Trade Issues

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USCC Calls for "Course Correction" in US-China Relations

On June 15th, the US-China Economic and Security Review Commission (USCC), which was established by the US Congress in 2000, released its 2004 Report to Congress. The report concludes that "a number of the current trends in US-China relations have negative implications for our long-term economic and national security interests, and therefore US policies in these areas are in need of urgent attention and course corrections". The report emphasises that the US continues to play a pivotal role in China's economic and technological development, and that Washington should use the resulting leverage to develop a framework for the bilateral relationship "that will help avoid conflict, build co-operative practices and institutions and advance both countries' long-term interests".

Since China joined the World Trade Organization (WTO) in December 2001, Sino-American trade has boomed. Total two-way goods and services trade reached almost US$181 billion in 2003, which resulted in a US trade deficit of US$124.07 billion, a 20% increase over 2002. This reality poses a persistent problem for any US administration.

Assessing how the reality of Sino-American trade relations affects the US economy as well as broader US security interests is an essential focus of the USCC's work. Ralph D'Amato, the USCC's vice-chairman, explained, "Our report details a number of areas where US-China relations have not developed in a manner that benefits our nation's long-term interests". He added, "We believe, however, that with a more co-ordinated, better managed approach to our relations with China, accompanied by the firm use of the significant economic and political leverage the US can bring to bear, we can move US-China relations in a positive direction".

USCC Chairman Roger Robinson added, "US-China relations have become increasingly complex, touching on vital areas of both US economic and national security". He also underlined that the commission's report seeks "to identify the key intersections of our vast economic relationship with China, the economic health of our country and the security challenges we face from China's growing political, economic and military prominence in Asia. Properly managing this relationship will be an essential 21st century undertaking for the US".

The USCC report notes that the US trade deficit with China is of major concern because it has contributed to both the erosion of US manufacturing jobs and the current "jobless recovery". Yet, as the report chronicles, corporate America continues to invest heavily in China, moving manufacturing capacity and, in some cases, research and development operations into the country. In addition, an increasing number of Chinese state-owned enterprises (SOEs) are tapping into US and global financial markets, attracting billions of dollars from US investors.

The report acknowledges that Beijing has made significant progress in its efforts to meet China's WTO accession obligations, but stresses that significant compliance shortcomings remain. In this context, the USCC also recommends that the US Congress should press the Bush administration to make greater use of the WTO dispute settlement process and US trade laws to redress unfair Chinese trade practices. This should include the effective use of the product-specific safeguard under Section 421 of the Trade Act of 1974 and the China textile safeguard.

With regard to textile and apparel trade issues, in particular, the USCC echoes the demands of the US textile industry. The reports notes, "The textile and apparel industries have suffered enormous trade-related job losses. Employment in textile mills, textile product mills and apparel has fallen by nearly half over the last decade. The ending of the Multi-Fibre Arrangement (MFA) at the end of 2004 promises to significantly increase US imports of Chinese textile and apparel products and wreak further heavy job loss on these sectors".

To halt this trend, the USCC urges the US Congress to direct the Bush administration to work with other WTO members to convene an emergency session with the objective of extending textile and apparel quotas at least through 2008. The commission reasons that this quota elimination delay would give the affected US and foreign industries enough time to adjust to surges in imports from China.

In addition, the USCC report emphasises that Congress should urge the US Department of Commerce (DOC) to apply countervailing duty (CVD) laws to non-market-economy (NME) countries such as China. And, in case the DOC refuses to do so, Congress should pass legislation to apply CVD laws to NME countries.

Among other issues of greatest concern to the USCC is the alleged currency manipulation of China. Despite the fact that the US Treasury Department cannot find evidence of China's currency manipulation, the commission calls on the US government to take action to counter China's exchange rate practices.

Specifically, the USCC demands that if the Bush administration fails to make progress in its efforts to persuade China to undertake "a substantial upward revaluation of the yuan against the dollar and to re-pegging the yuan to a trade-weighted basket of currencies, Congress should pursue legislative measures that will direct the administration to take action - through the WTO or otherwise - to combat China's exchange rate practices".

Other alleged areas of concern are subsidies to Chinese producers, the use of technical and safety standards to exclude foreign products, poor enforcement of intellectual property rights (IPR) and the discriminatory tax treatment of foreign semiconductor and microprocessor manufacturers.

To address these alleged shortcomings of China's trade regime, the USCC calls on Congress to direct the Office of the US Trade Representative (USTR) and the DOC to conduct "a comprehensive investigation of China's system of government subsidies for manufacturing, including tax incentives, preferential access to credit and capital from state-owned financial institutions, subsidised utilities, and investment conditions requiring technology transfers". USTR and the DOC should provide the results of this investigation in a report to Congress, assessing whether these practices violate WTO rules and spelling out specific steps the US government can take to address these practices.

Finally, the USCC contends that corporate governance standards in China are not what they should be. The report observes that lacking "adequate information about Chinese firms trading in international capital markets, US investors may be unwittingly pouring money into black box firms lacking basic corporate governance structures, as well as enterprises involved in activities harmful to US security interests". Moreover, USCC also recommends barring US investment in Chinese companies that have been identified and sanctioned by the US government for proliferation activities.

Generally speaking, the USCC report views Sino-American trade as one ingredient, albeit and exceedingly important one, of the overall bilateral relationship. The report is generally critical of the current state of relations and wants Washington to adopt tougher policies vis-à-vis Beijing.

However, the Bush administration has shown little inclination to increase US pressure on China. By and large, the Republican leadership in Congress has supported this approach. In other words, at this time it is unlikely that many of the USCC's recommendations will be translated into official US trade or foreign policy, at least not any time soon.

Textile Industry Associations from 25 Countries Attend Summit in Brussels, Call for Emergency WTO Meeting

On 16-17 June textile and apparel industry associations from twenty-five countries attended the Summit on Fair Trade in Textile and Clothing in Brussels, Belgium. The groups released a communiqu&ecute which called for convening an emergency meeting of the World Trade Organisation (WTO) "to analyse and identify WTO solutions to the pending crisis associated with the expiration of textile and apparel quotas on 1 January 2005". The communiqu?also expressed support for a three-year extension of textile and apparel quotas, the implementation of automatic safeguard mechanisms to prevent disruptive surges of textile and clothing imports and expedited and effective remedies to unfair trading practices employed by certain major suppliers.

Cass Johnson, the president of the National Council of Textile Organisations (NCTO) which had organised the meeting, stated, "There is no need to speculate on what will happen after quotas expire on 1 January 2005. A few countries are well positioned to monopolise the world market. For example, Japan and Australia are developed countries with no quotas on textile and apparel imports. China now controls more than 75% market share in those countries. In the US, in apparel categories released from quotas on1 January 2002, China jumped from 9% market share in 2001 to 65% market share as of March 2004. To make matters worse, Chinese market share in these categories is still increasing".

Despite these appeals to postpone the quota elimination, it is as good as certain that US textile and apparel quotas will disappear under the terms of the 10-year phase-out of the Multifiber Arrangement pursuant to the 1994 Uruguay Round Agreement on Textiles and Clothing (ATC). The summit participants also acknowledged, albeit indirectly, that it is probably too late to stop the quota phase-out.

After all, the Brussels summit communiqu?also urges all countries to "implement automatic and seamless transitional safeguard mechanisms in order to prevent massive disruptive surges of trade from a few countries," which is indicative of the desire on the part of attendees that there should be no time, or as little time as possible, between the quota elimination and the imposition of safeguards.

That said, most analysts do not expect import protection to evaporate altogether, particularly where China is concerned. In fact, Chinese textile and apparel exporters are likely to face a barrage of US import restraints, ranging from the textile and product-specific safeguards contained in the country's WTO accession agreement to anti-dumping duty (AD) orders. Some experts believe that the US industry will rely more on AD cases and the product-specific safeguard than on textile safeguard mechanism because the former stay in force much longer and are generally perceived as being more effective in shutting down imports.

CITA Reserves Right to Deny Entry to Overshipments

On 25 June 2004 the inter-agency Committee for the Implementation of Textile Agreements (CITA) announced that textile and apparel products from WTO member countries, and exported from the country of origin on or after 1 January 2005 will not require a paper visa, an Electronic Visa Information System (ELVIS) transmission, a Guaranteed Access Level (GAL) certification or an exempt certification to enter the US. For the exports of countries that are not WTO members, the currently applicable requirements will remain in force.
In addition, CITA reserves its right under bilateral agreements, the Uruguay Round Agreements Act and the ATC to deny entry to goods that have been shipped in excess of 2004 limits; or to stage entry in 2005 to merchandise exported during 2004, which exceed the restraint limits established for that period.

A properly completed visa, ELVIS transmission, Guaranteed Access Level (GAL) certification, or exempt certification will be required for all shipments exported in 2004, regardless of the date of entry into the US.

Filing Fees Chargeable for Customs Protection of IPR

The General Administration of Customs (GAC) recently issued a circular revising its regulations governing payments for the filing of records for customs protection of intellectual property rights (IPR). Under the new regulations, IPR holders are required to pay fees in accordance with state regulations when filing IPR records with GAC. The fee is Rmb800 for each record.

Applicants are required to make payments through GAC's special bank account. GAC will not accept postal orders, cash, cheques or other forms of payment. Applicants must pay the fees before submitting their applications and present the pay-in slips together with the applications. GAC will not process applications submitted without the pay-in slips. The new regulations will take effect on 1 July 2004.

Shenzhen's motorcar population is growing at an annual rate of 25%, while the number of parking spaces is growing at a rate of 15%. The problem of meeting the shortfall in parking supply is especially serious in the old residential areas, so investors have started to tap the great demand.

A four-storey car park in Shenzhen's Jingtian Estate with 420 berths has over 95% of its space leased out. At Rmb400 (HK$377) per month per parking space, annual parking revenue approaches Rmb2 million (HK$1.8 million), a tidy return on investment.

In addition to collecting charges for parking, some residential developments are also selling their parking spaces as commoditised berths, with prices ranging from tens of thousands of yuan to over Rmb200,000 (HK$188,679). Many developers have made a fortune from selling parking lots alone.

To encourage private investment in building car parks, Shenzhen is believed to be considering new regulations governing the assignment and transfer of parking spaces and allowing residential developments to sell parking spaces to flat owners.

The freedom to sell or purchase parking spaces is almost certain to make car park construction an investment hot spot.

According to people in the real estate trade, a large car park can fetch Rmb5,400 (HK$5,094) in parking fees a month, while a well-decorated flat of the same size can only generate Rmb3,000 (HK$2,830) in monthly rental.

Economic returns will more than double for multi-deck car parks. Since these are cheap to build and maintain, it makes much better business sense to build car parks than to build residential units and shops.

The shortage of parking spaces is most keenly felt in prime commercial districts, residential developments and large hotels and parks.

Mr Chen, who has been doing business in Dongmen for many years, reckons that a convenient car park is like a treasure bowl and brings prosperity to its surrounding areas.

The rise of Huaqiang Road North and the stagnation of Dongmen is a good case in point. Business was slow around Huaqiang Road North six or seven years ago. As the number of cars increases, it is still possible to find a parking space in this area today. But parking is impossible in Dongmen.

Experts also pointed out in particular that mechanised vertical parking facilities are the wave of the future, and a major area of investment in the next few years.

Mechanised parking facilities have the advantage in that they take up less space and therefore have a higher rate of space utilisation. In general, they only need 1/2 or 1/2.5 of the space needed for level parking, and can increase the rate of space utilisation by 75%.

The mechanised facilities are relatively inexpensive to construct. It costs between Rmb30,000 and Rmb120,000 (HK$28,300 to HK$113,207) to build a mechanised parking space, but over Rmb150,000 (HK$141,509) to build an ordinary, standard parking facility.

Finally, it requires no more than 120 seconds to park or pick up a car. Cars also have a leading edge in anti-burglar and safety protection and in improving the city's appearance and environment. Some motorists simply leave their cars on the sidewalk when they cannot find a parking spot. Well-designed car parks provide these motorists the facilities - and investors with good returns.

Foreign heavyweights at China's top car show - report from Auto China 2004, Beijing

The biennial Beijing international car show attracted 1,400 automobile and component makers from more than 20 countries to this year's China 2004 show, which recently closed. The event was record-breaking both for its exhibition area of 120,000 sqm and the number of exhibitors from home and abroad.

China's automotive industry will soon be fully open to foreign investment, as the car market grows by leaps and bounds. The Chinese government promulgated its second set of policies for the industry on 1st June, allowing foreign and domestic carmakers to compete equally, so competition is set to intensify.

Foreign companies appear to regard the Beijing event as one of the eight major car shows in the world, alongside those in Frankfurt, Detroit, Tokyo and Geneva.

China has become the fourth largest auto market in the world and is set to overtake Japan as the second largest in 2008, according to auto analysts.

Ford made its appearance as a company of multiple brands for the first time at the show. In addition to Buick, a leading name in the local car market, Ford also introduced its top-of-the-line, China-made luxury Cadillac, to be introduced at the end of 2004.

The joint presentation of Regal, Excelle and Buick GL8 with Cadillac's CTS and SRX showed Ford's determination to make use of its international and domestic resources to venture into China's luxury car market after conquering its mid-to-high grade, medium-grade, MPV and mini-car sectors.

The show also marked Ford's entry into a new period of simultaneous development of all passenger car series. The display of Buick and Cadillac's North American concept cars was meant to show the latest international trends to Chinese consumers.

Buick has developed from a name for a single product into a brand name with 19 models represented in four different series, all manufactured in China. It has won the praise of consumers with its local cultural identity and strong sales figures.

Buick increased sales by 99% year-on-year between January and the end of May this year, far outstripping the industry average. Its market share also rose from 9.8% at the end of last year to 11.7%. It is because of the popularity of Buick that Shanghai GM has firmly consolidated its position as one of the three dominant car manufacturers in China.

The Beijing car show also provided the platform for local car manufacturers. Marques such as Chery, Changan, Geely and Hafei have continuously launched new models - but have also introduced a number of concept cars and power systems of international advanced standards.

The growing R&D capability of enterprises with own marques should actually increase the influence of the Beijing car show in coming years.

Peugeot-Citroen and Ford both did their best to introduce their latest brands into the show.

According to Citroen general manager Claude Satinet, although the marque did not launch any new model this time, its partner's Peugeot 307 made its formal debut at the recent car show.

This, together with the subsequent launch of Peugeot 206 in China, underlies the group's determination to make a synchronised entry into the China market with both brands. Satinet believes that Citroen's 10-year history in China is irreplaceable by any of its rivals.

