| Age of the FTA |
| Monday,December 18,2006 Posted: 10:07 BJT(0207 GMT) China Daily |
"Southeast Asia is my second hometown" jokes Liu Yonghao, president of Sichuan New Hope Group (New Hope). During the last two years, more than one-fifth of Liu's time was spent in Southeast Asian nations including the Philippines, Viet Nam, and Indonesia. "I went there to investigate markets, for negotiations and to sign contracts," Liu said in a recent telephone interview from company headquarters in Chungdu. His efforts are paying off. New Hope has three factories operating in Viet Nam, two in the Philippines, one in Indonesia and another one under construction there, with a total investment worth 300 million yuan (US$38.46 million). New Hope is one of China's major producers of dairy products, meat and feed. One of China's biggest privately-owned companies, its annual sales reached US$2.5 billion. "Southeast Asia is becoming our most important overseas market. In three years, we will have more than 10 factories there, with the investment expected to amount to US$200 million," he predicts. Liu says he has great confidence in the market, primarily based on the free trade agreement (FTA) China and the Association of Southeast Asian Nations (ASEAN) signed in November 2002. Scheduled to come into effect by 2015, the FTA is the first anywhere for the both parties and the largest worldwide. Under the FTA framework, nations involved must reduce tariffs and remove non-tariff barriers on commodity trade, and lift limitations on market access for service trade (such as banking, telecommunications) and investment. This is good news for companies eager to reduce export costs or invest overseas with fewer hurdles. Free trade agreements have been heatedly discussed worldwide. China is involved in FTA talks with 28 nations from Asia Pacific, Latin America, the Middle East and Africa. New Hope is not alone in betting on the business opportunities resulting from the China-ASEAN FTA and other FTAs with China as a partner. "Chinese companies' growing interest in investing in Southeast Asian nations is amazing. Annually, investment from privately-owned companies in ASEAN alone exceeds US$600 billion," says Liu. China General Technology (Group) Holding Ltd (Genertec), a major State-owned multi-industry group whose business includes exporting machinery, technical equipment, medicine and health products, is another example. Li Dang, the company's general manager, says that from early 2005, Genertec began to target ASEAN nations and Africa as strategically important markets, aiming to obtain more infrastructure contracts in these countries. In late November, Li travelled to India for field study. That was the same time that President Hu Jintao paid an official visit to India and mentioned establishing a free trade area with India. "Genertec is planning to expand in India," an executive from Genertec says on condition of anonymity. From WTO to FTA During the second half of last century, as global multilateral trade negotiations under the World Trade Organization (WTO) had been progressing well, FTA negotiations had been ignored among Asia-Pacific nations. That changed in 2000 with China's acceptance into WTO. "ASEAN, which suffered from financial crisis (1997-1998), was afraid China's entry would pose threat to them, so they turned to FTAs," says Nicolas Kwan, regional head of Economic Research, Northeast Asia, with Standard Chartered Bank. Thitapha Wattanapruttipaisan, with the ASEAN Secretariat, agrees. "China's powerful economic performance has given rise to dire predictions of China as a global and regional competitor." Thitapha heads the Secretariat's Studies Unit with the Bureau for Economic Integration and Finance. ASEAN firstly targeted Australia and New Zealand, setting up closer economic partnerships with them in December 2000, yet without any hint of possible FTA discussions. A month later, the then premier Zhu Rongji put forward the idea of a China-ASEAN FTA at a forum in Singapore. The Agreement on Comprehensive Economic Co-operation was signed between China and ASEAN in November 2002, the first step in establishing the China-ASEAN free trade area. The proposed China-ASEAN FTA has had a ripple effect. China entered into agreements with Chile in 2005 and Pakistan last month, and is now involved in FTA talks with Australia, New Zealand and some African nations. Additional FTAs with trading partners South Korea and India are also possible. Dynamic trade is an obvious result of FTAs. In 2004, China-ASEAN trade volume rose by 35 per cent year-on-year, reaching US$105.9 billion. In 2005, China-ASEAN trade stood at US$130.3 billion, with a year-on-year increase of 