CHINA'S WTO ACCESSION - LIKELY IMPACT ON MALAYSIAN COMPANIES

(Paper by Dato' Dr. Michael Yeoh, Chief Executive Officer, Asian Strategy & Leadership Institute (ASLI) presented to the National Economic Action Council's Consultative Group on Globalization on 5th December 2001)

1. Preamble

1.1. The Chinese word for Crisis (Wei Ji) consists of two characters, danger and opportunity. This perhaps best characterises China's emergence as an economic power and the implications of its accession to the WTO - that it is both a threat and an opportunity for Malaysia. This is also summed up by Stephen Roach, Chief Global Economists for Morgan Stanley, "Over the next 10 years, the emergence of China will be both a great challenge and great opportunity to the other countries of Asia".

1.2. At the recent launching of the Asean-China Business Council in Jakarta on 9th November 2001 by President Megawati and the visiting Chinese Prime Minister Zhu Rong Ji, the Asean Secretary-General, Mr Rodolfo Severino said, "China's WTO accession will magnify challenges and expand the opportunities. As Governments can only do so much, businesses have to cope with these challenges and seize the opportunities". The question that has been frequently asked is how the Chinese will play the game and will they play it straight.

2 China's Economic Emergence - Prospects and Problems

2.1. China, the world's most populous nation with 1.3 billion people had an economic output of US$1.08 trillion, exports of US$249.2 billion and imports of US$225 billion in 2000. China's GDP last year of US$10.8 billion is double the combined GDP of the 10 Asean countries. Shanghai alone with a hinterland of over 20 million and a per capita income of US$4,500 has an economy larger than Malaysia's. China's projects GDP growth of 7.5% for 2001 and 7% for next 5 years. Over the past decade, China has been one of the world's fastest growing economies. China's economic policy continues to focus on expanding domestic demand, which will take up the slack in external demand. Rising per capita income in China over the past decade will continue to fuel higher import demand as well as greater foreign travel. With rising affluence in China, there is growing demand for high value and greater variety of food, as well as stronger demand for overseas travel and foreign education. Hence, outbound tourism from China will rise.

2.2. China has also maintained a stable monetary policy. Nevertheless, with China's WTO accession and the need to fulfill WTO commitments including withdrawals of state subsidies, non-performing loans (NPL's) of Chinese banks are expected to rise. China's state-owned enterprises will also be forced to restructure and face stronger competition. Another problem China has to cope with is rising unemployment. The unemployment problem currently at 10% can be expected to worsen with on-going restructuring of state-owned enterprises expected to accelerate following China's WTO accession. Unequal development between the coastal region and the vast interior poses another challenge. The Chinese Government under President Jiang Zhemin has announced a go-West policy to promote greater investments and higher priority for Western provinces such as Sichuan. Hence, this year alone, the Chinese Government has hosted two key conferences in Chengdu, the capital of Sichuan province - the Asean-China Joint Consultative Council Meeting in March and the Asean-China Entrepreneurs Exchange Symposium in October after the Shanghai APEC Summit.

2.3. Despite various internal problems China has to grapple with, it is arguably to China's greater benefit its WTO accession will bring. It has been projected that by 2015 China will overtake the US to become the largest economy in the world. Interestingly, a global management consultancy, AT Kearney in its recent research study of the implications of September 11 concludes that China is the only country in the world where foreign investor perceptions has improved since September 11. The study pointed out that foreign investors polled have a more rosy picture of China after September 11. It is the irresistible duopoly of cheap labour and a huge domestic market that is making China the destination of choice for foreign investors. Currently, about 80% of Asia's FDI's goes to China, although a significant portion comes from Hong Kong and Taiwan.

2.4. Growing economic cooperation between China and Asean which has resulted in the establishment of the China-Asean Cooperation Fund and culminating in the proposal to establish a China-Asean Free Trade Area has also led to the inauguration of the China-Asean Business Council just after the Asean+3 Summit in Brunei. Over the years there is increased Asean-China trade and investment flows. Asean is China's fifth largest trade partner, whilst China is the sixth largest trade partner of Asean. In the year 2000, 2.3 million Chinese tourists visited Asean whilst 1.8 million Asean tourists visited China. On a bilateral basis, Chinese investments in Malaysia has also gone up significantly. In the year 2000, MIDA approved 8 Chinese-owned projects amounting to RM33.7 million (US$8.9 million). In the first 8 months of 2001, Chinese investments in Malaysia shot up to RM2.9 billion (US$76.3 million). Thus whilst Malaysians have invested in China for some time, we are beginning to see more Chinese investments in Malaysia.

2.5. The proposed Asean-China FTA which will create the world's largest free trade zone needs to be further studied for its implications on Malaysia as well as the smaller Asean countries. To quote Rodolfo Severino, the Asean Secretary-General, "Growing competition from China and others will push Asean into hastening the integration of the regional market. Large integrated markets - not small, fragmented ones are what attract investors".