Ford, together with Mazda, Jaguar and other brands represented by the group, occupied 1,800 sqm of Hall 2, with dozens of different models.

BMW exhibited 14 prototypes, including four Minis, five BMW motorcycles, one F1 simulator and one BMW formula car, virtually covering all major series produced by the group. Five models were produced and marketed in China.

Mercedes-Benz, which occupied the whole of Hall 5, announced that its investment and profile at this show represented the company's biggest show outside the Frankfurt auto show last year. The carmaker unveiled its super luxury Maybach.

The high degree of international carmakers at Auto China 2004 was a global watershed for the show, as it was for the wider market. At previous Beijing car shows, multinationals only displayed models which had already been exhibited elsewhere.

This year, Ford made the unprecedented move of unveiling its new concept car in Beijing.

Organisers however said that the existing exhibition centre cannot meet international needs in terms of transport facilities and venue size. A new international exhibition centre is being planned and a new, modern venue should be ready for Auto China 2006.

Car shows are conceivably the most important events in China's exhibition calendar. Profits are impressive because there is no competition - yet. Auto China 2004 achieved a record revenue for domestic car shows. It is estimated that rental and ticket revenue alone amounted to Rmb200 million (HK$188.6 million).

According to a staff of the Information Department of the China International Exhibition Centre Group Corp which co-organised the event, space at the car show was charged at a rate of US$260 per sqm for foreign companies and Rmb1,200 (HK$1,132) per sqm for domestic manufacturers. With an exhibition area of 110,000 sqm and calculated at Rmb1,500 (HK$1,415) per sqm, the show grossed Rmb160 million (HK$150.9 million) in rental charges alone.

Two types of ticket were available to enter the show. Special tickets were sold at Rmb100 (HK$94.3) and ordinary tickets at Rmb50 (HK$47.1). Assuming that 400,000 people visited the show, ticket revenue amounted to at least Rmb24 million (HK$22.6 million).

Car shows also have impressive fringe value. They give a big boost to catering, entertainment, tourism, carparking and even telecommunications businesses. The ratio between the direct revenue and social benefits of exhibitions is 1:9 according to international standards. On this basis, the weeklong exhibition indirectly generated an income of Rmb1.8 billion (HK$1.6 billion) for Beijing.

Auto China now among eight major car shows in the world.
Leading foreign car manufacturers are understood to be optimistic about the China market, because of its new regulatory environment.

China's latest Auto Industry Development Policy supports the development of auto financing. Subject to approval, all qualified enterprises may establish non-bank financial institutions for auto sales.

According to people in the trade, the development of auto financing is an important means for promoting car sales under the country's new industrial policy. At present, less than 10% of motor vehicles have credit financing. This compares to 70% in Germany and 80% in the US.

The presence of a large number of Chinese consumers with a low ratio of consumption credit suggests that auto companies are looking at a huge market worth hundreds of billions of yuan. The growth of auto financing is itself expected to greatly stimulate vehicle sales.

However, in spite of soaring car sales over the last two years, banks and insurance companies are forced currently to act with caution, because of mounting bad debts and the rate of loss they have incurred.

The China Banking Regulatory Commission (CBRC) is aware of the risk. At the Conference on Foreign-Funded Banks in China, CBRC Chairman Liu Mingkang made it clear that China intended to raise the threshold for auto financing companies.

In future, Chinese car manufacturers wishing to set up auto financing companies must form strategic partnership with companies with strong retailing track record. Since no domestic enterprise meets this criterion, domestic carmarkers have to team up with qualified foreign partners to set up auto financing companies.

Actually, foreign enterprises with substantial strength have already started their fight for a share in China's auto financing market. Not long after the promulgation of the Measures Governing Auto Financing Companies and the Implementing Rules of the Measures Governing Auto Financing Companies, CBRC gave the go ahead for SAIC-GM, Toyota and Volkswagen to start auto financing business.

On 27th May this year, the BMW Group's Huachen-BMW signed a cooperative agreement with China Merchant Bank to provide credit to customers and dealers of BMW and Mini cars. Beijing Hyundai also signed an agreement of all-round cooperation with CITIC Industrial Bank to provide the Hyundai manufacturer and dealers with credit support.

Meanwhile, Volvo Financial Services and Shenzhen Development Bank have signed a financial cooperation agreement, with the bank providing Volvo dealers with factoring service for complete cars and components. In the long term, foreign auto companies will aim to set up their own auto financing companies if conditions permit.

Tax Amnesty for Foreign Residents Before 30 June, 2004

For foreign residents subject to individual income tax in China who have overdue or under-reported tax liabilities, Circular No.27 issued by the State Taxation Administration (SAT) in March 2004 is in effect a “tax amnesty”. According to this circular, penalties will be waived if they declare and pay taxes in arrears before 30 June.

This SAT circular on strengthening the collection and administration of individual income tax for foreign individuals has aroused great concern among foreign residents in China. The gist of the circular is: First, foreign residents or their withholding agents will not be penalised if they declare their outstanding tax liabilities and pay the taxes in arrears before the end of June with an interest of 0.05% per day for late payment. Second, foreign residents who fail to pay their taxes in arrears before the above-mentioned date will be pursued for delinquent payment plus surcharge and other penalties according to the Tax Collection and Administration Law for the taxable income they have long concealed or falsified in their tax return.

Payment of Taxes in Arrears in Beijing to be Reported Before End of July

Many foreign residents are taking a wait-and-see attitude toward this first-ever amnesty granted by SAT, and very few of them have come forward to pay tax in arrears. According to media reports, some foreign residents have misgivings about paying taxes in arrears, thinking that if they do so, the tax authorities might suspect that their employers have under-reported or failed to report their salaries and would hence be asked to pay up this part of corporate income tax.

According to Beijing’s municipal local tax bureau, the district and county tax sub-bureaus will keep separate records and open special files for tax in arrears paid by foreign individuals. The implementation of this task and the specific payments have be reported to the municipal local tax bureau before the end of July. The government appears to be taking a low-profile approach to this amnesty. A local tax official stressed that the exercise is intended to encourage taxpayers to clear their outstanding tax liabilities.

Tax Losses Involving Foreign Residents Amount to Rmb10 Billion A Year

According to SAT, the mobility of foreign residents and the complicated nature of policies for individual income tax have made it difficult for the tax authorities to correctly assess the tax obligations of taxpayers and monitor the tax sources. For these reasons, income tax return omission and payment evasion are frequent. Conservative estimates by experts put tax losses involving foreign residents at about Rmb10 billion a year.

Shaanxi: shirts of many colors for men in Summer 2004

Spring and Summer clothing for men are in perfect match with the seasons for 2004, with gaudy and showy colors giving way to natural shades. Light and fresh colors are in vogue, and nothing reflects this trend more than in shirts.

Gone are the dull, monotonous and predictable tones of the past. Beige, pastel, light yellow and ivory colors are popular. Even rugged men from the north look somehow more sartorially inspired in these softer and lighter colours.

In addition to plain, light-colored shirts, there are also shirts made of colourful yarn-dyed fabrics. Thick and thin yarns are used to produce patterns of stripes or checks. These are not only used on casual wear. Even top brands are matching bright-coloured checked shirts with formal suits, a break from the drab dress code for formal wear.

Fine embroideries and romantic prints have been exclusive for ladies' wear in the past. But today, they are also used in designs for men's shirts, either above the hemline in front or on the chest.

Modified embroideries and prints are more natural and elegant, with a touch of "country" and sunshine. They are no longer just in black and white: tropical prints and brighter colours are ubiquitous.

Although changes in men's shirts are more subtle than for ladies' blouses, there are still many changes in detail and design of men's shirts this summer. One obvious one is the use of raised seams on various parts of the shirt, as with jackets.

Youngor, Romon, Shanshan and other domestic manufacturers of men's clothing have all highlighted this detail on the cuff, neck, fronting and other suitable parts of shirts. Other finer details include cuff buttons, little triangles on the pocket, rounded fronts and flat bottoms with slits.

The collar has always been a major element of the changing design in men's shirts. Stand collars are back in favor. Stand collars of square, round and other irregular shapes best portray the image of the city man - trendy, with character and having innately elegant qualities. Small pont collars are also popular.

Discarding old-styled suits, men can still look suavely sophisticated freely picking from a wide selection of shirts.

Many of the latest technologies are used in the making of fabrics for today's men's shirts. Bamboo fibre fabrics and functional fabrics that are anti-bacterial, stain-proof and scented are now freely used in the production process.

Bamboo fibres are wrinkle-proof and porous - and are excellent as fabrics for shirts. Anti-bacterial, stain-proof and scented fabrics are designed to suit man's physiological characteristics.

In addition to classic, pure cotton and mercerized cotton, fabrics featuring seersuckers, fine stripes and jacquard stripes are also widely used for men's shirts this spring and summer. Subtle jacquard and weaved patterns and stripes can best show man's temperament and their fondness for texture.

A Review of US Trade Measures and their Implications for Hong Kong Exporters Content

Executive Summary - To enhance cost competitiveness, most Hong Kong manufacturers have already relocated their production facilities to the Chinese mainland, making the mainland by far the most important production hinterland for Hong Kong. Hong Kong's manufacturing sector is supported by around 60,000 factories and over 10 million workers in the mainland. The US, for its parts, is Hong Kong's second largest export market after the mainland, accounting for 18.6% of Hong Kong's total exports in 2003. Against this background, certain US trade measures against mainland goods are likely to affect the interests of Hong Kong exporters.

While the US economy has regained growth momentum, slow creation of manufacturing jobs continues to be a concern. To complicate matters, the US has recorded growing trade deficits with China, particularly in the past two years. Although a report of the US Congressional Budget Office points out that the increase in imports from China only reflects a shift of imports from other Asian countries rather than an increase in total imports, some members of the US public may still associate the loss of manufacturing jobs with growing imports from the mainland. This perception could lead to an increasing use of US trade remedy measures against Chinese products.

Within this setting, this report is prepared to assist Hong Kong companies to acquire a better understanding of a wide variety of trade remedy measures at the disposal of the US government, in order to keep abreast of regulatory developments and their implications.

Major US Trade Remedy Measures

Purpose and Type of Measures - Similar to those in other parts of the world, the purpose of trade remedy measures in the US is twofold. On one hand, they are used to protect the domestic industry from the influx of imports. While proof of unfair trade practices by foreign countries is required to invoke some measures (e.g. anti-dumping and countervailing duties), such grounds are not applicable to certain other measures (e.g. safeguards). On the other hand, trade remedy measures may be employed to enhance the market access of US companies/products to foreign countries. Typical examples are "Special 301" scrutiny and "Section 301" investigation.

Among various trade remedy measures, Hong Kong manufacturers should pay special attention to anti-dumping (AD) investigation and textile and apparel safeguard, which are likely to be invoked more frequently in the US.

Anti-dumping Investigation (AD) - AD orders provide relief from the adverse impact of imports sold at "less than fair value" in the US market. The relief is granted in the form of extra duties on the dumped product. For the purpose of anti-dumping investigations, the Chinese mainland is considered to be a non-market economy in which the government controls pricing and production decisions. Against this background, the US selects the prices of inputs and the expense and profit percentages experienced in a "surrogate" market economy to determine a theoretical price that would be charged in the mainland if the mainland were a market economy.

In the coming future, AD actions will likely remain the weapon of choice. What makes AD actions so attractive is the fact that they are predictable for the petitioning industry and highly efficient in shutting down foreign suppliers. In fact, the mere filing of a case can be disruptive, simply because US importers suddenly become unsure of the ultimate cost of their purchases, which means that long-established sources of supply could suddenly become traps. In turn, that danger may prompt US buyers to switch suppliers.

Textile and Apparel Safeguard - This measure is contained in China's WTO accession protocol, which allows the US (and other WTO members) to restrain imports of textiles and clothing of China origin in the form of quotas if these imports are causing a market disruption, thereby threatening to impede the orderly development of trade in these products. The textile safeguard will be valid through 31 December 2008.

In the coming year, textile and apparel safeguards appear to pose the greatest challenge to Hong Kong exporters of textile and clothing for at least two reasons. First, as last year's safeguard action illustrated, the standard of proof for establishing "market disruption" under the China textile safeguard appears to be quite low. Second, a precedent was set by invoking this safeguard successfully in December 2003.

Main Suggestions for Hong Kong Exporters

Understanding and Monitoring US Trade Remedy Measures - Hong Kong exporters are advised to strengthen their understanding of US trade remedy measures, including their operation and timelines, so as to plan ahead for any changes which might affect their business. In the next year, textile and clothing safeguards are expected to be a major threat. The first basic requirement is therefore to detect the possible textile and apparel categories likely to come under fire. Since it takes time for the US government to process a safeguard petition, Hong Kong exporters can respond properly in the interim to minimise disruption.

Preparing for Anti-dumping Allegations - Far and away the most frequent measure with which all Chinese products will be confronted in the coming years is AD action. Companies that take a proactive stance in dealing with AD investigations can gain a competitive advantage in the US market. If an anti-dumping proceeding has been initiated, Hong Kong exporters should participate in the investigation to reduce the adverse effect of the action. Seeking assistance from an experienced law firm is deemed necessary for completing the questionnaire and submitting information. To lower or eliminate the adverse effect of an existing AD order, the manufacturers concerned may take advantage of procedural opportunities, such as administrative, new shipper, sunset and changed circumstances reviews.

US Official Says Market-Economy Status for China Still Years Away

On June 3rd an inter-agency working group of the US government held a public hearing on China's desire to receive market-economy status under US anti-dumping law. The fact that a public discussion of China's status under US trade law is underway at all suggests that the Bush administration's declared goal of helping China shed its non-market-economy (NME) status is no empty promise. However, a senior Bush administration official poured cold water on hopes that this process could be completed in the near future. James Jochum, the US assistant secretary of commerce for import administration, said that it may take years for China to graduate to market-economy status.

In his opening remarks Jochum, who chaired the meeting, observed that the process remains in its early stages, stressing that Beijing first needs to implement a number of "fundamental reforms" in a number of areas. He also underlined that under World Trade Organisation (WTO) rules, members of the world trade body do not have to treat China as a market economy until 11 December 2016.

However, in light of China's growing global economic importance - the country is already the third largest US trading partner - Beijing is likely to achieve market-economy status much earlier. As Dai Yunlou, the economic minister-counsellor of the Chinese embassy in Washington, pointed out, China views the December 2016 date "as a maximum, not a minimum". In fact, the Chinese government believes it already has undertaken the necessary reforms to qualify as a market economy. New Zealand, Singapore and Malaysia treat China as a market economy.
No matter, it appears certain that the process is destined not to be a quick one. According to Jochum, the purpose of the hearing and the creation of the Working Group on Structural Issues under the umbrella of US-China Commission on Commerce and Trade (JCCT), was simply to gather information and identify the structural economic reforms that must be taken by China before it can qualify as a market economy.

