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AUTOMOTIVE Overall Grade: A- Robert Eisen is a senior partner and head of the customs and international trade group at Coudert Brothers in New York. Much of Eisen’s practice revolves around China. Eisen: China is on schedule in implementing the laws and legal structure necessary to liberalize its automotive market, but it’s too early to tell how changes in the legal framework will affect the ability of foreign [auto] companies to sell. The changes have been recent, with further liberalization of foreign investment as a result of China’s accession to WTO and the [follow-up] legislation [that WTO membership requires] that will take place in December [under the Doha Development Agenda deadlines]. Liberalization will allow companies to set up their own manufacturing entities in China and avoid some of the joint venture model � in the past, foreign-owned manufacturing entities would have to export their product. Many companies are looking to produce automobiles and sell them into the Chinese market � an enormous market that in theory can accommodate all different brands. Until recently the Chinese market has been dominated by Volkswagen/Audi. You can actually see the advancement of the Chinese economic situation on a personal level by the number of more expensive vehicles on the roads � and the congestion they cause. There will be more foreign investment by both American and European companies, but the sales of vehicles have been slowed by limitations of the Chinese infrastructure, especially too few roads, as well as the [increasing] price of oil . . . and the Chinese lack of understanding of traditional vehicle financing. [In America] we’re used to leasing or borrowing money for a car, but credit companies are a new phenomenon to the Chinese. [General Motors Corporation announced in August that it has final approval to begin offering vehicle loans in China soon through its General Motors Acceptance Corporation; Ford Motor Credit Company said it has preliminary approval and expects to offer loans by mid-2005.] Also the creditworthiness of the Chinese is an issue for these finance companies. An obvious way to sell more cars is by offering financing, but it’s much too early to assess the risk of how good those loans will be. And what will be the market for used cars in China? AGRICULTURE Overall Grade: B Daniel Rosen is a visiting fellow at the Institute for International Economics in Washington, and principal of China Strategic Advisory consulting business. From 2000 to 2001 he served as senior adviser on the White House National Economic Council Staff, and he has written two books on China; the latest is Roots of Competitiveness: China’s Evolving Agriculture Interests. Rosen: I give China points for a bold WTO [entry] agreement, generally good implementation of WTO, and moving smart people into position to advise the government on policy. They lose points for lack of imagination in letting farmers have better access to bank lending so they can upgrade their businesses, for using nontariff barriers in a handful of crops, especially soybeans, and for illegally subsidizing the export of corn to Korea. But they show good promise to move up to a B+/A- next year. China is the fasting-growing market for manufactured goods and capital equipment. As a result, China has an interest in exporting the labor intensive crops its many farmers grow, and [the country has] the ability to threaten access to its huge domestic import market for manufactured goods. China therefore has the leverage to make its desire for more open trade in agriculture heard by wealthier countries, including Japan, South Korea, the European Union, and the U.S. The transformation of Chinese agriculture has lifted 300 million people out of poverty and is the most significant achievement in development economics in two decades. It happened by letting people change what they did for a living, letting them move from things that didn’t produce income to those that did, letting them react to market signals and prices and opportunities. China is very much transitional. In 1979 � 80 almost all agriculture was collective and run by the state, no private farming. Most agriculture today is driven by market forces and prices. What makes China very different from the U.S. is coming from that very different background. . . . Land itself still is not privately owned, but generally standard 30-year leases control the land use rights. So farmers now know they’ll have 30 years’ control over the land. With 400 million farmers, the problem is that parcels of land are much too small to be efficient. The real efficiency story is moving China toward larger farm sizes so the individual can justify investing in capital equipment, like a tractor. What China is good at is not land-intensive crops like grains, but labor-intensive ones � fruits and vegetables, tomatoes, apples, fresh-cut flowers, and shiitake mushrooms. These crops need people for harvesting, not machines, In part, thanks to WTO discipline, food prices in China are rising faster than any other category of products, leading to enhanced opportunities for Chinese farmers and foreign agro-businesses alike. The era of keeping farm prices artificially low, impoverishing farmers and precipitating trade disputes as a result, appears to be coming to a close. BANKING Overall Grade: B- or C+ Donald H.Y. Koo heads the China practice of Paul, Hastings, Janofsky & Walker and is a senior partner of Koo and Partners in association with Paul Hastings. He is office chair of the Hong Kong and Beijing offices. Koo: I think if we look at the [Communist] foundation, China is really opening up. It is a very complex and huge process. The move is not an overwhelming or wide open move . . . really a very slow move. [China has until 2007 to fully open its banking system to foreign competition under the WTO.] In absolute terms everybody expects China to do things overnight. . . .It is a very difficult period for them. Look at their efforts, and you see lots and lots of regulations coming out every week trying to bring China in line with international standards. They have the determination to do it, and they are moving in the right direction. In the move to open up and meet compliance issues, I see four areas. First, in April of 2003, they established the China Banking Regulatory Commission (CBRC) with authority to supervise the