frequent companion, but so have growth and progress for those who stay the course.

Robert Poole is vice president of the US-China Business Council in Beijing.

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	E-Mail \| Print \| License Letter from Beijing Uncertainty by Robert Poole In many ways, the uncertainty surrounding expected developments in 2008 makes it more difficult than usual to look ahead. These developments include China's domestic economic conditions and linkage to a shaky global economy, political changes following the 17th Chinese Communist Party Congress, and the entirely unprecedented hosting of the summer Olympic Games. One local US-China Business Council (USCBC) member company neatly summarizes the PRC government's priorities for the year: first, inflation; second, the Olympics; and third, government reform. There is, of course, a great deal more to the story, but companies would do well to bear in mind the bigger picture—making life easier for foreign companies is not among the PRC government's top priorities for the year. Economic outlook Companies would do well to bear in mind the bigger picture—making life easier for foreign companies is not among the PRC government's top priorities for the year. Uncertainty was the theme sounded by Professor Wang Luolin, former vice president of the Chinese Academy of Social Sciences, at a recent economic forecasting conference in Beijing. His assessment included a large number of uncertainties: the effect of US economic conditions on China; the effect of administrative measures to rein in prices and investment in China; the harvest (after four successive good years, China is due for a weak year), and more. Ultimately, his forecast was nonetheless for another year of 10.5 percent economic growth, a fraction less investment growth than in 2007, and one certainty: China's State Council will act to ensure a stable economy in this year of the Beijing Olympics. Western economists have moderated their forecasts but expect solid growth in China, despite inflation worries. From Beijing, it is easy to see that inflation will indeed be the government's number-one target because of its possible effect on social stability. Government reform continues The major event of 2007 in China was certainly the party congress in October, and the subsequent government changes that will take place at the upcoming National People's Congress session in March will dominate developments in 2008. Already, ministries, agencies, companies, and others have held numerous meetings and released revised work priorities based on the proclamations of the party congress. At the local level, officials also campaign vigorously for promotion and new positions in party congress years. Historically, fixed-asset investment rises after each congress, as officials bolster support by priming economic performance with projects. This phenomenon may hinder the central government's ability to keep investment within target limits. Many observers expect China to undertake few, if any, major economic reforms this year, as the desire for stability will keep policymakers using marginal administrative adjustments, rather than major change in financial markets, energy prices, or some of the other awaited areas. Though the chance of significant economic reform this year is slight, the government will likely undergo some reorganization, as it has after every congress since 1983. Topping the list of possible changes is the reorganization of the 28 government ministries into a configuration that combines some of them into "grand ministries." Along with this organizational change, personnel changes will occur at all levels, from top positions down to the lowest level of local government. Efforts to address social issues such as healthcare, social security, and the environment should also make progress, as they fit within both national and local priorities and the main themes of the congress. What it means for business For foreign business, most of the underlying trends from recent years look set to continue. Prominent among them are China's drive for indigenous innovation, desire to build national champion companies and brands, and support for outbound investment. These nationalistic objectives suit party congress themes such as "scientific development" and "good and fast" (modified from "fast and good") development, and it seems likely that they will persist, if not intensify, in this important political year. The trends or goals are, however, sometimes seen as protectionist, or are adopted by those in China with protectionist views, and have given rise to difficulty for US companies in mergers and acquisitions, standards setting, and other areas. Financial reform might be a good example. Though international trading partners believe China will benefit from greater competition, more market access for foreign firms, more open markets, and faster reform, China's reform efforts are largely directed at building domestic capacity and improving the technical capabilities of Chinese financial institutions. (For example, China is trying to build a capacity for international leasing and domestic private equity, and to create a framework for universal banks, which would allow cross ownership and involvement in banking and insurance, rather than embracing some of the changes long advocated by the US financial industry.) Some foreign companies hoping for market access say that if change hasn't happened by now, it won't until some time after the Olympics, as Beijing seeks to avoid upsetting any applecarts. Olympian challenges The summer Olympic Games indeed loom large. We often remind visitors that Beijing represents only 3.5 percent of China's GDP, and that USCBC is interested in 100 percent of China's economic development, but there is little doubt that the 17 days from August 8 to 24 will set the standard by which the year is judged and that much will be calibrated by the PRC government to ensure a successful event for host nation and city. Here in Beijing, the logistical challenges seem great. The city announced in January that its population has reached 16.33 million—two years ahead of an expected 16 million by 2010—and migrants may make the actual figure larger. More than 1,000 new cars appear on Beijing roads each day, and the total on the capital's crowded streets exceeded 3 million sometime in the middle of last year. Estimates for the Olympics themselves include some impressive numbers as well: 7 million spectators, and possibly more than 60 visiting foreign heads of state, to name but two. These are formidable numbers, but, as Professor Wang suggests, we can expect extraordinary measures to ensure the success of the games. International relations will be especially important to China this year, particularly with the world's cameras coming to Beijing. Some predict trade frictions, as China's trade surpluses engender resentment amid politically charged election cycles and economic woes in the United States, the European Union, or elsewhere. The United States will be preoccupied with congressional and presidential elections, and the European Union is less likely to be aggressive during Slovenia's seat in the presidency—but could pay greater attention to China when France assumes the EU lead in the fall. Companies coping In Beijing, it is difficult to be too optimistic or too worried—there is too much we cannot know, or predict, with more elements at play than simple dollars and cents this year. Several things seem fairly clear, however, based on our work with member companies. Meticulous attention to the environment, employment, product quality, and other operational areas will be essential this year, as accidents or failures in compliance will draw more attention. China's media and an increasing number of domestic nongovernmental organizations and interest groups are quick to criticize foreign companies, and global media are watching more closely than ever. Taking care of short-term business challenges (though easier said than done, of course) is probably the best positioning for the long term. Some rather significant developments are working their way through the income statement, as materials and labor prices adjust, new tax and customs rules evolve, and labor and employment laws enter force—all of which deserve careful attention. At the same time, however, rising incomes and market demand continue to spread across China, making companies' hard work worthwhile. It is easier to be confident that the long-term outlook remains good for companies that manage well this year—after all, China has been through inflationary cycles before (last in 1992-96) and emerged as a strong and growing economy. Alignment with China's domestic initiatives is often discussed by companies in our Beijing office, and it means everything from corporate social responsibility programs, to seeking domestic status for foreign-invested enterprises when facing domestic content purchasing rules, to partnerships in China's standards setting, and more. As US business operations in China grow more complex, mature, and active, their interactions with regulators at all levels proliferate. From high-level seminars on energy policy with key PRC academics to working-level training sessions on responding to chemical spills for local-level environmental protection bureau personnel, US business is increasingly active—and increasingly interacting with the government—in many positive ways. In a year in which domestic politics dominate, this kind of local engagement and alignment will remain a key. Uncertain though the outlook for the rest of the year may be, one thing is sure: USCBC will celebrate its 35th anniversary this year, reminding us of the remarkable developments since 1973. Many of its members have been doing business with China for most or all of those years. Uncertainty has been a frequent companion, but so have growth and progress for those who stay the course. Robert Poole is vice president of the US-China Business Council in Beijing. Further Reading China's Economic Decisionmakers Harmonious Society Who's Cleaning Up This Mess? 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