This ain't good - WSJ today:
China Bans Certain Joint Ventures;
Move May Hurt Foreign Companies
By IAN JOHNSON
Staff Reporter of THE WALL STREET JOURNAL
BEIJING -- In a move that could cost Sprint Corp. and other foreign companies millions of dollars in losses, China has banned a kind of joint venture used to break into the country's highly protected telecom industry.
China's maneuver tops what U.S. officials call a lengthy list of trade barriers that are worsening the business climate for foreign companies in China and widening the two countries' growing trade gap. "The list keeps getting longer, and nothing gets struck off it," said David L. Aaron, U.S. undersecretary for international trade, during a visit to Beijing Tuesday.
Recently, for example, China also banned the import of small and midsize power plants -- those under 600 megawatts -- instructing its nominally independent power companies to buy local equipment. And Beijing has refused to issue business licenses for foreign insurance companies -- a situation that may prompt U.S. Trade Representative Charlene Barshefsky to retaliate by using trade legislation that could result in sanctions. Meanwhile, the country has basically stopped negotiating entry to the World Trade Organization.
Cabinet Approval
But more costly in immediate terms is China's still-unannounced decision to ban so-called "Chinese-Chinese-foreign" joint ventures, a step that government officials say has been approved in principle by China's cabinet, the State Council. The ventures are created when a foreign company forms a joint venture with a Chinese company, creating a Chinese entity, which in turn forms a new joint venture with a Chinese telecom operator. While on paper the final joint venture is between two Chinese organizations, it is heavily backed by the foreign company that participated in the initial joint venture. The complex structure has been a way around China's ban on foreign participation in the operation of telephone networks.
Such a method was used most notably by Sprint in its $30 million joint venture with state-owned telecom operator, China Unicom, last year to set up a fixed-line telephone network in Tianjin, China's fourth-largest city. The project, the first phone network to challenge the state monopoly on fixed-line networks, was touted as an example of how China's telecommunication sector was slowly opening to foreign participation.
But Chinese telecom-industry officials say the State Council has decided that the novel joint ventures could lead to foreign domination of strategic Chinese industries. For months, rumors circulated that the unusual ventures would be banned. Now, says Sprint spokesman Wang Ping, a ban is definite. Questions remain about what the ban will cost foreign investors and how China will deal with the related contracts already signed.
Potential Sprint Loss
The government may grandfather existing deals, Mr. Wang says, but ban future investments. Sprint, however, would still lose money because its $30 million investment has allowed it to connect only 50,000 customers -- a tenth of what it needs to break even, he adds. Sprint would like to have to be allowed to invest as much as $200 million more to make the Tianjin project viable, he says.
Another option would be for China to buy out the foreign investors, but no formula has been reached for assessing the value of these ventures or the future returns counted on to compensate for the current, costly start-up phase. Chinese Premier Zhu Rongji is reported to have issued a memo seeking suggestions about how capital might be raised to buy out the foreigners.
U.S. officials say they are puzzled at China's moves because the Asian economic crisis had already made foreigners leery of investing in the country. China, says the U.S.'s Mr. Aaron, is acquiring a reputation for "changing the rules a little more frequently than one would like," making investors uncomfortable with long-term Chinese infrastructure projects.
Infrastructure-Financing Delay
Adding to the concerns is China's failure so far to draft rules governing the most popular method of infrastructure financing among foreign investors in the country -- build-operate-transfer, in which a foreign investor builds the project, operates it for some years and then transfers ownership to a Chinese entity. The rules were supposed to have been drafted last year, but the plans remain in limbo, awaiting top-level approval.
Mr. Aaron worries that China's protectionist policies may increase in the coming years as the country spins off state-owned enterprises. Cut off from government subsidies, the enterprises may pressure Beijing for other kinds of help, such as protection from foreign competition. "China is taking the (U.S.-China) trade relationship for granted," he says. "They want to export to us but not buy our products."
Mr. Aaron says China is being more cooperative over a recent U.S. ban on untreated wood packing materials used in Chinese exports. A type of beetle found in the wood has been ravaging neighborhoods in New York and Chicago. China's initial reaction was to complain that the U.S. was simply trying to curb Chinese exports. Now, Mr. Aaron says, China seems willing to take the ban seriously and to find alternative packing materials.
Mr. Aaron also says intellectual property rights continue to be a problem in bilateral trade relations. Pirates in China have begun copying not only products, he says, but also related packaging, user instructions and seals of approval by U.S. institutions. These issues will be discussed in Washington in October by a joint U.S.-China trade commission, which Mr. Aaron says is proving increasingly effective.
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