Jochum underscored, "Any decision to graduate China to market-economy country status - whenever that decision is made - must be made in the context of a formal, quasi-judicial proceeding" in accordance with Section 771(18)(B) of the Tariff Act of 1930. He also stressed that the Bush administration is not launching a formal review of China's NME status.

If and when the Bush administration gets around to considering a formal request by China, under the Tariff Act of 1930 the country will have to meet six criteria to be designated a market economy by the US Department of Commerce (DOC). Those criteria are: (1) currency convertibility, (2) free bargaining of wages, (3) foreign investment, (4) the extent of government ownership or control of the means of production, (5) government control over the allocation of resources and (6) other appropriate factors.

Most US industry witnesses concurred in their submitted comments that China currently falls short on all of these counts. Congressman Philip English (Republican-Pennsylvania) echoed these sentiments. He warned that China has not made the necessary economic reforms to be granted market-economy status.

English has authored legislation (HR 3716), co-sponsored by 50 other House members, that would allow countervailing duty (CVD) laws to apply to China despite its NME status, and another bill, the Currency Harmonisation Initiative through Neutralising Action (CHINA) Act of 2003 (HR 3058), which would allow tariffs of up to 40% to be applied to Chinese imports to the extent that China's currency is being manipulated. English noted that the latter is co-sponsored by 85 House members.

Graduating from NME to market-economy status is an important goal for China because exports from NME countries frequently face higher duties in anti-dumping cases because of the DOC's methodology. This reality effectively negates whatever genuine comparative advantage Chinese firms might have. However, the DOC-chaired hearing illustrated that the US government is not yet prepared to proceed with alacrity. Although it is not likely that China's NME designation will stay intact until 2016, it is still too early to predict when the US government might be ready to accommodate Beijing's wishes in this area, at least not with any amount of accuracy. Jochum will travel to China next month for talks on changing China's NME status, but it would be overly optimistic to expect any breakthroughs. A long hard road still lies ahead before China will achieve its goal of being recognised as a market economy.

US Textile Industry Hails First Asian Signatories of Istanbul Declaration, Announces Summit in Brussels on 15-17 June

On May 27th National Council of Textile Organisations (NCTO) announced that twenty-five additional textile and clothing trade associations from sixteen different countries have endorsed the Istanbul Declaration since April 13th. The effort is led by NCTO, the American Manufacturing Trade Action Coalition (AMTAC) and the Istanbul Textile and Apparel Exporters Association (ITKIB). In total, 71 trade associations from 38 different countries now support the so-called "Istanbul Declaration", a letter that calls on the World Trade Organisation (WTO) to extend the quota phase-out until 31 December 2007.

NCTO, AMTAC and ITKIB also have announced that an "Istanbul Declaration Summit on Fair Trade in Textiles and Clothing" will be held in Brussels, Belgium on 15-17 June. The purpose of the summit is to bring together world textile and apparel industry leaders to co-ordinate efforts to persuade the WTO to address what the groups term "the certain catastrophic fall-out to be associated with the phase-out of textile and apparel quotas" on 1 January 2005 under the WTO Agreement on Textiles and Clothing (ATC).

The prospect that China will dominate the global trade in textiles and apparel is the primary motivation behind these efforts. The Istanbul Declaration contends that China's WTO accession "represents a severe and disruptive change in circumstances not present during consideration in the early 1990s of a timetable for the phase-out of quotas".

According to the declaration's signatories, the threat posed by China and a few other countries could result in massive job losses around the world, many in least-developed countries whose economies depend on textile and apparel exports. In a statement, Augustine Tantillo, AMTAC's executive director, explained, "Not only will the US lose more than 75% of its textile and apparel manufacturing sector, but millions of the expected 30 million job losses will occur in countries on the frontline in the war on terrorism such as Bangladesh, Sri Lanka, Malaysia, Thailand, Indonesia, Morocco, Tunisia, Turkey, Jordan and Egypt". Tantillo added pointedly, "Destabilizing the economies of these critical allies by damaging their textile and apparel industries with the quota phase-out will only make the war on terrorism that much more difficult to win".

The most recent additions to the list of the Istanbul Declaration's signatories all come from Asia. They are the Bangladesh Textile Mills Association, Bangladesh Knitwear Manufacturers & Exporters Association, the Federation of Bangladesh Chambers of Commerce and Industry and the Confederation of Garments Exporters of the Philippines. The new signatories are the first Asian associations to endorse the Istanbul Declaration.

Though the worldwide effort to garner support for the Istanbul Declaration among textile industry groups has been impressive, it is unlikely to be successful in achieving its declared goal of postponing the quota phase-out. After all, the quotas will be eliminated on 1 January 2005, and US as well as European Union (EU) trade officials have observed repeatedly that it is simply too late to change the process now.

Nevertheless, the apparent success of the Istanbul Declaration in garnering international support ensures that postponing the quota phase-out will remain a part of the trade policy debate in Washington, thus improving the chances of success for future textile safeguard petitions and other trade remedy measures against imports of Chinese textiles and apparel come January 2005.

CBP Launches Third Phase of Bioterrorism Act Implementation, FDA Announces Procedures for Detention of Suspect Food

The US Department of Homeland Security's Bureau of Customs and Border Protection (CBP) has launched the third phase of implementing the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. This phase requires that CBP and the Food and Drug Administration (FDA) receive prior notice of all food for humans and animals imported into the US. Failure to provide prior notice will result in the refusal of entry.

Under the law, prior notice timeframes are two hours for truck shipments, four hours for rail and air shipments and eight hours for ocean shipments. According to CBP, in this implementation phase the US government will hold goods which have not given prior notice at the port of entry or an FDA-registered secure facility. The carrier will have the opportunity to voluntarily re-export the items if compliance with the Bioterrorism Act cannot be accomplished in a timely manner or at all.

Meanwhile, on May 27th FDA announced a final rule establishing procedures for the administrative detention of food under the authority of the Bioterrorism Act. This new authority applies to food for which FDA has credible evidence or information, resulting from an inspection, examination or investigation, that it presents a threat to the US food supply. The final rule will take effect on July 6th.

Lester Crawford, the acting FDA commissioner, explained, "Identifying and removing contaminated food from the food supply is an essential part of responding to terrorist acts". He added, "This rule describes how the FDA can hold food in place while it initiates legal action in court to seize it and permanently remove it from commerce. Alternatively, our experts can determine that the food is safe and the detention order may be terminated".

Every detention order must be approved by the FDA district director in whose jurisdiction the detained article of food is located. A copy of the detention order will be presented to the owner, operator and/or agent in charge of the place where the article of food is located, and to the food's owner if the owner's identity can be readily determined. If FDA issues a detention order for an article of food located in a vehicle or other carrier, it also must provide a copy of the detention order to the shipper of record and the owner and operator of the vehicle or carrier if the owner's identity can be readily determined. The food detention period may not exceed 30 days.

Chinese Multinationals to be Allowed Greater Autonomy to Operate Forex Funds Overseas Operation

Wei Benhua, deputy director of China's State Administration of Foreign Exchange (SAFE), said at the end of May that SAFE is drafting rules allowing qualified Chinese multinational companies to have greater autonomy in using their own forex funds for overseas operation.
This would expand the investment channels and diversify investment risks while better supporting overseas enterprises, said Wei Benhua at an international forum on Chinese enterprises "going global".

According to Wei Benhua, China has a steadily growing foreign exchange reserve and enjoys a favourable balance of international payments. Under the prerequisite of controllable risk and prudent supervision, it is not only feasible, but also necessary, to appropriately relax foreign exchange control for capital accounts and allow qualified Chinese multinational companies to use their own forex funds to support overseas operation.

The shortage of working capital funds and the high cost and harsh terms of overseas financing have become major problems urgently awaiting solution for Chinese enterprises "going global".

Under the existing administrative framework, overseas companies can only gain financial support from home through capital increases by domestic investment entities. This involves complicated procedures and cannot effectively address the fund flow shortage. Thus, many Chinese-funded multinationals have requested that they be allowed to extend loans to their overseas operations from their forex funds.

China's favorable balance of international payments, stable RMB exchange rate and abundant foreign exchange reserve have created satisfactory conditions for the further implementation of the development strategy of "going global", said Wei Benhua.

One of the redoubtable features of the distribution scene in Hubei Province is its large number of substantial commercial enterprises, with four in Wuhan alone. There are also many sizeable shopping malls in the province, with more than 10 in Wuhan and others in prefectural-level cities.

Little wonder that people in Wuhan are enthusiastic about shopping in their numerous malls. But there are not that many specialty shops around. So, for example, most retailing in Wuhan by Hong Kong-based Jean West tends to be through special counters at department stores, with only a few street-level shops.

One insider in the toys and electronic market likes to say that shoppers at department stores and those frequenting specialty stores are two completely different consumer groups, with different shopping mentalities.

People go to department stores because they have faith in their management and believe they will not end up buying fakes. Tourists from other provinces and cities, in particular, are attracted by the reputation of certain stores.

By contrast, people who shop at specialty stores tend (at least in their own eyes) to have more of an informed understanding of products on display, and prefer to protect their own interests. They also like to compare prices.

Competition is naturally keen among Wuhan's shopping malls. Suppliers are often compelled to slash prices, and only a few dominant brands can afford to refuse to play the price competition game.

People in the trade estimate that Hong Kong brands have a leading edge in Wuhan and are competitive not only in style and service but also in price. They have the highest shares in the casual wear market.

Jean West has a market share of 20%, while Baleno, G2000 and U2 each has a market share of 9%. Casual wear has dominated the mainland fashion scene in recent years and many women now wear more casual clothing to work. Basically, there is huge demand.

By contrast, specialized counters play a dominant role in department stores. The foreign stores and hypermarkets have brought pressure to bear on traditional stores in recent years through this approach

Despite losing market share, traditional stores have generally not modified their business strategy, given the fact that hypermarkets have a different market trajectory.

However, department stores like Wuhan Plaza and Central Department Store have taken on a more "high-class" image and adjusted their merchandise mix in the hope of attracting more influential and appealing brands.

For example, Central Department Store now has Mondi and other European brands in its imported fashion section, while Wuhan Plaza has SK-II, Lancome and several international names displayed in its cosmetics department.

The majority of leading brands are marketed through their branch offices in Wuhan. The reason is that they are doing a better job in brand protection and image building. Most distributors in Wuhan are small operators with limited expertise.

Wuhan opened its retail sector in 1997. Foreign players in the market include PriceSmart from the US, B&Q from Britain, Carrefour from France, Ekchor Lotus from Thailand, Sogo from Japan, Trust Mart from Taiwan and New World from Hong Kong.

Walmart plans to open in the city shortly. Faced with competition from hypermarkets like PriceSmart and Carrefour, Central Department Store has been expanding its hypermarket business in recent years, an area which now contributes 35% of its overall turnover. Central's supermarket business approach has traditionally been to assume a virtual monopoly in Wuhan - but that is changing.

In order to stay competitive, Central Department Store plans to consolidate and set up a purchasing centre in Guangzhou. It also intends to develop house brands for 15% of its merchandise, and will directly approach manufacturers to produce the goods.

The retail scene is soon to become more complicated, with new shopping malls in Wuchang and Hankou. This is likely to loosen the grip of department stores still further, so that specialty outlets will find more scope for development, capitalizing on new brands on the market.

As a result of these swift and somewhat brutal changes, Wuhan is becoming a retail and distribution centre for other provinces and cities, especially those on the borders of Henan, Anhui, Jiangxi and Hunan.

According to Wuhan's commercial bureau, the city grossed Rmb85 billion (HK$80.1 billion) in retail sales in 2003, ranking second after Guangzhou.

However, Wuhan consumers are very price sensitive. They have comparatively low incomes and their spending power is lower than in Chengdu. Non-residents tend to leave out Wuhan for brand-name and high-end product shopping. Dealerships are also undeveloped because Wuhan does not as yet possess its own branding or the expertise to develop their brands.

However, Wuhan's strategic position as China's highway and railway hub should begin to transform already active industrial and geographic advantages into an impressive logistics sector, as its economy continues to develop in leaps and bounds.

China to Strictly Enforce Market Access for Protection of Domestic Industries

China will act to protect its domestic industries by strictly enforcing market access requirements, strengthening self-discipline by individual industries and other measures, according to a set of guiding opinions for protecting the domestic industries recently issued by the Ministry of Commerce.

The guiding opinions stress that government departments and industrial organisations must guide enterprises to readjust and optimise their industrial structure and regulate competition through various means in accordance with the state’s industrial, technological and environmental protection policies. They must restrict and eliminate products and enterprises that are technologically backward, encourage the development of priority and high-tech industries and products with future and market demand, avoid vicious competition and waste of resources, and establish a good market environment and competition order.

The document also calls for greater efforts to build a credit system, regulate market competition, and prevent and stop monopolies, regional barriers, underselling and other improper acts of competition. It is necessary to fully bring into play the role of market regulations and self-restraint, and make sure that the self-discipline mechanism built by individual industries meets the requirements of the socialist market economy.

It is understood that overlapping construction of enterprises at a low level has led to excessive production capacity, price competition between enterprises, and anti-dumping measures imposed by foreign governments on Chinese exports, which have affected the development of China’s industries.

Beidaihe, under the city of Qinhuangdao, lies in the middle section of the northern shore of the Bohai Bay in northeastern Hebei. It is 250 km to the east of Beijing and only takes two hours to travel from Beijing on the Beijing-Shenyang Expressway.

Renowned as China's summer capital, Beidaihe has beautiful scenery and has always been the summer resort for China's top leaders. With millions of tourists visiting annually, the city has well-developed tourism, service and retail sectors.

Shi Tang Lu Market is located in the mid-section of Shi Tang Road, which runs parallel to the coast of Beidaihe.

With its ideal location at the foot of the hill and facing the sea, Shi Tang Lu is at the busy commercial section of Beidaihe. The market was first established in 1984 as a small open market. At the beginning, it was just a place where peddlers sold to tourists necklaces made of pearls they cultivated themselves. As the number of tourists multiplied, the market also grew in size.

The market is currently undergoing relocation and transformation to widen and renovate Shi Tang Road and attract investment. There are plans to turn Shi Tang Road into a pedestrian shopping street like Beijing's Wangfujing. This shows the importance of Shi Tang Lu Market to the local business sector.
Inland tourists find shell decorations fascinating.