3. Challenges and Opportunities for Malaysian Companies

3.1. China has pledged to provide an environment for fair competition after its WTO entry. It has undertaken to improve its judicial and legal system which is still relatively problematic for foreign investors. It has pledged to improve its investment environment to accord better investor protection. Nevertheless, it has to be pointed out that doing business in China can be quite opague. Whilst the Government is relentlessly pushing to stamp out corruption, it is still a problem for investors. The different layers of getting approvals in China can also be quite problematic i.e. national level, provincial level, municipal level and canton level. Singapore's rather bad experience in Suzhou should serve as an eye-opener.

3.2. China has had a close bilateral relationship with Malaysia. The high regard Prime Minister Dato Seri Dr. Mahathir Mohamad is held in China is a plus point. Our businessmen should take advantage of the strong bilateral relationship between our two countries and especially between the top political leadership of the two countries. Plans to establish a Malaysia-China Business Council pursuant to the establishment of the Asean-China Business Council should further boost business cooperation between our two countries. Whilst China's accession to the WTO presents opportunities to Malaysian businessmen, it should be recognized that doing business in China is not easy. To succeed in China, one needs to think long-term, carefully cultivate and nurture relationships, choose the right strategic partner and have clear objectives. A careful and thorough understanding of China's legal system is also vital so that the Malaysian side is aware of the legal recourses available should there be problems down the road.

3.3. Specifically several specific opportunities could be available to Malaysian businessmen with China's WTO accession:-

(a) China's economic restructuring will require more infrastructure to be developed, particularly in the energy, telecommunications and transportation sectors.

(b) China's urbanization strategy which targets moving 100 million Chinese to urban areas over the next five years will create demand for affordable housing.

(c) China's Western Development Strategy will create opportunities for construction and infrastructure opportunities in Western provinces such as Sichuan, the birthplace of Deng Xiao Ping.

(d) As more and more Chinese seek to travel and to study overseas, Malaysian tourism and education providers can more proactively tap the China market.

(e) There can also be potential collaboration in Life Sciences and Biotechnology focusing on Chinese traditional medicine and herbal medical products.

The China Council for Promotion of International Trade (CCPIT) which is Malaysia's equivalent to MATRADE has also just launched a web-site, www.china-asean.net that provides useful data and information on China for Asean businessmen.

3.4. Whilst China's WTO accession opens up its vast domestic economy, generating abundant opportunities for foreign investors and businessmen, one needs to be also mindful of the many pitfalls in doing business with China. On the negative side, China's WTO accession could result in a hollowing-out of low-cost, assembly-line and labour intensive industries from Asean, including Malaysia as such industries shift production bases to China to take advantage of lower costs of production. Several American and Taiwan companies have relocated to China recently. What needs to be highlighted is that China does not only offer lower salaries but also high productivity. A recent ILO study has determined that labour productivity in China is accelerating with its economic restructuring and reforms adopted over the past few years. The President of Motorola in China who is himself a Malaysian said that Motorola in China could employ a qualified engineer at a fraction of the cost to employ a similar engineer in Malaysia. Hence, China's WTO accession could have a negative impact on Malaysia's manufacturing sector, particularly electronics and textiles unless we more quickly move up the value-chain and invest more in research and development and product design.

3.5. Another sector that could have a negative impact pursuant to China's WTO accession is the garments and textiles sector. This has already impacted on Malaysian SME's involved in garments and textiles. The Associated Chinese Chamber of Commerce & Industry (ACCCIM) reported that out of over 4,000 SME's involved in this sector, some 3,000 have closed down. However, the silver lining is that many of these small players have diversified. Instead of being manufacturers they have changed to become importers of China-made garments and textiles. Malaysian manufacturers need to diversity. They cannot compete with China on the basis of price. Even quality of Chinese-made goods are increasingly getting better. Malaysian companies should form joint-ventures on strategic partnerships with Chinese partners to move into the China market. With China's WTO accession, some 3,000 rules in China have been changed to comply with WTO requirements. A number of Malaysian companies are already in China. Between January and June 2001, Malaysian companies invested in 88 projects in China amounting to RM540 million.

3.6. Malaysia also needs to be watchful over dumping of Chinese products on to the local market. However, the WTO rules could mitigate such dumping activities. However, there needs to be careful vigilance in this regard.

4. Conclusion

4.1. On balance, in as far as Malaysia is concerned, China's WTO accession could be more positive than negative. We need to maintain our competitive edge and ensure our transformation into a knowledge-economy is expedited as that will differentiate us from China. We have a head-start over China in terms of knowledge and skills. However, this advantage can close rapidly if we do not continue to be more innovative, flexible and nimble. Speed is vital and getting things done faster should be recognized as a competitive advantage. We owe it to ourselves to ensure that firstly we do not lose our competitive edge and secondly to build on our strategic partnership with China to ensure that China's WTO accession and its market opening will be of benefit to Malaysia and Malaysians companies.

 

16th November 2001