banking industry. Formerly, the banking industry in China was only the People’s Bank of China, which served as the essential bank and the supervisor. CBRC is a move toward compliance with international financial centers. Second, before WTO, China’s banking industry was very closed. [Joining WTO] has in fact [pushed] China toward gradually opening the banking industry to foreign financial institutions. China raised the foreign investment ratio to a total of 25 percent in any one bank, and a single foreign investor’s equity can be 20 percent. I anticipate this will further open up in years to come. [In August the U.K.'s HSBC Holdings Plc said it would pay $1.75 billion for 19.9 percent of China's Bank of Communications, the biggest foreign investment yet in China's financial industry.] China also is allowing more banks to handle its renminbi (currency) business. We have also seen Citibank [USA] and HSBC as forerunners in domestic renminbi business. Third, there is an opening up of the domestic securities market. China has a very big domestic market, with what we call A shares. Foreign investors were only allowed to invest in B shares. That has changed gradually. In 2002 [came] a system where category investors who qualify as foreign institutional investors can invest in the A share market, subject to certain restrictions. Fourth, I see another big movement in banking and finance [in adopting] further measures against money laundering. I think this is a universal issue. For the future, the most imminent issue is really the minimum regulatory requirement for the capital adequacy ratio of 8 percent [a measure of a bank's capital, expressed as a percentage of the bank's risk]. Most Western company banks satisfied that long ago. . . . In order for most [local] banks in China to maintain the 8 percent ratio, there is still a lot of work to be done. I think the average capital adequacy ratio of local banks in China is somewhere between 6 percent and 7 percent, so it is still below the minimum of 8 percent. This relates to nonperforming loans that they need to take care of. This is a huge, huge market that foreign investors are really looking at, and China is determined to open it up to foreign investment. So whether China has met its obligations so far under the WTO, my observation is that they are trying their best, and in some areas moving ahead [of deadlines]. ARBITRATION Overall Grade: C to C+ Peter Neumann is a partner in the Shanghai office of Minneapolis-based Faegre & Benson, which has represented clients in confidential arbitrations in China. He has been in China since 1993, also representing commercial clients in Beijing, Chengdu, and Hong Kong. Neumann: I would give China a B+ in arbitration, but a C- or D+ on enforcement. CIETAC (the China International Economic and Trade Arbitration Commission, headquartered in Beijing and created in 1956) is one of the busiest in the world. The WTO entry might have put more focus on CIETAC and the main tribunals to run more professionally. But the regulatory structure still has loads of ambiguities. For example, at the level of enforcement, you can still face the issue of local protectionism and corruption, because local authorities enforce a judgment. Judges function differently in China. A judge in the enforcement division of a court may reach an accommodation with a judgment debtor and determine whether that debtor has an aggressive payment schedule or a laid-back and strung-out one. Depending on where you are, local authorities may be paid off by a defendant. Especially in backwater areas, a defendant may be the largest employer, and local authorities may not be very proactive in enforcement. Although experience under the WTO varies with different government entities, there is more transparency now in the whole legal and regulatory area. But I am not convinced there has been any sea change. INTELLECTUAL PROPERTY Overall Grade: D Joseph Papovich is senior vice president/international for the Recording Industry Association of America, and has been deeply involved in negotiations to protect recordings from counterfeiting in China. He is the former assistant U.S. trade representative for services, investment, and intellectual property. Papovich: I give China a D, but a B or C on amending their laws under the WTO to bring it up to the world’s standards. Their laws look a lot better on paper, more up-to-date, to reflect new technology. For example, China has taken steps to recognize copyrighted material transmitted on the Internet. But they just seem to have this strong reluctance to impose penalties that really deter people from pirating all kinds of products. The availability of counterfeit products remains as high as it ever was. And it remains very difficult to enforce your rights in China, particularly against large-scale commercial counterfeiting, and this is true of other copyrighted products, such as Callaway golf clubs, as well as CDs. There are three ways to enforce IP rights in China � seek an administrative sanction like a fine, file a civil suit for damages, or seek criminal sanctions. The first two are fairly readily available, and are China’s preferred way. For counterfeit CDs, the Chinese will seize the product and impose a small fine. For the commercial pirates who make unauthorized copies, it’s just a cost of doing business. We have also used civil suits, but they’re usually effective against someone who has resources [to sue for], and most people involved in [piracy] don’t have [any]. Criminal sanctions have become quite a bone of contention between copyright owners in the U.S. and the Chinese government. The U.S. Joint Commission on Commerce and Trade announced in April that the Chinese have made numerous commitments to remedy the IP area, and are committed to do it by the end of this year. A strong part [of that] is their commitment to significantly reduce infringements in both copyright and trademark, agreeing to modify laws and procedures so criminal remedies can be available. If they don’t come through, we’ll be pressing the administration to do something serious. The U.S. could choose to bring a complaint against China in the WTO, or to do something else, such as impose our own trade sanctions. China is now in the implementation phase, and I’d say the jury is still out. We’ll have to wait and see what happens by the end of the year. n

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