Shi Tang Lu Market has now developed into a large and comprehensive indoor market. It sits on an 18,021 sqm site and has a total floor area of 28,189 sqm. With 800 fixed stalls and more than 100 shops, it provides jobs for 2,000 people and receives more than 3 million local and overseas tourists a year.

Annual turnover is Rmb250 million (HK$235.8 million). This Rmb58 million (HK$54.7 million) market has become the largest shopping centre in Beidaihe. It is a place tourists have to go for souvenirs.
Pearl strands form the bulk of merchandise at Shi Tang Lu Market.

The market has two levels. Ground floor shops mainly sell traditional commodities such as necklaces, handicraft works and dried and fresh seafood. Shops on the first floor sell souvenirs, clothing, bags and luggage. The market deals in over 1,000 varieties of goods, with 30 major categories.

The wholesaling of necklaces and handicraft works forms an integral part of the business of Shi Tang Lu Market. As many as 310 operators deal in these products, accounting for more than one-third of the total number of operators in this market.

Most of the necklaces are made of cultured pearls from Zhejiang and other places. In addition to pearl, necklaces made of agate, jade and crystal are also sold. The necklaces range between a few yuan and over Rmb1,000 (HK$943.3) in price, and are much cheaper than in retail markets in the big cities.

According to people in the trade, pearl necklaces priced over Rmb1,000 (HK$943.3) in shopping plazas in other cities can be bought for just Rmb300 (HK$283) at Shi Tang Lu. The wholesale price can be even cheaper.

Many of the handicraft works on sale are made of marine products. These include shell decorations and ornaments. There are also items made of crystal, jade and ox horn. The varieties of dried and fresh seafood are similar to those sold in other seaside markets. These include dried fish, dried shrimps, dried seaweed and all kinds of seafood fresh from the sea.

Shi Tang Lu Market is a wholesale/retail market. The golden period for retail is the summer peak tourist season. As a designated tourism spot, the market attracts some 30,000 visitors a day in peak seasons.

Retail turnover is very impressive in summer, while wholesaling dominates after the summer peak. Purchasers come from all parts of the country. Most of them are buyers for handicraft retailing in the three northeastern provinces as well as Beijing, Tianjin, Shijiazhuang and other northern cities.

More investors from various parts of the country come to make investment as Shi Tang Lu Market grows in fame. Leases for market stalls are open for tender, and more than 2,000 bidders take part in bidding each year.

Average annual rental is around Rmb10,000 (HK$9,433) for stalls, with the highest bid for the best spot reaching a record Rmb49,800 (HK$46,981) last year. Average rent for shops (13 sqm in size) is Rmb15,000 (HK$14,150) per year, and those in prime locations could fetch Rmb130,000 (HK$122,641).

The market's total rental income was Rmb7 million (HK$6.6 million) last year. According to Li Guang, deputy director for market development and services, Shi Tang Lu Market plans to undergo internal extension following the renovation of the surrounding streets.

The project will increase the number of stalls by 100 to satisfy investors' needs. The market provides tenants with a range of services, such as application of licences and payment of fees. In a bid to diversify the market, preferential tax and rental terms are offered to tenants intending to bring in new commodities.

In order to ensure its market lead in pearl necklaces, the market management has strengthened its hardware and software in recent years and assigned equal importance to management and services.

The offices for industrial and commercial administration and taxation, commercial banks, post office, clinic and a transportation centre at the market are ready to serve tenants and customers.

In order to protect the interests of consumers, the market development and services centre signed a responsibility agreement with tenants to ensure that all goods sold are genuine.

A market access system is also in force. Supervisors for individual trades would inspect the goods coming into the market every morning. They would strictly abide by this market and bar any substandard goods from the market. The centre has also established a jewellery appraisal office, which has four experts with PhD qualifications from Yanshan University's Jewellery An Appraisal Research Centre taking turns to provide customers with jewellery appraisal service so that they can make purchases without fear of being cheated.

The market has invested Rmb10 million (HK$9.4 million) to carry out renovation and refurbishment since 2001 in order to turn itself into a tourist attraction and a mall with beautiful, clean and green shopping environment.

The first fitness centre opened in the city of Xian four years ago. The industry has since developed from scratch, evolving from small to large operations with precise market positioning.

Today, there are fitness advertisements all over the city, from roadside billboards to elevators in residential estates. As many as 80% of the fitness centres were established from 2002, including leading names such as Megafit Spa Fusion, Orient and Maxwin Gymnasium.

Competition has never been keener. Many fitness centres are offering discounts of between 50% and 60% to attract members.

Competition in Xian is already comparable to Beijing, and nation-wide the phenomenon is growing.

The Spa and CSI-Bally Total Fitness opened for business in Beijing in 2002. The former is a subsidiary of UK-based Fitness First, the third largest fitness group in the world, while the latter is a joint venture between the China Sports Industry Co Ltd and Bally Total Fitness, the only commercial operator of fitness centres to be listed on the New York Stock Exchange.

These operations show that China's fitness market is rapidly growing and maturing.

According to the general manager of a health club in Xian, there is still ample room for development in the city's fitness market.

In the US, 30% of people in the 20-to-50 age group has joined health clubs or similar institutions.

In China, less than 1% of people in the same age group have similar health plans.

In Xian with a population of 7 million, 1% means 70,000 people. It will take some 70,000 sqm of professional fitness venues to meet their needs. The total area of fitness centres in Xian falls far short of this target.

The growth in health club membership best illustrates the development prospects for the fitness market.

Megafit has opened two centres in two years, with membership exceeding 3,000. Orient has a membership of over 2,000. Maxwin also has more than 2,000 members. Hefty membership fee of Rmb3,000 (HK$2,830) do not seem to deter people's enthusiasm for fitness.

Although health clubs are fairly concentrated, they each have their distinct character and do not completely overlap.

Megafit targets young white-collars and designs its décor and programmes accordingly.

Orient caters to the business set. It has a business bar and attracts businessmen with is full range of equipment and spacious venue.

Maxwin is mainly for more mature people. Most of its members are over 40 years of age. It has even introduced a social card for its members.

Jiqing Feiyang is open in the vicinity of schools and targets nearby students.

Flamingo caters to people in the local community.

While all health clubs can afford to buy expensive equipment and hire capable instructors, unique business concepts and precise market positioning are crucial for their success.

Market integration and improvement needed.

The distribution of health clubs is quite concentrated in Xian. Virtually all health clubs in the city are located in the new and high industrial development zone, in the neighbourhood of the Second Ring Road and within the walled city.

There are very few clubs in the northern, western and eastern suburbs. According to people in the trade, health clubs have a service radius of between 3 and 5. Customers are unlikely to go to gyms that are too distant. Unbalanced geographical development is one of the shortcomings of Xian's fitness market.

Compared with places like Beijing and Tianjin, another shortcoming of Xian's fitness market is the lack of personal attention.

For example, large health clubs in Beijing and Tianjin have children's play corners where parents can leave their kids while they work out.

Health clubs in Xian do not have such facilities. For this reason, many people have to give up the idea of going to the gym for workouts, and gyms are losing their valuable customers.

Central Commercial and Cultural Plots at Olympic Park Up for Tenders

The planning organ for commercial and cultural plots at the centre of the Beijing Olympic Park has started the work of calling for bids. The invitation of tenders will ensure not only the smooth progress of the construction of the park's central district but also the effective use of the venues after the Olympics.

These commercial and cultural plots are situated at the heart of the Beijing Olympic Park. They cover an area of about 33 hectares and will have a total building area of 1.37 million sqm. The nature of planned land use is commercial or cultural/commercial. The plan is to build commercial facilities, offices, guest houses, hotels and apartments on these plots. Legal persons and other economic entities legally registered within or outside China with experience and expertise in real estate investment planning may submit tenders individually or as conglomerates (unless otherwise stipulated by law). Tenders may be submitted between 28 April and 2 pm on 21 May.

Taiwan-associated companies to list in Hong Kong

Solomon Systech, a Motorola spin off chip designer with a Taiwan and Hong Kong background, recently made its debut on the SAR's Stock Exchange, the Hang Seng Index.

Meanwhile, a large contract electronics manufacturer, Hon Hai Precision (otherwise known as FoxConn Electronics in the US) is also intending to carry through listing plans in Hong Kong, while cable TV specialist Taiwan Broadband Co is scheduled to reveal its initial public offering (IPO) to Hong Kong investors this year, appointing as underwriter Goldman Sachs.

Taiwan companies are determined to raise funds internationally and while the mainstream might seek a US listing through the offer of American depositary receipts, or by floating in Luxemburg or London through offers of global depositary receipts, Euro-convertible bonds or exchangeable bonds, there is another, closer venue to look at.

"The latest trend is to look for the possibility of listing in Hong Kong," said Chien Kuo-wei, Taiwan representative for merchant banker, JP Morgan Chase.

As pointed out by Jonathan Back, managing director and co-head of equity capital markets for JP Morgan Chase, global fund raising soared last year, with securities issuances growing by 76% and 68% in the US and the Asia-Pacific countries respectively.

Securities issued in the Asia-Pacific region accounted for 52% of the global total last year, far exceeding the 34% share of the US market.

According to Capital/Data Bondware, shares with a total value of US$63 billion were issued in the Asia-Pacific region, including Japan, Australia and New Zealand, last year. The biggest source of funds came from Taiwan, accounting for 26%, followed by Japan with 23%, Australia and New Zealand with 13%, the Chinese mainland with 11%, and Hong Kong with 10%.

Shares totalling US$33 billion were issued in Hong Kong between 2000 and 26th March this year, says Bondware. Mainland companies accounted for 79.6%, while domestic firms made up only 20.4%.

Solomon Systech's IPO set its price on 30th March and was listed on the Hong Kong market on 8th April. The company's funds mainly came from Taiwan's China Development Industrial Bank and Quanta Computer, with JP Morgan Chase as underwriter.

About 20 Taiwan companies have listed in Hong Kong over the past 10 years. Taiwan companies, including Yue Yuen Industrial Holdings of the Pou Chen Group and Kangshifu of the Tinghsin Group, have long since actively studied the option of listing in Hong Kong to raise funds for their mainland ventures, said Chien of JP Morgan Chase.

Many Taiwan companies have indeed already listed in Hong Kong. As Brad Rohal, vice president of JP Morgan Chase points out, Hong Kong has attracted considerable international capital in recent years with its developing capital market and stable regulatory system.

It is quicker to list in Hong Kong than in Taiwan, bankers like to say. The price-to-earnings ratio of Hong Kong shares is also higher. Both are good reasons why Hon Hai is eyeing a Hong Kong issue.

The biggest shareholder in Taiwan Broadband is the Carlyle Group, a leading private equity firm. Taiwan Broadband mainly operates cable TV in Taoyuan, Taichung, Hsinchu, Miaoli and the Greater Taichung District, but is keen on going public. Its underwriter is Goldman Sachs, which plans to raise US$200 million in Hong Kong this year.

Hebei's Xianghe Wholesale Furniture Market dominates north

Xianghe county, Hebei province, lies within the triangle of Beijing, Tianjin and Tangshan, and is 50 km from Beijing and 70 km from Tianjin. It is accessible via the Beijing-Shenyang Expressway and several other provincial-level highways.

Xianghe is 30 minutes from Beijing on the Beijing-Shenyang Expressway. Beijingers new nothing of the market a few years ago, but it is now becoming increasingly well known.

The wholesale furniture market has expanded to its present scale of 500,000 sqm following the establishment of the 1,200 sqm Chuncheng Furniture City back in 1998. Today, it is the largest furniture wholesale and distribution centre in northern China and ranks third in the country after Shunde in Guangdong and Likou in Jiangsu.

Liu Fengshun, chairman of Xianghe Furniture City Management Committee, says Xianghe Furniture City makes use of trade fairs, expos and seminars to promote itself to domestic and foreign furniture dealers and tries to attract investment through online and media advertising.

The present Xianghe Furniture City has 23 exhibition halls and 2,300 enterprises, with products from Fujian, Zhejiang, Hong Kong, Taiwan, Beijing, Tianjin and other places. These companies produce, supply and market.

The City is wholesaling to more than 10 provinces and municipalities in northern China and has expanded its retail business to neighboring cities within a radius of between 400 km and 500 km. Annual turnover in 2003 is Rmb1.5 billion (HK$1.4 billion).

In spite of its northern location, it is understood that Guangdong funds are behind one-third of its exhibition halls and nearly 20 of the 2,000-plus enterprises that have set up business in the furniture city are Hong Kong-funded. According to Liu Fengshun, the place is attracting a large number of southern enterprises because of its flexible policies.

The local government has introduced a series of preferential policies to attract foreign investment and accelerate development.

For example, projects with a fixed investment of Rmb10 million (HK$9.4 million) are eligible for a 30% discount on fees other than those payable to the state, province, city and land compensation; projects with a fixed investment of between Rmb10 million and Rmb30 million (HK$9.4 million and HK$28.3 million) are exempted from all fees except those payable as above.

These projects are also exempted from land use fees for five years. For projects with an investment of over Rmb30 million (HK$28.3 million), preferential policies are fixed on a case-by-case basis.

For enterprises that invested Rmb1 million (HK$943,396) or more on new or additional fixed assets, all corporate income tax paid in accordance with state law will be returned to them as of right for five years, starting from the first profit-making year, to be spent on enlarging reproduction.

For high-tech projects that comply with state regulations, the value-added tax paid to the local government will be returned as of right for five years on the basis of the actual amounts paid, that is, 50% for investments of less than Rmb500,000 (HK$471,698), 70% for investments of between Rmb500,000 (exclusive) and Rmb1 million, and 80% for investments of over Rmb1 million.

Article 9 of the regulations stipulates that preferential policies for key projects with an obvious role promoting the furniture industry will be considered on a case-by-case basis.

The regulations also stipulate that domestic and foreign investors are entitled to the same treatment as local residents in nursery, schooling, medical treatment, insurance, housing and other domestic concerns.

In terms of supporting facilities, the banking, taxation and industrial and commercial departments can provide integrated service to occupants of the furniture city.

There are supporting logistics companies in the furniture city. Consumers only need to pay a delivery and handling fee of Rmb200 (HK$188.6) to have their purchases delivered and installed.

The furniture city practices strict management, so occupants are required to pay a deposit of not less than Rmb5,000 (HK$4,771.6) as guarantee for good service.

In order to bring the market closer to Beijing consumers, Xianghe Furniture City set up an office in Beijing at Tiantong West Garden in September 2003.

