CHINA IN THE WTO: MYTHS AND MISCONCEPTIONS

Thirty years ago, Richard Nixon who was then the president of the United States and his national security adviser Henry Kissinger concluded a historic journey to China.

At the outset of the 1972 trip, Dr Kissinger reportedly told his Chinese hosts: "The good thing about our relationship is that we want nothing from each other."

Chairman Mao reportedly disagreed and replied: "If I had wanted nothing from you, I wouldn't have invited you. And if you wanted nothing from me, you shouldn't have come."

Similar sentiments apply to China's entry into the WTO. If China did not have something to gain, it would not have joined the WTO. Nor would it have made as some observers suggest commitments that are far more reaching than any previous membership applicant has.

Likewise, if foreign companies thought there was nothing to gain they would not be flocking to China. Nor would foreign companies already doing business in China be expanding their operations if they thought there were no profits to be made.

That said, there are certain foreign business myths about China in the post-WTO entry period. I want to talk about five of these myths and more importantly the realities.

Myth number one: China is a market with enormous potential

That's right - you heard me correctly. It is a misconception to think that China is a market with enormous potential.

Now before anyone gets the wrong idea, let me clarify that I believe China has enormous potential. I also believe, however, that it is unrealistic to think of China as just one single market. In reality China is like any large economy, it is a collection of markets, with emphasis on the plural.

The foreign businessmen who drool over the prospects of selling to "the land of a billion buyers of shoes, cars and computers" are forgetting one key fact--- That the mainland market includes 23 provinces, 5 autonomous regions and 4 municipalities directly under the central government as well as various special economic zones, open coastal and border cities, export processing areas, bonded zones, provincial-level economic and technological development zones and new and high-technology development zones.

Obviously, the preferential policies of some of these special zones will gradually disappear under WTO. However, the complexities of doing business in such a large and rapidly changing country will not.

Simply put, any foreign company prone to impatience or focused solely on short-term gains is destined to be disappointed.

It takes time to build a business in China just like it does in any developing economy. Profits cannot be made overnight. It is not a place for foreign companies to improve next quarter's earnings.

Myth number two: China is there for the taking

Some foreign business people are so eager to get access to China that they can hardly contain themselves.

The reality is that many of China's domestic firms will be strong competitors both at home and abroad.

Consider the area of financial services for example. Pessimists predict that some of China's domestic banks will have a limited life span once the market is fully opened up in five years time and foreign banks get national treatment.

Personally, I do not share this view. I expect domestic banks to be very competitive. Partly because they are in the advantageous position of knowing the marketplace. Partly because they have national networks that are impossible not to mention impractical to match. And partly because they have a strong base of customers and are becoming increasingly advanced on the technology side.

However, the main reason I think foreign banks will face stiff competition is that China's domestic banks are very fast learners.

HSBC, for its part, is not a typical foreign bank in the mainland. Our roots are in China, right here in Shanghai in fact. And we have had a continuous presence in the mainland for more than 135 years.

Our name is also well known. For example, a survey carried out in Beijing, Shanghai and Guangzhou found that we were by far the most-recognized foreign financial institution. Close to 90 percent of the respondents said they were familiar with the name HSBC.

Despite this history and this recognition, we know that we will not automatically benefit from the further opening of China's financial services sector under WTO. And despite the fact we are China's largest foreign bank, we know that we will have to work very hard to maintain our position. And we are.

We have signed RMB remittance pacts with all four of the big state banks and we continue to seek ways to enhance our co-operation with domestic banks. On the people side, localisation remains a top priority. Already nine out of every 10 of our mainland staff are hired locally.

Recently we, along with a few other foreign banks, were given permission to offer foreign currency services to mainland Chinese citizens and corporations in select cities. In HSBC's case, we are allowed to offer such services in three cities: Beijing, Guangzhou and here in Shanghai. And we have applied to offer similar services at each of our six other branches elsewhere.

Myth number three: China is there for the taking over

The reality is that even under WTO, China's domestic firms are not about to become the latest offerings on the merger and acquisition menu.

