At the completion of the summit between President Obama and President Hu, there was little doubt that China sees itself as a global power on equal footing with the United States. During his visit, President Hu had several important messages for U.S. companies. While the $45 billion in contracts that were signed during the summit received much attention, it’s important to look beyond that.
So what is China saying to U.S. businesses?
"We don't mind if you want to sell us more goods and services. We'll buy."
U.S. companies currently export around $100 billion of goods and services to China annually, making it one of the largest purchasers in the world of U.S. goods and services. Currently China is our second largest trading partner overall, behind Canada and ahead of Mexico. Chen Deming, China’s Commerce Minister, indicated recently at a business conference in Chicago that they “hope” U.S. exports to China double to $200 billion by 2015. An extra $100 billion in exports would provide tremendous opportunities for U.S. companies -- especially small businesses -- to expand. China has relationships with key cities and states across the country and purchases are not simply concentrated among a few large companies.
"OK. We'll consider giving you a shot at selling directly to the government..."
As China's continues its economic expansion, infrastructure consumes billions of dollars of investment capital weekly. This investment program is administered by the Chinese government which has an inherent preference for domestic companies in the procurement of services and equipment. U.S. and European companies have been largely shut out of this market. According to the American Chamber of Commerce in Shanghai, the second, third and fourth biggest complaints by U.S. companies respectively are: Preferential treatment of domestic companies by regulators; lack of transparency on the part of regulators; and government contracts being awarded to Chinese rivals without justification.
During the summit, these concerns were raised by several CEOs and President Obama. China has subsequently agreed to submit its government procurement policies and practices to the World Trade Organization for review before the end of the year. This begins the process of raising China’s procurement practices to internationally-accepted standards. These standards provide for greater transparency and will open tens of billions of dollars in procurement contracts to U.S. companies. Equipment providers, engineering firms, architectural firms, and other sectors will benefit.
"...but don't expect us to change course on our current strategy. You're on your own there."
One area where China will not budge is on its exchange rate with its trading partners, especially the U.S. Like any market, currencies are priced based on supply and demand. U.S. companies are expected to buy around $250 billion more in Chinese goods and services than Chinese companies will buy in U.S. goods and services. As the buying and selling takes place, currency needs to be exchanged.
As Chinese companies buy $100 billion from U.S. companies throughout the year, they need to “buy” dollars to pay for them. But as U.S. companies buy $350 billion from Chinese companies, they need to “buy” Yuan to pay for them. In this scenario, the demand for Yuan is far greater than the demand for dollars. In a competitive market, high demand means that the price should go up. As the Yuan goes up in value relative to the dollar, U.S. goods and services become relatively cheaper for Chinese buyers, which helps increase sales at U.S. companies. This also hurts China as its exports to the U.S. then become relatively more expensive.
In order to prevent the market from doing what it does best, China manipulates the “price” of the Yuan, keeping it artificially low. This situation won’t change any time soon. But when it does, it will be because China feels it is in its best interest to do so, regardless of U.S. protests.
"And don't hold your breath on intellectual property issues either..."
Another key concern for U.S. companies is the protection of intellectual property. Intellectual property theft is the top concern of U.S. companies in China. Chinese suppliers are notorious for not respecting international intellectual property laws. Local manufacturers reverse-engineer products and sell them under their own brand. Even more concerning, foreign companies that outsource manufacturing to Chinese companies sometimes find that these companies run additional production runs (known as the “third shift”) and sell directly to distributors without informing the outsourcing client.
This is a tremendous hurdle and the greatest risk to doing business in China. But for now, there doesn’t appear to be any meaningful change in the works.
Now that you know where we stand with China as a trading partner, how will you position your company to benefit?
Mike Periu is the founder of EcoFin Media, LLC which develops financial training, financial education, entrepreneurship training and more to small business owners on television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Post your questions in the comments of this article.