Noted for its cheap prices and reliable quality, Xianghe Furniture City is visited by over 10,000 people on a busy day and grosses Rmb4 million (HK$3.7 million) a day on average. Most buyers are people in the Beijing and Tianjin areas, many of whom are employees of foreign embassies in Beijing.

According to statistics compiled by the China Furniture Association, per-capita furniture consumption is less than US$8 in China, only one-third that of countries like Brazil, the Philippines and Thailand.

People in the industry predict that market demand will grow to Rmb180 billion (HK$169.8 billion) at an annual rate of over 10% between 2001 and 2005 and to Rmb300 billion (HK$283 billion) at an annual rate of 5% between 2005 and 2015.

Beijing will be building more than 300 new hotels and renovating another 500 over the next five years for the Olympic Games in 2008. This will generate excellent business for the furniture market.

According to market analysis by a management consultancy in the Chinese capital, sustained market growth will provide ample room for the development of the furniture industry.

Furniture as bulk consumer merchandise has a higher average profit rate than usual. The furniture industry fares much better than other industries in capital investment and the expansion of operational scale. In terms of regional demand, northern China is trailing behind the south, especially the southeastern coastal areas, by at least 10 years in the level of consumption. The region is bracing for an upsurge in household furniture consumption in the wake of rising per capita income and a property boom.

Tower cranes dominate the landscape on the sites of Xianghe Furniture City, where several projects with an investment of over Rmb10 million (HK$94.3 million) each are under construction amidst the rumbling of piling machines.

The Rmb200 million (HK$188.6 million) Golden Key International Furniture Plaza was opened in November 2003, providing 110,000 sqm of facilities for exhibition, trading, catering and accommodation.

Construction of Huabei-II, Huimei-II, Shuanghexuan, Xinyilong and other furniture plazas with investments of over Rmb10 million each are underway, ready to tap booming business opportunities.

JCCT Meeting Results Improve Sino-American Trade Relations Significantly

The US and China took significant steps to resolve a number of smouldering trade disputes at the annual meeting of the Joint Commission on Commerce and Trade (JCCT) on April 21st. Going into the meeting, the US sought commitments from China in a number of areas, including improving intellectual property rights (IPR) protection, progress towards abandoning discriminatory industrial policies and generally opening its market more to US exporters. By all accounts, Washington got most of what it wanted. In return for China's concessions, the Bush administration promised to establish a process to help China receive the market-economy status under US trade law. Without this status, China is subject to more antidumping cases with higher duties on its exports to the US.
Beijing's promises to meet its World Trade Organisation (WTO) accession obligations go a long way toward restoring US confidence in China's commitment to genuine economic reform. Meanwhile, Washington and Beijing agreed to establish a working group to assess the reforms China has undertaken to date and identify steps the country would have to take to be granted market-economy status by the US government. That working group will be chaired jointly by James Jochum, an assistant commerce secretary, and the appropriate director-general from China's Ministry of Commerce (MOFCOM).

In short, the JCCT meeting provided a much-needed reaffirmation of Sino-American trade relations. President George W. Bush continues to face political pressures to get tough with China, as the US unemployment rate remains relatively high despite improving somewhat last month. While JCCT meetings have taken place annually since 1993, President Bush and Chinese Premier Wen Jiabao agreed last December to raise the profile of the exercise. Vice Premier Wu Yi, who has authority over all the key economic departments, led the Chinese delegation. For the US government, the meeting was co-chaired by US Commerce Secretary Donald Evans and US Trade Representative Robert Zoellick and Agriculture Secretary Ann Veneman.

IPR Protection - At the top of the JCCT agenda was the lack of effective IPR protection in China. The Bush administration and corporate America sought a "credible plan of action" to reduce counterfeiting and piracy of US films, software, music and other products. It got what it wanted, on paper at least. Beijing presented an action plan designed to significantly reduce piracy levels through a nationwide campaign co-ordinated at the national, provincial and local level by Vice Premier Wu. Among other things, China will increase penalties for IPR violations by the end of this year. This includes subjecting a greater range of IPR violations to criminal investigations and applying criminal penalties to the import, export, storage and distribution of pirated goods.

In addition, China will amend its laws to protect sound recordings transmitted over the Internet. Toward this end, China promised to ratify and implement the World Intellectual Property Organization (WIPO) Internet treaties and to do so as soon as possible. Beijing will also extend to the local level the existing ban on the use of pirated software for central and provincial government agencies.

With regard to IPR enforcement, the Chinese government intends to crack down on IPR violators by conducting nationwide raids as well as increasing customs targeting of both imported and exported products. Finally, Beijing committed to launching a national campaign to educate the Chinese population about the importance of IPR protection and establishing a JCCT IPR working group, which will allow US and Chinese trade, judicial and law enforcement authorities to improve their co-operation.

How corporate America and thus the US government will perceive China's IPR protection efforts will depend largely on the measures' effectiveness in actually reducing piracy.

Various American trade associations welcomed China's IPR commitments. Mitch Bainwol, the chairman and CEO of the Recording Industry Association of America (RIAA), praised the agreement by saying, "China has committed to tangible, specific steps to address the rampant piracy of copyrighted works. If fully implemented, this will be a landmark announcement and a real victory for composers, record companies, artists and other copyright owners in China". Bainwol called China's commitments an "important first step", adding that Beijing must reduce piracy by 50% by the end of 2004, with further verifiable and significant reductions in the following years.

The International Intellectual Property Alliance (IIPA) struck a more critical note. It pointed out that China made no commitment to combat the unauthorised use of business software in the private sector. Moreover, IIPA highlighted that Beijing did not commit to take enforcement actions against software piracy administratively.

China's Industrial Policy in Technology
The US also wants China to abandon what US government and industry view as discriminatory industrial policies that appear to be primarily designed to strengthen China's technological base. This issue clearly has national security implications for the US, as Beijing's policy is perceived in Washington as serving to build up its defence industry. In this regard, the Bush administration was successful on at least one issue. The Bush administration received a commitment from Beijing that China would indefinitely delay the implementation of a new encryption standard for wireless technology, which was due to come into force on June 1st.

Late last year, China had stipulated that Wi-Fi products sold in the country would have to use the WLAN Authentication and Privacy Infrastructure (WAPI) encryption standard, but had provided the technical specifications for this standard only to twenty-four Chinese companies, which would have forced all foreign firms to enter into joint ventures with these Chinese entities. China promised to work to revise the WAPI encryption standard, taking into account comments received from both Chinese and foreign firms and participate in international standard-setting bodies.

China also announced that it would move towards a market-based and technology-neutral approach for the development of next generation wireless standards, which means with respect to third-generation (3G) telecoms standards that telecom service providers in China will be able to choose which standard to adopt. All of these steps help to ease some of the concerns shared by the US high-technology industry and, albeit to a lesser degree, the US national security establishment.

Textiles and Apparel
Total US imports of textiles and apparel from China were worth US$11.6 billion in 2003 while US exports to China of these products totalled only US$225 million. China's exports of textile and apparel products to the US have surged dramatically since quotas were lifted on for some products at the end of 2001.

The US textile industry has maintained that a variety of Chinese policies distort trade and investment in the sector, citing high tariffs, improper customs valuation practices, arbitrary import taxes, non-transparent import licensing, subsidies provided to state-owned enterprises, value-added tax (VAT) rebates and currency undervaluation. In addition, the US industry maintains that IPR violations, including textile design "knock-offs" and trademark piracy, continue to be problems in textile and apparel trade between China and the US.

Despite the continuing friction over surging Chinese textile and apparel exports to the US, this sector was not expected to play a significant role in the discussion. Nevertheless, the issue was addressed, and both sides agreed to take steps to ease tensions. Specifically, Washington and Beijing agreed to reinforce the existing dialog on textile trade, including by upgrading ongoing discussions to the under-secretary-vice ministerial level. These talks will cover mutual trade and investment opportunities, barriers to US exports of textile products to China, IPR protection and possible scenarios for the evolving bilateral textile and apparel trade relationship when quotas are eliminated under the WTO Agreement on Textiles and Clothing.

The US government's press release stressed that "further business-to-business discussions" will be held in the US later this year "with a view to improving the trade imbalance in this sector".

Market Access for US Services
In the services sector, China agreed to move with alacrity to give American companies full control of their supply chains by allowing them to import, export, distribute and sell their products in China without having to go through local intermediaries, ie, state trading companies. Specifically, China agreed to implement its WTO trading rights obligations by July 1st, fully six months ahead of schedule, with draft regulations to be published for comment by June 1st. Beijing will also extend distribution rights to US companies on schedule by the end of 2004. Draft implementing regulations for this were already published on April 16th.

The US and China also exchanged diplomatic notes that confirm the completion of all agreed upon actions to allow the bilateral maritime agreement to enter into force, which allows US shipping companies and container transport service companies to exercise commercial rights that are on par with domestic Chinese firms, such as the ability to open full branch offices throughout the country. China also agreed not to raise the threshold weight below which only the Chinese postal service may deliver packages.

Agricultural Trade Issues
US agricultural exports to China have tripled over the course of the past two years. In fact, China is now the fifth largest market for US exports of farm goods. Some progress was made with regard to agricultural trade disputes at the JCCT meeting. For example, China agreed to implement new transparency procedures and issue product approvals that will further open its market to US agricultural products, such as increasing transparency of its tariff-rate quota (TRQ) allocation process for wheat, cotton, corn and other commodities. Beijing also will issue final safety certificates for US biotech soybeans.

In addition, China agreed to partially lift its ban on the import of US beef products. Beijing had banned imports of US beef and beef products after the discovery in the US late last year of bovine spongiform encephalopathy (BSE). This so-called "mad cow disease" has been linked to a fatal brain disease in humans called new variant Creutzfeldt-Jakob disease (nvCJD). Under the deal struck in Washington, China will resume imports of beef tallow, semen and embryos. Yet, not all agricultural trade issues were resolved, as little progress was made on China's import ban on US poultry which had been imposed in response to an outbreak of avian influenza in some parts of the US.

Other Steps
The US and China reached agreement on various other trade issues. Among other things, Washington and Beijing agreed on the issue of end-use verification visits for US dual-use and high-technology exports (please see the related article in this issue of Business Alert-US). China's General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) and the US Consumer Product Safety Commission (CPSC) formalized a working relationship under which they will exchange scientific, technical, and regulatory information to help ensure the quality, safety and proper labeling of consumer products.

Sino-American Trade Relations Back on Track
In short, the JCCT meeting was a resounding success, particularly for Washington. The results from the meeting go a long way towards resolving some of the most contentious issues of the bilateral Sino-American trade relationship, which continues to grow in importance for the health of the US economy. Although the global economy has struggled since 2000, China's economy has expanded by more than 8% in each of the last three years. Meanwhile, US exports to China have grown by 76% during this period, while US sales to the rest of the world actually declined by 9% between 2000 and 2003. China is now the sixth largest market for US exports and America's third largest trading partner, surpassing Japan last year.

These facts alone explain China's growing importance in the US, and why the country is increasingly becoming a target for US criticism. And despite the positive results, US criticism is unlikely to die down any time soon. Both the US government and the corporate sector want to see action.

The Chinese government's actions with regard to combating IPR piracy and living up to its market-opening commitments will be the measure by which Beijing will be evaluated. However, in light of the fact that the bilateral trade relationship appeared to be drifting toward a crisis in recent months, as various trade disputes were on the verge of escalating, the JCCT meeting's outcome represents a stunning turnaround. Both sides effectively managed to calm the waters sufficiently enough to ensure that election year rhetoric in the US, which will inevitably be hostile to China, cannot do significant damage to the bilateral relationship. That qualifies as a significant success indeed, and one that both Washington and Beijing can savour.

Bush Administration Rejects AFL-CIO's Section 301 Workers' Rights Petition, Says Will Not Accept Currency Manipulation Petition

On April 28th US Trade Representative Robert Zoellick, Commerce Secretary Donald Evans, Labor Secretary Elaine Chao and Treasury Secretary John Snow appeared together to announce that the Bush administration had rejected a petition by the AFL-CIO labor federation under Section 301 of the Trade Act of 1974. However, in turning down the AFL-CIO's petition, which had called for an investigation of working conditions in China, the Bush administration announced that China has agreed to a comprehensive joint effort aimed at effective implementation by China of internationally recognized core labor standards.

The AFL-CIO's petition documented how the Chinese government prevents workers from forming and joining independent unions and bargaining collectively, denies workers safe working conditions, provides no minimum wage and uses forced labor in a number of industries. As a result, the AFL-CIO's case claimed that Chinese workers' wages are between 47% and 86% lower than they should be, which in turn reduces the price of Chinese manufactured goods by 11% to 44%.

The AFL-CIO petition argued that if China did not violate workers' rights, the price of Chinese manufactured goods would increase by 12% to 77%. Applying the COMPASS model used by the US International Trade Commission (USITC), the AFL-CIO calculated that Chinese manufacturers enjoy an unfair cost advantage of 43%, which is the midpoint of the 12% to 77% range, and that this unfair advantage has translated into a loss of between 268,345 and 727,130 American jobs.

The petition argued that this employment impact clearly constitutes a "burden" on US commerce and that the Chinese government's persistent pattern of violating workers' rights is an "unreasonable" practice, under the terms of Section 301. On the basis of this conclusion, the AFL-CIO called on President George W. Bush to impose trade remedies commensurate with the 43% cost advantage caused by China's denial of workers' rights, and to negotiate a binding agreement with the Chinese government to come into compliance with internationally recognized labor standards.

In addition, the Bush cabinet members stressed that the White House would not accept either a Section 301 petition alleging that Beijing manipulates its currency to gain an unfair advantage vis-à-vis US manufacturers. This announcement effectively pre-empted the Fair Currency Alliance, a group of approximately 40 trade associations and labour unions, which was close to filing such a petition. The petition was being prepared by the Washington law firm of Collier Shannon Scott.

In a statement, Treasury Secretary Snow said, "With steady progress clearly being made, the most effective way at this time to achieve the goal of a flexible, market-based exchange rate in China is to maintain the persistent engagement we have established rather than through a trade petition. Economic isolationism does not work and it is a path we will not follow".

Zoellick added that until Beijing floats its currency and allows "free bargaining between labour and management", China will not be able to reach its goal of gaining market-economy status from the US.

Progress Made to Enable US Technology Exports to China

At the Joint Commission on Commerce and Trade (JCCT) meeting on April 21st the US Department of Commerce (DOC) reached an agreement with China's Ministry of Commerce (MOFCOM) on procedures to strengthen end-use visit co-operation, designed to help ensure that US exports of controlled dual-use items are used by the intended end-user for their stated purpose. This understanding specifies procedures for conducting end-use visits, while also providing a mechanism for consultations on issues that may arise during those visits. It thus promises to resolve a long-standing issue of great importance to Sino-American high-technology trade relations.