23 per cent. At the 2006 China-ASEAN Expo opening ceremony in October, Premier Wen Jiabao predicted the figures would exceed US$200 billion by 2010. In November 2005, the China-Chile FTA was signed. Bilateral trade was already growing. "In 2005, the bilateral trade was US$7 billion, 3.5 times of that in 2000, and we would like to see more growth," says Fernando Reyes Matta, ambassador of Chile in China. "In five years, sales from the 10 factories in Southeast Asia will account for more than 20 per cent of New Hope's total sales, although the current percentage is still small," says Liu Yonghao. Genertec has witnessed growing business as well. Last April, China National Technical Import & Export Corp (CNTIC), a subsidiary of Genertec, signed an agreement with the Philippines National Railway Corp on the first phase of the 540-kilometre-long South Philippines railway project worth US$1 billion. The company is expected to win the contract on the second phase of the project soon. But the blossoming of multiple FTAs is not all win-win. Various FTAs with different rules can give rise to complicated procedures in exporting, leading to growing costs, the so-called "spaghetti effect," says Lu at the Institute of Asia-Pacific Studies . Greater possibilities Experts and officials unanimously agree companies' FTA benefits can go far beyond exports and direct investments. "Bilateral trade cannot just stay at buy and sell," says ASEAN Secretary-General Ong Keng Yong. He suggests China and ASEAN nations set up a regional production network. Take local auto makers. They could invest in ASEAN nations by setting up factories to produce parts, then export them back to China, where the cars would be assembled. The completed cars could then be exported to ASEAN nations. "In this way, the bilateral trade keeps growing," says Ong. For New Hope, products to be made in the 10 Southeast Asian factories will all be for sale in Southeast Asia. "We'd like to think about importing them back to China," says Liu. Furthermore, Chinese companies could expand into other overseas markets using the FTA platform, says Lu Jianren, senior researcher at the Institute of Asia-Pacific Studies at the Chinese Academy of Social Sciences. Ambassador Matta agrees. "Chinese companies investing in Chile would find it more convenient to do business in the US, Canada and the EU, with which Chile has signed FTAs." This is also true for those establishing manufacturing facilities in Pakistan. "Pakistan plays an important role in helping them promote exports worldwide, thanks to its strategic geographic position," says Chen Gang, a senior analyst at research Anbound Group. Support, please! Long-term FTA success takes more than enthusiasm and planning. "It would help if the Chinese Government could provide more financial support and preferential policies including measures to help companies hedge risks from exchange rates including special loans or insurance," Li from Genertec says. Liu concurs: "New Hope's experience proves you need good knowledge of the risks of investing overseas, like exchange rate fluctuation, finance and taxes, before you carry out a development strategy." New Hope has direct experience in the downside of monetary exchange. "In 2003, we got some loans from a Philippine bank at an interest rate as high as 20 per cent, and then the peso depreciated. We suffered a lot," Liu recalls. In 2005, New Hope partnered with Citibank, which offered the company preferential loans in US dollars through its worldwide network. Help may be on the way. In late October, the Export-Import Bank of China signed a strategic partnership framework with the China Council for the Promotion of International Trade on providing preferential rates for well performing companies to invest in ASEAN. China Development Bank is also considering some similar initiatives. In the next three years, the Chinese government will also provide loans worth US$5 billion to companies aiming to expand business in ASEAN. But financial support is no guarantee of success. "You need good management, the best people, and perfect understanding of the local market," Liu says. This July, New Hope announced plans to set up an "O-Park," a trade, logistics and industrial processing centre, connecting Kunming and Nanning in Southwest and South China with Ho Chi Minh City in Viet Nam. "The O-Park is set to attract more Chinese high-tech companies to get together, sharing information and benefiting from each other," Liu says. Haier-Ruba Economic Zone in Pakistan is also under way. The zone provides good facilities and marketing channels for Chinese home appliance companies. |
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