interesting article: Stock News, Tuesday, 11/16/99
Welcome to Our World
By S.P. Brown
American and Chinese negotiators reached a landmark agreement Monday that will open the economy of China, the world's most populous nation, to foreign competitors and will also make it a full partner in the world's trading system.
After nearly a week of intense negotiations, U.S. trade representative, Charlene Barshefsky, and her Chinese counterpart, Shi Guangsheng, signed papers at 3:50 p.m. that marks China's emergence from an economic backwater to a global trading powerhouse.
Under the terms of the agreement, China will cut tariffs an average of 23 percent on various industrial and agricultural products. Last summer, the International Trade Commission said reducing China's tariffs would boost U.S. exports by about 10% and its imports from China by about 6.9%. In addition to slashing tariffs, China will also lift many of the barriers that have hamstrung American banks, insurance, and telephone companies that want to expand their operations and investments in this massive country.
In exchange, the U.S. will back China's entry into the World Trade Organization. Under WTO rules, an entrant must negotiate separate accords with major trading partners; then it must offer the best terms pledged in any of the talks to all WTO members. Winning U.S. approval removes the biggest obstacle to China's 13-year quest to join the WTO because the U.S. had demanded the most significant trade liberalization.
Here are the highlights of the Sino-American trade agreement from a U.S. perspective:
Phone companies, now restricted to equipment sales, will be able to own up to 49 percent of all telecommunications service ventures upon China's entering WTO and up to 50 percent two years later.
Foreigners may invest in Internet companies, including the content providers the government says they are barred from.
Foreign firms will be allowed minority stakes in securities fund management joint ventures. Foreign stakes will be limited to 33 percent initially, rising to 49 percent three years after China joins the WTO.
Tariffs on agricultural products will fall to 14.5 from 15 percent. China will also eliminate all export subsidies.
Auto companies will have full distribution and trading rights. By 2006, China will reduce tariffs on automobiles to 25 percent from the current 80 to 100 percent. China also will allow foreign financing of car purchases.
U.S. banks can offer services in local currency to Chinese enterprises, two years after joining WTO, and to individual Chinese, five years after joining.
Manufacturers can import and export without government middlemen and distribute and sell products directly to China's 1.2 billion consumers. They also can handle after-sales, repair and maintenance services.
The immediate benefactor from this agreement is America's already high-flying high-technology sector, and now that a deal is in hand, look for many U.S. companies that already have significant investments in China to up the ante there.
Among the high-tech firms that have a significant China presence, the Internet service providers may turn out to be the biggest winners of all. Internet users in China are expected to surge to 33 million by 2003 from just 4 million now. Two Internet companies particularly well positioned to seize the moment are America Online (AOL), which owns 8 percent of China.com (CHINA) with an option to buy up to 25 percent the company, and Yahoo! (YHOO), which in September launched Yahoo China -- a Chinese-language site that serves as a jumping-off point to the Internet. YHOO's senior vice president for international business, Heather Killen saw the agreement as an "an overwhelmingly positive development" for her company.
On the backend of the Internet it looks like Lucent Technologies (LU) rules. LU far outpaces all the other U.S. server and router providers in China. The company has been working in China for more than a decade and currently has 3,500 employees there. LU is involved in eight joint ventures and has labs in Beijing and Shanghai. The company believes that the trade agreement will lead to more competition in the Chinese telecommunications industry. Said LU spokesman Scott Horne, "Our business is the infrastructure that makes that happen. More service providers will need more equipment to make those services work, which means more opportunities for Lucent."
Telecoms should do well, too. Only 11 percent of Chinese have telephones; millions have never made a phone call. "China is still building the equivalent of a Baby Bell a year," said Robert Fox, head of the telecommunications practice at Mercer Management Consulting. The big winner here is AT&T (T), which has long had a presence in China but whose operations have been limited to providing services for 50 foreign multinational companies in China.
But don't look for T to go unchallenged in China for long. Many American telecom firms that have historically invested successfully overseas can't be ignored, particularly MCI Worldcom (WCOM). "We have no plans to go into China at this time," Bernard J. Ebbers, WCOM's chief executive said at a conference in New York recently. Still, the lure of China has to be undeniable to the deal-happy Ebbers.
Of course, all the new communication devices the Chinese will buy will need to be powered. The company most likely to provide the processors the Chinese will need is Intel (INTC). Chuck Mulloy, a spokesman for the giant chip-maker, which opened a chip assembly and test plant in China two years ago, said the agreement would benefit INTC, especially if tariffs were eventually lifted on high-tech exports to China. Mulloy says the Chinese semiconductor market -- currently worth $8 billion a year -- could become the world's largest by 2000. INTC also recently opened a unit in China, developing a Chinese language computer keyboard.
Finally, one other potential high-tech winner - one desperate for a break these days - is Microsoft (MSFT), and not for the reasons you may think. Membership in the WTO will require China to enforce intellectual property laws in a country where it's often difficult for law-abiding consumers to purchase software that hasn't been pirated. The piracy rate for business software has been 95 percent in recent years, which means that for every 100 copies of MSFT Office software exported to China, 95 are copied illegally. Said one analyst, "One has to wonder why the rate has stayed so high over the years unless there has been some government involvement."
Aside from the tech sector, the other immediate benefactor of free trade with China will be the financial services sector, particularly the money-center banks and insurance companies.
The trade agreement offers U.S. banks a crack at a market that is $132.88 billion in size when measured in loans outstanding. With rule changes that will take place over the next five years, U.S. lenders ultimately will have unlimited access for the first time to manage the deposits of Chinese citizens and to make loans to individuals and corporations. Unfortunately, U.S. banks will still face the same restrictions applied to local banks. Deposit and loan rates, for example, will continue to be set by central authorities, which means American banks won't be able to undercut Chinese lenders on price.
While the banking industry's response to the trade deal may have been somewhat subdued because of competitive restrictions that will remain in place, property & casualty insurers, were downright ebullient at the prospect of China opening itself fully to insurance competition. Two U.S. insurers in particular have their sights on the brass ring.
"From an overall, national interest point of view, I think it's very positive," said Maurice R. "Hank" Greenberg, the chairman of American International Group (AIG), which has one of the closest relationships of any U.S. executive with Chinese Premier Zhu Rongji. "Right now, we have $200 million in revenue from selling insurance in China and I expect that to grow to a very big number in the future," said Greenberg. The agreement will enable AIG to increase the number of its branch offices to as many as 12, from four, and expand into property and casualty insurance -- well ahead of other American insurers just moving into China.
Despite AIG's lead, Chubb Corp. (CB) was equally as positive on the trade accord. "I think the degree to which we can play will be greatly expanded," said Dean O'Hare, CB chairman and CEO. "China's growth and its moves toward capitalism will spur demand in all the basics of insurance coverage." CB recently received a license to sell property-casualty insurance in the two currently permitted Chinese provinces about three months ago; they expect to begin operations there early in 2000.
Though the trade agreement news was overwhelming good news for both the U.S. and China, don't look for an immediate payoff from companies building a Chinese infrastructure anytime soon. Investors must remember that profitable, unfettered trade with China is still some years away. It's no coincidence that at this point the companies whose stock benefited the most from China's conversion to laissez faire today are some of the world's largest multinationals - companies with deep-enough pockets to whether the storms China will surely experience as redundant and inefficient firms are purged from its economy. |