The US high-tech industry hopes that this understanding will lead to increased US exports to China. On the other hand, whether this end-user inspection agreement will have the desired effect is highly questionable. House Armed Services Committee chairman Duncan Hunter (Republican-California) and House International Relations Committee chairman Henry Hyde (Republican-Illinois) oppose loosening export controls in general, and that is all the more true vis-à-vis China, which many conservative Republicans view as America's greatest challenger in the 21st century.

Meanwhile, the established export control procedures run their usual course. For example, the DOC's Bureau of Industry and Security (BIS) has issued an updated version of its "unverified" or "red flag" list, which removes the Power Test & Research Institute of Guangzhou, China, from this list, after a post-shipment verification took place at its facilities.

Exporters are called upon to use "enhanced due diligence" on exports to foreign entities cited on the "red flag" list, which identifies parties in past transactions where pre-licence checks and post-shipment verifications, which are required for granting a license for advanced US technology exports, could not be conducted despite the US government's best efforts. In this context, it should be noted that end-use visits for licensed US exports are a normal part of US high-technology trade and are conducted routinely with US trading partners. The inability to carry out such visits raises concerns regarding the ultimate end-user.

Any transaction involving an entity or individual cited on this list is deemed to raise a "red flag". Whenever there is a "red flag", exporters have the duty to inquire, verify or otherwise satisfy themselves that the proposed transaction does not involve a prohibited proliferation activity or another violation of the Export Administration Regulations (EAR). However, the listing of an entity does not in itself constitute a licensing requirement.

Currently, the "red flag" list is comprised of the following entities: Lucktrade International of Hong Kong, Brilliant Intervest of Malaysia, Dee Communications of Malaysia, Shaanxi Telecom Measuring Station of China, Yunma Aircraft Mfg of China, Civil Airport Construction Corporation of China, Beijing San Zhong Electronic Equipment of China, Huabei Petroleum Administration, Bureau of China, Peluang Teguh of Singapore, Lucktrade International PTE Ltd of Singapore and Arrow Electronics Industries of the United Arab Emirates (UAE).

In related news, the US Department of State has announced that it will undertake a massive campaign to prevent US companies from illegally exporting defense-related equipment. In 2003, the State Department imposed record fines totaling US$63.5 million. The programme is administered by the State Department's Bureau of Political-Military Affairs, which is headed by Assistant Secretary of State Lincoln Bloomfield, who has doubled the number of licensing officers dealing with defense-related export controls covered under the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).

While the US government's efforts to crack down on illegal exports of defence-related systems is largely explained in the context of the "war on terrorism", the spectre of the ongoing Chinese arms build-up plays just as important a role.

This fact is abundantly illustrated in official Washington's unease at the prospect that the European Union (EU) might lift its fifteen-year-old ban on selling arms to China, which is likely to occur in the coming months. In recent years, China has become the world's largest importer of defense systems, worth more than US$2.3 billion in 2002. The US government is opposed to the EU lifting the embargo, arguing that the move would destabilise the delicate security balance in East Asia, particularly in the Taiwan Straits.

Why is this arms export control issue relevant to export controls administered under the expired and not-yet-renewed Export Administration Act (EAA)?

After all, US defense exports to China are banned. Harald Stavenas, a spokesman for the House Armed Services Committee, provided the answer when he was quoted in the National Journal's April 24th edition. He said that should Brussels lift its arms embargo that decision would undermine the Wassenaar Arrangement, the multilateral export control regime for advanced dual-use technology, which in turn would render unilateral US export controls useless.

Foreign Banks Have Set Up 192 Business offices in China - None from Hawaii yet

To date, 64 foreign banks from 19 countries and regions have established 192 business offices in China, the TDC has learned from the Conference on Foreign Bank Development in China held by the China Banking Regulatory Commission in Beijing in mid-April (12 April 2004).

Among these 192 business offices, 88 have been authorized to conduct renminbi business. Total assets of all foreign bank offices in China valued at US$49.5 billion. In addition, foreign banks have established 209 representative offices in China.

As an integral part of reform and opening up, China's banking sector has made remarkable progress in opening up in recent years. Upon China's accession to the World Trade Organization, the banking sector quickened its pace of opening up by lifting the geographical and client restrictions on foreign currency business conducted by foreign banks. Foreign banks are allowed to conduct renminbi business in 13 cities, as opposed to just two cities, namely, Shanghai and Shenzhen, in the past. Foreign banks that satisfy relevant requirements are allowed to provide renminbi business to Chinese enterprises from 1 December 2003, and foreign financial institutions are now allowed to have a higher equity participation in Chinese commercial banks.

Shishi, which will be one of the largest garment trade marts in Asia, has over 3,000 textile and clothing enterprises, and the number exceeds 10,000 if firms for textile, garment manufacturing and neighboring supporting industries are taken into account.

Annual output is already valued at over Rmb30 billion (HK$28.3 billion).

The city produces a wide range of casual wear under some 3,000 registered trademarks, including Septwolves, Fuguiniao, Gemzboh, Yepao, Seven, K-Boxing, Edenbo, Pin, Hadley, Joe One and Weles.

Shishi has also developed a chain of industries that encompasses textile, dyeing, production of auxiliary materials and marketing, with garment processing at the core. The nationally-renowned Yuanyangchi Fabrics Market, the up-and-coming Yatai Textile and Fabrics Market, as well as the Nanyang Fabrics Street have each become booming trade centres for over 1,000 fabric suppliers from Southeast Asia and various parts of China.

More than 60 textile factories across the country have so far set up offices in these markets, where some 2 billion metres of fabric have been sold annually so far. With a total annual turnover of Rmb12 billion (HK11.3 billion), these factories have, in a short space of time, become the second largest fabric market in the country in terms of scale and sales volume. It is in Shishi that many internationally-recognised brand owners purchase materials and place their production orders.

Shishi also boasts a flourishing clothing market, which serves the whole country. Today, the city has already become the most renowned distribution centre for clothing and raw materials along China's southeastern coast.

As many as 18 streets are taken up by the wholesalers, primarily garment traders, with over 6,000 clothing shops doing business there. Apart from these, eight other wholesale markets are available for different types of garments, including casual wear, children's wear and sportswear.

More than 30,000 people are engaged in garment trading in the city. Annual turnover amounts to over Rmb6 billion (HK$5.6 billion).

Shishi has held more than 10 trade fairs for clothing and related industries since 1992, before the event was officially named the Straits Textile Clothing Fair (STCF) in 1995. It is becoming increasingly influential and is attracting many visitors. The display of the works of leading designers and the latest fashion trends at STCF is the only platform where one can see the latest works of famous Hong Kong, Taiwan and mainland designers.

In 2003, the Casual Wear Expo and the Third Chinese Professional Models Competition were staged at STCF. Total turnover of the fair has come to exceed Rmb3 billion (HK$2.8 billion).

Accessibility to Hong Kong and Taiwan

The main structure of the Shishi Clothes City had its topping out ceremony on 9th March this year, making it one of the top projects for the province in 2004. It is also a major construction project for Quanzhou and Shishi town, with support from local governments at all levels.

The entire project is a joint deal between the private sector and the government, with the latter playing a leading role and providing effective backing.

A garment city after 20 years of development. The Shishi Clothes City is located to the south of the city and adjoins the Fujian-Xiamen Expressway. It lies close to the Xiamen Airport, Jinjiang Airport, the 10,000-tonne-class Shihu Wharf and the Quanzhou Railway Station. The area is considered the most economically vibrant region west of the Taiwan Strait.

The garment city sits on a 73 hectare site, with the central part of the city covering 45 hectares. With a total investment of Rmb1 billion (HK$943 million), the project comprises five sections dedicated to garment trading, exhibition, leisure, logistics and commercial services.

The garment trading section has a floor area of 425,000 sqm. Other facilities include a 25,000 art exhibition centre, 54,000 sqm of hotels and offices, 6,000 sqm of passenger terminals and 81,500 sqm of warehouses.

With the Clothing City very much a vibrant operation already, trade fairs are frequent: the next Straits Textile Clothing Fair, for example, will be held in the new Shishi Clothes City in March 2005.

Phase One of the Shishi Clothes City has four blocks of buildings for the trading of garments. They cover an area of about 10 hectares and have a floor area of 213,000 sqm for 2,180 shops and 1,884 rooftop and underground parking spaces. The main structure of Block A in the southern section of Phase One has already been topped off. Block B was scheduled for topping off in early April. Wiring and decoration will start after the topping off and this phase of the project is slated for completion at the end of December.

Among the shops in Phase One of Shishi Clothes City, 50% are for sale. The 1,090 shops that are currently up for sale are housed in four blocks of three-storey buildings, including two for men's wear, and one each for ladies' wear and children's wear.

The standard price is Rmb13,800 (HK$13,018) per sqm for street-level shops, Rmb10,800 (HK$10,188) per sqm for first-floor shops and Rmb7,800 (HK$7,358) per sqm for second-floor shops. The standard shop size is 4.2 m x 8.4 m. For the benefit of occupants, the measurement is calculated in terms of usable area and does not include public areas (which account for nearly 50% of total site area).

People started queuing up at Shishi Construction Bank and Industrial Bank to pay their purchase deposits since Shishi Clothes City was first put on the market on 10th March this year. Phase One shops are already over-subscribed and shop spaces are in short supply.

According to the Fujian Clothing Trade Association, the Quanzhou Garment, Shishi Textile, the Clothing Association and other associations, as well as their members, are interested in moving into the Shishi Clothes City as collective bodies.

Most of the large clothing enterprises in Quanzhou have submitted rental and purchase application forms. Many Taiwan, Hong Kong and South Korean companies are also interested in moving into the Shishi Clothes City, with more than 100 Taiwan companies having submitted applications.

Nestlé steals an ice cream scoop over rivals

Swiss drinks and confectionery company Nestlé is pre-empting rival Wall's by launching 14 new ice cream products, as the summer joust for market share on the Chinese mainland gets underway.

A box of six Nestlé ice cream chocolate bars covered with black sesame costs just Rmb3 (HK$2.8), while unit ranges go from Rmb1 to Rmb5 (HK$0.9 to HK$4.7).

The UK company Wall's is losing no time following with its own price and product challenge, while local producer Yili has put its ice cream plant in Guangzhou into action. Beijing Sanyuan also plans to launch more than 100 ice cream products this year.

The drinks market is also gearing up to a competitive summer, with new electrolytic drinks (which are claimed to prevent colds) especially prominent.

New electrolytic drinks have been launched under the Red Bull, Aodeli and Gatorade labels. These include a glucose-based drink called Jingliang by Coconut Palm, Maidong by Roberts and Kangyouli by Wahaha.

Fruit drinks have won a 24% share of China's soft drinks market - up 13% over the past year - and an increasing number have been launched this year.

Ice cream, alcoholic and soft drinks consignments are allowed to enter the mainland market tariff-free from Hong Kong under the Closer Economic Partnership Arrangement, CEPA.

Business chimes for wedding planners

People about to get married are naturally both excited and nervous about their upcoming wedding - but are said to be generally happier after getting tailor-made briefing and advice from their wedding consultant. Weddings are enjoyable for guests, but the scrupulous preparations required before, during and after the ceremony are often overlooked or underrated by those who have never been through the experience.

More and more shrewd investors are turning their eyes to the wedding market.

Xiyangyang, Style Lady and Haorizi are some of the better-run wedding consultants in Shenzhen.

It is worth bearing in mind that the ability to cater to the individual needs of clients is a magic ingredient in the competitive wedding service market.

Wedding consultants in Shenzhen are offering church weddings, beach weddings and garden wedding packages to fulfill young couples' dreams of getting married in style.

An initial investment in a wedding planning company could typically be about Rmb400,000 (HK$377,358). Location is crucial to success. Generally speaking, a 50 sqm shop in a busy commercial district is quite sufficient. Rentals would come to around Rmb15,000 (HK$14,150).

Overheads for such a business would include the purchase of wedding decorations, such as props, floral columns, silks and satins. Some companies also buy expensive backdrops and other accessories to provide services with style. One company has bought a Cadillac limousine for this purpose.

Influenced by traditional culture, the long holidays in May and October are peak seasons while April and July are low seasons for wedding consultants.

Consultancy firms generally charge between Rmb29,999 and Rmb59,999 (HK$28,300 and HK$56,600) for service packages.

Firms usually handle five or six weddings a month in peak seasons and two to three weddings in the "off" period. Most service packages have a profit margin of between 10% and 20%, varying on services required and the season. It costs Rmb3,200 (HK$3,018) to rent a Lincoln limousine in peak seasons and only Rmb2,800 (HK$2,641) in low seasons.

Many young mainlanders are envious of the romantic weddings they see in Hong Kong TV dramas. So Hong Kong wedding planning companies are bound to have a considerable impact on the local industry. The implementation of CEPA and the gradual opening of the market should bring great business opportunities for budding wedding planners.

Enterprises Employing Laid-offs Can Borrow at 50% Interest Discount

According to the People’s Bank of China (PBOC), upon State Council approval, the PBOC, Ministry of Finance and Ministry of Labour and Social Security have recently issued a circular on further promoting the granting of small-amount guaranteed loans to laid-off workers. In future, small enterprises employing a given number of laid-off workers can borrow from banks at preferential terms. The counter-guarantee threshold for laid-off workers seeking small-amount guaranteed loans will also be lowered.
The circular proposes for the first time that greater credit support be given to labour-intensive small enterprises that meet the lending requirements and create considerable new jobs to absorb laid-off workers. In addition to credit support from banks, the finance departments will also offer preferential policies to these small enterprises if the laid-off workers they employ in the current year account for more than 30% of their total number of workers and the labour contracts signed are for one year or more.

For banks extending loans to qualified small enterprises, the finance department will offer them a 50% interest subsidy at the benchmark lending rate announced by PBOC. However, there will be no discount for rollover loans.

The ceiling for such loans is Rmb100,000. The length of maturity is up two years and may be extended once. The interest subsidy is to be equally shared by the central and local governments. In the case of bad debts, 10% of the loss incurred by the bank will be borne by the central and local fiscal departments on a 50-50 basis.

In order to encourage banks to unfold this business, local finance departments will offer them subsidies for handling fees amounting to 0.5% of the sums actually lent. However, the government will not provide any form of guarantee for these loans.

