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Asia Economy Last Updated: Sep 23, 2011 - 3:59 AM

China’s markets excessively regulated; Less open to competition than other major economies says European Chamber of Commerce
By Finfacts Team
Sep 3, 2010 - 1:37 AM

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Chinese Premier Wen Jiabao meets with European Union High Representative for Foreign Affairs and Security Policy Catherine Ashton in Beijing, Thursday, Sept. 02, 2010.

The European Chamber of Commerce in China says in its annual report that European companies wish to have equal access to China’s markets but despite China’s 30 years of reform, it still remains excessively regulated and less open to competition compared to other major economies.

The chamber says certification requirements exist in most markets and compulsory certification serves a purpose in cases where products pose real and direct risks to human health, safety and the environment. However, compulsory certification procedures must be limited to these specific areas, beyond which they create barriers to trade.

The Chinese government goes beyond this and relies on compulsory certification schemes to regulate its large and growing market. Such practice unduly restricts access to the Chinese market for European companies in a range of key industries such as the automotive, auto component, IT and telecommunication equipment, healthcare equipment, electro-technical and power transmission industries.

As a full member of the World Trade Organisation (WTO), China is under the obligation to notify all standards and technical regulations affecting trade to the WTO Technical Barrier to Trade Committee (TBT Committee).

In the service sector, licensing requirements continue to exclude foreign companies from entire sectors. Nearly ten years after China’s WTO accession, and despite clear commitments to increase competition in service sectors, European companies are still denied fair market access to several of them.

“Compulsory certification in excess of what is reasonable is being used to keep foreigners out of the market and business license requirements continue to exclude foreign companies from entire sectors,” the EU chamber said.

China uses business licensing to restrict foreign access to some sectors and applies “vague and unprecedentedly broad definitions of public security and critical infrastructure” in its certification of a wide range of products, the group added.

For a foreign automobile manufacturer wanting to invest in China, the only permissible business structure is a joint venture (JV) with a Chinese partner, where the maximum share is limited to 50%. In addition, a foreign investor is limited to setting up no more than two such Sino-foreign JVs for the production of passenger cars, and two for commercial vehicles (“2+2”).

The paper says to reach decisions in a 50/50 JV, consensus between the partners is required; reaching a consensus is no easy matter when the partners’ interests diverge. Unfortunately, such divergence leads to management inefficiency in a competitive landscape that demands efficient decision-making. If occasional managerial deadlock were the only price to pay to have long-term benefits accrue by participating in China’s automotive industry, a less than optimal business performance by Sino-foreign automotive JVs could be condoned. But compared to these JVs, the fastest-growing domestic carmakers are those who simply buy, and then successfully assimilate, technological know-how in the open market, and who neither need nor want a foreign partner. The chamber says this argument is fast being superseded by the reality unfolding before any impartial observer. Investors in the automotive industry (foreign or otherwise) should be allowed to hold stakes in an automobile-producing venture proportional to the business risk they are prepared to take.

The EU chamber says mandatory 50/50 partnerships are counterproductive and are an anomaly in a market economy. In addition, with a view to furthering the consolidation of the automotive industry, mergers and acquisitions should not be hampered by the corollary regulation that foreign investors are limited to a total of two JVs for the production of passenger cars and two for commercial vehicles.

This year, Chinese carmaker Geely acquired 100% control of Swedish carmaker Volvo.

Graeme Maxton, chief economist at The Insight Bureau, discusses how foreign companies in China are faring so far, with CNBC's Martin Soong:

In its latest business confidence survey, the EU chamber reported that 39% of respondents expected the regulatory environment for foreign businesses to get worse over the next two years and a further 22% said they expected no improvement. Only 10% said they thought the regulatory environment would improve for foreign businesses.

"China-EU relations are at a critical period of development," Chinese Premier Wen Jiabao said during a meeting on Thursday with Catherine Ashton, EU's high representative for foreign affairs and security policy.

The EU is China's top trading partner.

Wen urged the two sides to enhance coordination to tackle the difficulties caused by the international and European debt crises.

"We should build up the confidence of China, Europe and the international community to overcome difficulties and realize common development," Wen said.

Trade in goods
  • EU goods exports to China 2009: €81.7bn
  • EU goods imports from China 2009: €214.7bn

EU's imports from China are mainly industrial goods: machinery & transport equipment and miscellaneous manufactured articles. EU's exports to China are also concentrated on industrial products: machinery & transport equipment, miscellaneous manufactured goods and chemicals.

Trade in services
  • EU services exports to China 2009: €18bn
  • EU services imports from China 2009: €13bn
Foreign Direct Investment
  • EU inward investment to China 2009: €5.3bn
  • China inward investment to EU 2009: €0.3bn

EU's China Page

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