Let me use the banking sector as an example. China's domestic banks may be facing pressure to improve their risk management practices, increase their levels of efficiency, reduce their non-performing loans, and become more competitive. However, foreign banks need them more than they need us.

Consequently, I do not expect to see any so-called 'Big Deals' involving foreign financial institutions and domestic banks. Rather, I think we will see joint ventures. And we will see foreign banks taking minority stakes in domestic banks, similar to the 8 percent stake that HSBC took in the Bank of Shanghai last year.

Although we were the first foreign commercial bank to be allowed to invest in a domestic Chinese bank, not everyone seems to agree that our investment was all that momentous.

For example, in subsequent articles heralding the precedent-setting agreement, one banker was quoted as saying: "Most of the banks have been offering 15 percent to the market. If you get 15 percent you don't get anything."

Another banker said that our purchase was "only symbolic" and "without any actual benefits." He also said that his bank had no interest in acquiring a minority stake in any mainland financial institution.

I will not tell you which bankers made these rather pessimistic comments, if for no other reason than to help both individuals 'save face' should their respective banks decide to reconsider. What I will say is that both work for other foreign banks. Consequently, I am inclined to think they were suffering from a touch of fermented fruit syndrome otherwise known as sour grapes!

Myth number four: China cannot overcome its multiple challenges

Obviously China faces a number of challenges. But then what economy doesn't? In China's case the challenges include: allocating incoming capital effectively; reforming state-owned enterprises; creating more jobs; spreading wealth more evenly; reducing bureaucracy; and eliminating corruption. Now living up to the commitments and the expectations of WTO membership can also be added to this list.

Personally I think China can and will overcome these challenges. The reason for my confidence is twofold. First, China has already proven it is very adept at making the difficult transition from a command to a market economy. Never has a developing economy come so far in so short a period of time.

The second reason for my confidence: China has another advantage that no other developing market has had. China has Hong Kong. A city that is recognized as a financial and business centre. A city that has a skilled workforce with international financial expertise. A city that can be used as a testing ground for further liberalization efforts.

China is already considering allowing mainland investors to invest some of their foreign exchange holdings in Hong Kong. Likewise, banks in Hong Kong may be permitted to accept RMB deposits. Over the longer term, as China moves towards convertibility of the RMB, Hong Kong remains the obvious and ideal location to launch such initiatives.

Myth number five: WTO membership will solve all future trade disputes

The reality is that the WTO is often used more as a weapon for protectionism than as a shield for open markets. Consequently, long-time members of the WTO still regularly end up arguing in front of tribunals in Geneva or trying to make their point and counterpoints with new barriers and tariffs.

Personally, I think China will work very hard to live up to its commitments and to operate within the rules of the WTO. And if mainland officials are smart --- and I think they are --- they will also seek ways to exploit the rules to the benefit of their own industries. In other words China will act much like every other country on the WTO membership list.

One thing that is not clear is how China will change the WTO. What role the country will play in shaping future trade talks? Whether China's presence will prompt other members to address the concerns of developing nations more readily? And how having another large and influential player at the table will effect overall group dynamics?

Conclusion

So far, I have dealt with the implications and the myths and misconceptions related to an agreement that became official on the 11th of December 2001. I would like to briefly mentioned another history-making agreement that was signed on the 28th of February 1972.

In fact, there are a number of striking similarities between China's entry into the WTO and the signing of the Shanghai Communiqu. Both agreements changed the world significantly. Both agreements set the stage for increased contact, economic and otherwise. And both agreements came after some considerable negotiation.

There is however also one important difference

In 1972, overseas participation was confined to Richard Nixon, Henry Kissinger and as one commentator speculated a select group of "aides, policy-makers, spies, reporters, technicians, security men, cooks and gofers."

This time around participation is open to all foreign businesses. That said, there is one more reality I should mention. The reality is that not all foreign companies will be successful in China. I believe the successful companies --- and HSBC intends to be one --- will be the companies that are realistic not idealistic. The companies that are reasonably patient not irrationally exuberant. And the companies that have a long-term focus and not a short-term agenda.

(by David Eldon, Chairman of HSBC)