Webcast (in Mandarin) World Expo 2010 Shanghai sees huge potential The preparatory work of World Expo 2010 Shanghai has kicked off. Bureau of Shanghai World Expo Coordination Deputy Director General Huang Yao Cheng says a series of seminars will be held in different countries and regions to introduce the vision and business opportunities of the Expo, including one about finance and investment to be held in Hong Kong in May.

Congressional Pressure to file WTO cases Increases as US Reports on Chinese Telecom Barriers

On March 31st nine House Democratic leaders, including House Minority Leader Nancy Pelosi (California) and Minority Whip Steny Hoyer (Maryland), wrote to President George W. Bush, urging the White House to file more World Trade Organization (WTO) cases than it has done in the past three years. In particular, the Democratic leaders believe that the US government should more aggressively target unfair trading practices by China, the European Union (EU), Japan, South Korea and India.

The letter stresses, "After the loss of almost 3 million manufacturing jobs since January 2001, and the growing problem of outsourcing in the services sector, it is time to stop taking inventory and time to start producing results for American workers, farmers and businesses". The House Democrats point out that the Bush administration has filed an average of three WTO cases per year, whereas the Clinton administration averaged ten. With regard to China, the letter urges the president to file WTO complaints against Beijing's Wi-Fi encryption standard policy as well as its persistent restriction of trading rights.

To increase the potency of the US trade remedy arsenal, the House Democrats also announced the introduction of legislation (HR 4120) which would reinstate "Super 301". This provision of US trade law was last reinstituted for three years in January 1999, after statutory authority expired in 1997. It expired again in 2002, and the Office of the US Trade Representative (USTR) was in discussions with the US Congress on reinstituting it in the spring of 2002, but it has not been renewed as of yet. "Super 301" requires USTR to prioritize foreign market barriers to US products and services and take retaliatory action if problems cannot be resolved through bilateral negotiations. The letter added, "We hope that the White House will work for swift passage of this legislation this spring".

In related news, on April 8th USTR released its annual telecoms trade barriers report, which identifies global barriers facing US consumers and businesses in the US$1.3-trillion-a-year global telecoms services and equipment market. It is required under Section 1377 of the Omnibus Trade and Competitiveness Act of 1988.

With regard to Chinese trade barriers in the telecoms sector, the report lists the proposed single-technology product standard for wireless communications that would effectively exclude non-Chinese suppliers from the country's market. At issue is a law that China introduced in December 2003, which would force foreign wireless network equipment makers to use encryption technology standards that are only available from Chinese companies.

Specifically, China has stipulated that Wi-Fi products sold in the country must use the WLAN Authentication and Privacy Infrastructure (WAPI) encryption standard. Complicating the issue further, the Chinese government has provided the technical specifications for this standard only to twenty-four Chinese companies, which would force all non-Chinese firms to enter into joint ventures with these Chinese entities to make products that meet the standard.

USTR uses a variety of tools to press for the elimination of market access barriers in the telecoms sector: negotiations, consultations and, if warranted, litigation. The US industry views the US-China Joint Commission on Commerce and Trade (JCCT) meeting in April as a deadline of sorts.

Should China impose the standard on June 1st in spite of complaints from the US, the Bush administration is apparently prepared to take the issue to the WTO. Chinese authorities have made no moves that would indicate that they intend to oblige the Bush administration, which makes it exceedingly likely that this issue will result in Washington's second WTO case against Beijing.

Federal Maritime Commission Takes Steps to Implement US-China Maritime Agreement

The US government has taken steps to implement the bilateral Sino-American maritime agreement, which was signed on 8 December 2003 in Washington by US Transportation Secretary Norman Mineta and China's Minister of Communications Zhang Chunxian. The agreement is widely viewed as representing a milestone in the evolving maritime co-operation between the two countries. It is also an integral part of the Bush administration's continuing efforts to strengthen bilateral relations with China and expand trade between the two countries.

The US-bound transpacific trade continues to experience significant year-on-year growth, with cargo volumes increasing 13% during US fiscal year 2003. Currently, over 3.2 million cargo containers move between China and the US each year, more than between any other two countries in the world, and the implementation of the bilateral maritime agreement is anticipated to contribute to further growth.

However, the agreement will not enter into force until both the US and China take additional actions stipulated by the "memorandum of consultations". The completion of these steps will enable the US and China to exchange diplomatic notes that confirm the completion of all agreed upon actions, and that both sides are satisfied that the agreement should enter into force.

Required US government actions include the commitment of the Maritime Administration (MARAD) to advise the Federal Maritime Commission (FMC) of significant improvements in the bilateral Sino-American maritime relationship and to share such communication with US shippers and carriers. For its part, the Chinese government needs to make changes to the licenses of US shipping companies and container transport service companies so as to permit them to exercise commercial rights that on par with domestic Chinese firms.

As part of the agreement, the US government promised to grant relief from certain provisions of the Controlled Carrier Act to Chinese shipping lines that had pending requests for such relief before the FMC. Under US law, foreign carriers cannot change their shipping rates in the US without publishing their intent 30 days before the change takes effect. On 31 March 2004 the FMC granted exemptions to this rule to China Ocean Shipping (Group) Company (COSCO), China Shipping Container Lines Co, Ltd and Sinotrans Container Lines Co, Ltd. The exemptions from the Controlled Carrier Act will allow the three Chinese carriers to change tariff rates on a day's notice.

In addition, the FMC has amended its rules on proof of financial responsibility, which will allow US-owned non-vessel-operating common carriers (NVOCCs) to meet the financial responsibility provision of the Chinese Regulation on International Maritime Transport. The latter requires non-Chinese NVCCOs to make the equivalent of a US$96,000 cash deposit in a Chinese bank. Specifically, the FMC rule makes it possible for NVOCCs, which want to participate in the US-China trade, to file with the FMC proof of financial responsibility in the form of an optional US$21,000 bond rider, thus supplementing the evidence of financial responsibility required to secure their FMC license.

This FMC ruling would appear to meet China's requirement stipulating that non-Chinese NVOCCs must make a cash deposit in a Chinese bank. The National Customs Brokers and Forwarders Association of America, Inc (NCBFAA) has hailed the FMC's ruling as solving problems imposed by the Chinese regulations.

Taken together, the FMC's actions on the pending Controlled Carrier Act exemption petitions and the financial responsibility requirements appear to complete what is required of the US government for the exchange of diplomatic notes that would bring the maritime agreement into force.

Concurrently, with the announcements of its rulings, the FMC has solicited public comments on the current status of shipping in the US trade with China. Specifically, the FMC seeks information on whether anticipated improvements in the ability of US ocean carriers and NVOCCs to operate in China have taken place.

Technically, this request for comments is part of the FMC's investigation of China's shipping restrictions, requirements and practices that was initiated on 12 August 1998.

Among the potentially restrictive practices addressed in this investigation were the prohibition of branch offices on non-Chinese vessel operators in locations other than the port cities that they service, and their resulting inability to directly serve inland customers. Other prominent issues included the limitation of vessel agency operations to Chinese state-owned entities, which required non-Chinese liner operators to employ vessel agent subsidiaries of their Chinese competitors, and adverse effects of the Chinese Regulation on International Maritime Transport and their final implementing rules, which were issued on 25 December 2002.

In its request for comments, the FMC notes that the bilateral maritime agreement and its accompanying "memorandum of consultations" appear to provide significant relief from the restrictive Chinese practices. For example, with respect to the geographic restrictions on vessel operating carriers' branch offices, the agreement provides that shipping companies of both countries now have the right to establish and maintain any number of branch offices without geographic limitation.

The FMC believes that additional information is required to verify that China has lived up to its commitments, and to determine whether discontinuing of this proceeding is appropriate. Comments must be submitted by June 1st to assist the FMC in evaluating the effects of the maritime agreement.

USTR Reorganizes, Creates New China Office

On April 13th the Office of the US Trade Representative (USTR) announced the creation of a new Office of China Affairs, which will be responsible for trade with China, Taiwan, Hong Kong, Macao and Mongolia. The office will be headed by Charles Freeman, the acting US assistant trade representative for China affairs. This USTR reorganization is in line with congressional concerns over China trade issues, which translated into fiscal year 2004 (FY04) appropriations for USTR to increase staff specifically dedicated to China, to focus on IPR protection and manufacturing issues. As part of the reorganization, US Assistant Trade Representative Wendy Cutler will head a new office overseeing US trade relations with Japan and South Korea. Cutler also will have responsibility for APEC-related issues.

New Management of Commercial Enterprises with Foreign Investment Announced

China's Ministry of Commerce promulgated on 16 April 2004 the Management of Commercial Enterprises with Foreign Investment, which shall enter into force beginning 1 June 2004. The new Management of Commercial Enterprises with Foreign Investment shall supersede the Procedures for Pilot Commercial Enterprises with Foreign Investment promulgated in 1999.

Major contents of the new Management of Commercial Enterprises with Foreign Investment include:

Beginning 11 December 2004, geographic restrictions for setting up commercial enterprises will be removed.

Beginning 11 December 2004, wholly foreign-owned commercial enterprises will be allowed.
Remove entry requirements on foreign investors¡¦ sales turnover and asset size.

Part of the project approval power will be delegated to provincial level.

Xian's booming, bustling "city square"

Great Wild Goose Pagoda North Square was bustling during January's Lunar New Year, when 1.3 million tourists and shoppers visited the square. Turnover of restaurants and shops in the area has continued to soar since, with people taking advantage of the increased leisure opportunities. Above all, shops are doing particularly good business.

The shopping floor area is in great demand, with business growing. The proprietor of a 15 sqm snack shop took over the lease last October with a transfer fee of Rmb10,000 (HK$9,433) and a monthly rental of over Rmb1,000 (HK$943.3). Turnover was between Rmb400 and Rmb500 (HK$377.3 and HK$471.6) on a good day, at first. But today, the shop grosses between Rmb700 and Rmb800 (HK$660.3 and HK$754.7) on an average day, and over Rmb1,000 on a better day.

The corollary of the story is that it is now impossible to transfer the lease without paying a transfer fee of between Rmb30,000 and Rmb50,000 (HK$28,301 and HK$47,169.8). Monthly rentals would be at least Rmb3,000 (HK$2,830.1).

There has been a rush to view residential property developments in the area since the opening of the North Square. One such development claims that prices have risen to the level of Rmb3,600 (HK$3,396.2) per sqm since the residential units were offered for sale last December.

Most of the flats have been sold and deposits have been paid for many of the remaining units. An attractive environment and convenient transport links have also helped to draw purchasers to commercial vacancies in the area. Many companies are setting up offices, with growing inquiries about investment opportunities.

A large commercial complex with a 20,000 sqm underground carpark and 110,000 sqm of floor area for restaurants, leisure and entertainment facilities and residential units will open for business in May 2004, on the Square.

At the same time, the east, west and south gardens of the Wild Goose Pagoda are to be open to visitors free of charge.

These developments are set to increase the attraction of the "economic belt" around the Square, and trigger further investment.

As the Great Wild Goose Pagoda Square economic belt develops, prices may rise for real estate and land in the surrounding areas.

Beautiful urban squares with modern facilities serving multiple functions, not only provides citizens with leisure space, but improves the overall environment and enhances the overall image of the city. The tremendous business potential will also help boost the rapid development of the city's economy.

People in the industry see the city square economic model as a new concept in commercial property investment, and one that holds enormous opportunities. Next should come investments in restaurants, retailing and other sectors.

Jimo aims to be first knitwear city in Northern China

Jimo, a large city in Qingdao Province, has historically been a commercial centre. The rapid development of its wholesale market has since spurred the production of knitwear and precipitated the birth of respected Chinese knitwear trademarks such as Jifa, not to mention the emergence of a number of large knitwear and garment enterprises.

The Jimo Garment Wholesale Mart is one of the largest in northern China, and indeed ranks third in the country.

Jimo has over 5,000 stalls which offer about 5,000 different kinds of garments, knitwear, textile goods and shoes. Knitwear forms the bulk of products and knitwear or garment stalls occupy a large part of the total floor area.

About 600 enterprises and 22,700 individually-owned processing businesses operate at the mart, which has over 100,000 visitors a day. It is the largest knitwear market north of the Yangtze river.

The government of Jimo recently announced plans to invest Rmb5 billion (HK$4.7 billion) over the next five years to foster 20 key enterprises with annual turnover of over Rmb100 million each. The government also wants to establish two well-known national brands and three uniquely Qingdao ones.

The aim is to build the knitwear and garment industry into one that generates an annual turnover of Rmb16 billion (HK$15 billion) and turn Jimo into the largest R&D, production and marketing base for knitwear and garments north of the Yangtze river.

Bush Administration Escalating Criticism of China, but US Companies More Optimistic

The US government continues to escalate its criticism of China's trade regime. This new, more confrontational approach by the Bush administration was powerfully illustrated by filing the first-ever World Trade Organization (WTO) complaint against China, targeting what Washington deems to be Beijing's discriminatory value-added tax (VAT) on semiconductors. Corporate America, on the other hand, appears to have retained its general sense of optimism when it comes to commercial opportunities in China. US corporations are reporting significant revenue growth and are realizing profits from their operations in China. As a result, US companies with operations in China are satisfied with Beijing's WTO implementation efforts, according to a new report by the General Accounting Office (GAO), the congressional watchdog agency.

The GAO report, which was released on March 24th, analyses the views of 82 US companies regarding China's WTO implementation, and the impact of these implementation efforts on their commercial operations in the country. The study focuses on companies in the agriculture, banking, machinery and pharmaceutical industries. It highlights, "More than two thirds of respondents reported that China's implementation of its WTO commitments had a positive impact on their companies' ability to do business in China".

Specifically, 55% of the responding American companies indicated that China's WTO implementation efforts have had a "generally positive" effect on their business, and 13% even detected a "very positive" effect; 30% of the respondents felt that there was "little or no impact", and only 1% viewed the developments as "generally negative", with another 1% seeing them as "very negative".

Overall, US companies in China appear to think that Beijing has implemented reforms "to at least some extent". That said, the GAO also found that some US companies believe that China's WTO reforms actually have had a negative impact on their operations. The five most important areas for US companies are: (1) standards, certifications, registration and testing requirements; (2) customs procedures and inspection practices; (3) intellectual property rights (IPR) protection; (4) tariffs, fees, and charges; and (5) consistent application of laws, regulations, and practices.

The GAO report highlights US business concerns over increased registration and testing requirements and that the provincial and local governments' approach to WTO implementation is frequently at odds with that of the central government in Beijing. In this context the report notes, "For example, one banking representative said that different local governments each have different explanations of China's laws and regulations. This issue illustrates a larger rule of law-related problem discussed by company representatives: the Chinese national government's commitment to WTO implementation did not always coincide with local governments' interpretation and implementation of China's commitments".

The arguably most urgent among the US firms' concerns is China's lack of effective IPR protection. Broad-based Chinese IPR violations remain a significant grievance for US companies with regard to the Chinese market.

Why is IPR protection such a sensitive issue for the US? The World Intellectual Property Organisation (WIPO) estimates that copyright industries alone contributed 7.75% to US gross domestic product (GDP) in 2001. According to some estimates IPR theft and counterfeiting drain over US$200 billion from the US economy annually and have eliminated more than 750,000 American jobs. This has prompted the US Department of Justice to create an Intellectual Property Task Force, which will examine how the DOJ handles IPR issues and develop recommendations for future activity.

Appearing before the House Appropriations Commerce, Justice, State and Judiciary Subcommittee on March 25th, US Trade Representative Robert Zoellick was highly critical of what he characterized as China's backsliding on its WTO accession commitments relating to IPR protection. However, President George W. Bush's chief trade negotiator also noted that the US needs extensive empirical data to win a WTO case on IPR issues against China. Zoellick promised that Office of the US Trade Representative (USTR) would add staff to focus on China's IPR regime.

Zoellick also announced that the Bush administration is in the process of reviewing how to expand the scope of Section 337 of the Tariff Act of 1930, as amended, to include patent violations by companies that do not export to the US. Under Section 337 the US government has the ability to exclude goods from the US market that have been found to infringe upon a US patent, but the statute's reach is limited as it provides no authority for prosecuting the infringing companies overseas. Zoellick said that developing an international list of "bad actors" may help to discourage piracy and induce better enforcement.

Zoellick's remarks are a reflection of the fact that the patience of US companies is beginning to run thin with regard to China's lack of effective IPR protection regime. In recent years, the desire to secure as large as possible a slice of the Chinese market has taken precedence over IPR concerns, but that appears to be changing. In particular, the US software and entertainment industries are applying ever-increasing pressure on the Bush administration to force China into enforcing the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). If, or rather when a critical mass of US industry support is reached, the US government will in all likelihood bring a WTO complaint, and that could happen in the not-too-distant future.

In his testimony, Zoellick stressed that the USTR will increase the number of attorneys working on China-related issues by 20%, which will "help prepare the groundwork for additional cases, and more importantly provide negotiators the ammunition to solve trade rule violations before litigation becomes necessary". To enhance litigation capabilities, Zoellick also will appoint an official in the American WTO mission in Geneva to focus on China and expand co-ordination with other WTO members on China's WTO implementation issues.

Beyond that, USTR intends to double the number of China negotiators in its North Asia office and to broaden its WTO implementation focus to include the provincial and local levels. USTR will also add staff to its Office of Industry to ensure that it is adequately covering key Chinese industrial sectors, including the paper, plastics, medical devices, machinery, machine tools, scientific instruments, fisheries, automobile and aerospace industries.

These actions illustrate the importance that the Bush administration ascribes to Sino-American trade issues, but they do not mean that the two countries are teetering on the brink of a trade war. The more assertive rhetoric by US officials should not obscure the fact that most US firms with a presence in the country are satisfied with China's reforms, as they are beginning to see a payoff from their investments in China, which is illustrated by the GAO report. Could things be even better? Certainly, but the overall development of bilateral trade relations is viewed as positive by both corporate America and the US government.

Chinese businessmen and government officials, however, have to remind themselves constantly that the positive trend in evolving bilateral commercial relations does not mean that there will be no friction. On the contrary, the more Sino-American trade grows, the more disputes will occur, but in the final analysis that is only a natural by-product of the growing commercial ties.

USTR Releases 2004 Foreign Trade Barriers Report, Chronicles Few Problems with Hong Kong, Many with Mainland China

On April 1st the Office of the US Trade Representative (USTR) released its 2004 National Trade Estimate Report on Foreign Trade Barriers (NTE) to US exports. The NTE covers 58 major trading partners. In a statement, US Trade Representative Robert Zoellick said, "The NTE report is a useful inventory of global trade barriers to understand what has been accomplished and what more needs to be done". Not surprisingly, one of the NTE's longest chapters is devoted to mainland China, chronicling an extensive list of US complaints.

USTR prepares the NTE every year, as is required by the Omnibus Trade and Competitiveness Act of 1988. The report is drafted by USTR in close consultation with other US government agencies, based on monitoring programmes and information provided from public and private sector trade advisory committees. USTR also solicits public comments. US embassies also participate actively in the preparation of the report, providing critical input based on the experience of US exporters abroad.

As usual, the US government had few problems with Hong Kong's trade regime in 2003. This does not come a surprise, as Hong Kong is widely acknowledged as one of the freest economies in the world. Historically, the primary area of friction between the US and Hong Kong has been intellectual property rights (IPR) protection, or the lack thereof. However, this has changed in recent years as Hong Kong has made huge strides. The NTE stresses that Hong Kong maintains a robust IPR protection regime and continues "to educate its public about the negative repercussions of all types of piracy". It also takes note of the fact that several legislative amendments affecting IPR were passed or proposed in 2003. Hong Kong customs raids on underground production facilities have resulted in closing down most large-scale pirate manufacturing operations.

All the same time, USTR remains concerned "about Hong Kong's 724 licensed optical disc production lines, which give the territory a huge overcapacity that must be carefully monitored". The US government has additional concerns with regard to Hong Kong's telecoms, civil aviation, legal services and e-commerce sectors as well as with lengthy approval procedures for new pharmaceutical. However, all of these complaints are relatively minor.

Mainland China is a different case altogether. In recent months, the Bush administration has stepped up its criticism of China's IPR regime, which is quickly turning into the most divisive issue in Sino-American trade relations in the run-up to the Joint Commission on Commerce and Trade (JCCT) meeting in Washington on 21-22 April. IPR issues will be highlighted in the Special 301 report, which is submitted to Congress 30 days after the NTE each year, but the NTE, too, deals with them at some length. The report acknowledges that China has made significant progress with regard to laws and regulations, but stresses that the lack of effective IPR enforcement remains a major challenge.

The NTE highlights a number of areas - in addition to IPR protection, agriculture, services and industrial policy - continue to generate significant problems. With regard to agricultural trade, the NTE cites China's regulation of agricultural goods made with biotechnology, the administration of the country's tariff-rate quota (TRQ) system for bulk agricultural commodities, and the application of sanitary and phytosanitary (SPS) measures and inspection requirements. USTR has also located significant problems in many services sectors that suffer from legal reform delays and the use of prudential and entry threshold requirements that exceeded international norms.

The NTE concludes that China has become a more open and competitive economy than was the case 25 years ago. It also stresses that China's WTO accession has led to the removal of many trade barriers, but cautions that "there are still substantial barriers to trade that have yet to be dismantled". In addition, USTR notes that some Chinese government agencies have erected new barriers. Moreover, opaque and inconsistently applied laws and regulations as well as limitations on foreign direct investment (FDI) often combine to make it difficult for foreign firms to operate in China, and that these problems cut across many sectors.

The NTE stresses that the Bush administration's top priorities for Sino-American trade relations are (1) ending the discriminatory aspects of China's industrial policy that favor domestic products over imports, which is particularly the case in the high-tech sector such as semiconductors and wireless encryption; (2) lifting excessive restrictions on foreign service providers; (3) liberalizing trading and distribution rights; and (4) enhancing the transparency of China's regulations.

US, China Conclude Safeguard Consultations, Quotas Remain

Washington and Beijing failed to reach a compromise in their bilateral consultations on the safeguard measures affecting US imports from China of brassieres (Category 349/649), dressing gowns (Category 350/650) and knit fabric (Category 222). As a result, the quotas, which were originally imposed on 24 December 2003, will remain in place until 23 December 2004.

These quotas are based on US imports for the twelve-month period ending on 30 September 2003, plus 7.5%.

US and Chinese officials met on three separate occasions this year to discuss the issue, most recently in the week of March 22nd, but were unable to devise a mutually acceptable compromise. On the other hand, it does not appear that the US was really interested in finding a compromise solution. The US textile industry had even hoped that the consultations would result in a broad agreement in which China would adopt "voluntary" restraints covering a wide range of products, but the Chinese negotiators had shown no interest in such an arrangement.

The Washington coordinator for the American Manufacturing Trade Action Coalition (AMTAC), Augustine Tantillo, greeted the news by saying that the US textile industry is "disappointed that the Chinese government stymied efforts to negotiate a reasonable comprehensive agreement that would limit the growth of all sensitive textile and apparel exports to the US to a level that will not disrupt the US market in the future". Tantillo added, "As a result, AMTAC will continue to file China safeguard actions as necessary in the future as to combat market disrupting surges of Chinese textile and apparel exports".

In his statement, Tantillo did not specify which textile product categories might be targeted in future safeguard petitions, but it has been speculated that both gloves and socks would be likely targets. The US textile industry has indicated that it intends to make the Bush administration's support for the industry, or the lack thereof, an election issue.

In other words, political considerations would dictate that the next safeguard petitions are likely to be filed within the next two months, as this timing would guarantee maximum political impact.

MOJ Standardizes Law Firm Charges

The Ministry of Justice (MOJ) has recently promulgated the Rules on Law Firms in Setting Charges (the Rules) which stipulate the standards for law firms in charging their legal services. The Rules will come into effect on 1 May 2004.

The Rules stipulate that lawyer fees should be charged by law firms in a centralised manner; no lawyer should accept any fee from the client in private. In formulating their service items, fee schedule and payment schedule, law firms should abide by the standards set out in the Provisional Procedures for the Administration of Lawyers' Service Charges and those stipulated in the relevant rules of the price authorities in provinces, autonomous regions and municipalities, as well as by the judicial and executive organs.

The Rules state that law firms should publicize their service items, fee schedule and payment schedule by such means as information display and printed service guide, and accept the scrutiny of clients. When a law firm is engaged by a client, it should sign an agreement with the client regarding the fee or include the fee as one of the terms in the retainer agreement it signs with the client. A law firm should promptly issue a receipt to the client upon receipt of legal fee.

The Rules stipulate that expenses paid by a law firm on behalf of the client in the process of handling a case such as certification, appraisal and translation fees and People’s Court charges should be settled with the client upon presentation of valid proof. When a law firm requests advance payment for expenses incurred by out-of-own travel, it should provide the client with an estimate. After due negotiation, the two sides should agree in writing regarding the amount. The lawyer concerned should not request any payment from the client in private regarding out-of-town travel expenses.

The Rules also stipulate that law firms should not use inappropriate means to compete for business, offer kick-backs to clients, or pay commission to intermediaries in any form of payment or name.

Home décor tidies up profits in Shenzhen

Seasonal colors are abiding features of modern décor in Shenzhen, with tangerine, pink, light yellow and other warm colours a natural choice for curtains and sofas during the winter, but replaced by baby blue, lilac and green for the sort of "cooler" colors preferable in summer.

Seasonal reflections are just one option for householders, who usually have three or four sets of bedding to give accent and choice to their homes.

There are other popular home items that present a personal look, including paintings, mirrors, incidental ornaments, tea sets, bowls and chopsticks, towels and rugs, to list just some.

The fact is that home owners in Shenzhen are more prosperous than ever, and so have higher disposable sums to pay for better furnishing and home items.

Shoppers have difficulty pulling themselves away from home decorations departments as a result, with branded goods high on the list to buy.

From the Indian subcontinent, pure cotton decorative drapes and bedding are sought after, as is Spanish silverware and furniture from countries such as Thailand and Indonesia.

Plants and trees are also becoming important home accessories, to supplement interior décor.

Many of the leading fashion brands, such as Esprit from Hong Kong, are taking advantage of the "home" trend to present a range of items such as bed sheets, bed covers, pillows, pyjamas and towels.

Kenzo and CD are also producing house goods to compliment their well-known fashion clothing. Some Shenzhen clothing stores sell palace-style lanterns for decoration, for example.

Unlike in Hong Kong, there are no wholesale markets in Shenzhen where different items of specialty home ware are available under one roof.

Shenzhen decorating companies often have to travel to Hong Kong, South East Asia and Europe to find the right styles and goods.

Decoration companies in Hong Kong are in a good position to take advantage of the niche top-end sector, while avoiding the strong local market for building materials and the mass market furniture marts.

MOF Bans Unauthorized Tax Incentives

China’s Finance Minister Jin Renqing said the Ministry of Finance (MOF) aims to achieve the budget targets for 2004 by strengthening efforts in four areas.

First, supervision of revenue collection will be strengthened according to law to ensure stable growth in fiscal income. Unauthorized tax concessions and preferential policies will be banned. Upon expiry of existing incentives, regular tax rates should be resumed promptly. Tax-related illegal activities such as smuggling and tax evasion will be strictly dealt with. Exact tax payment, no more or less than the amount prescribed by laws and regulations, should be collected. Moreover, the administration of non-tax revenue will be standardized. In particular, proceeds from the compensated transfer of land-use rights will be included in the fiscal budget as a special item. Meanwhile, the clampdown on random fees and charges will continue.

Second, administration of fiscal expenditure will be strictly monitored to keep tabs on all kinds of spending. Construction projects such as offices and training venues to be used by party and government organizations will be closely scrutinized to resolve the problems of overdue construction fees and workers’ salaries by government departments. Activities such as festivals, celebrations and forums without much practical value will no longer receive any fiscal subsidies. Modern management techniques will be adopted to speed up the reforms of the fiscal and financial system, and the administrative and supervisory powers of the authorities will be strengthened to reduce wastage and standardize the fiscal order. Other areas of work include actively promoting the reforms of supporting services for government organizations by encouraging social participation, perfecting the reception system for official business, and implementing a scientific standard for defining the scope of subsidies for government organizations.

Third, reforms of budget administration will be deepened and strict adherence to the law will be promoted. Efforts will be stepped up to study the scientific categorization of government revenue and expenditure, and further standardize the various fees charged by administrative departments. Moreover, the authorities will study the establishment of a scientific system for performance projection and evaluation, standardize evaluation measures based on specific individuals and targets, enhance measures and means for the administration of expenditure items, and improve the efficiency of fiscal expenditures.

Fourth, work attitudes will be overhauled. Officials at MOF offices of all levels would be trained to adopt a pro-active, pragmatic and service-oriented attitude.

Great outdoors makes good business indoors

The surge in private car ownership in Shenzhen has (interestingly) prepared the ground for more strenuous outdoor leisure activities. At the back of the boom in outdoor trekking and other activities, is the fact that people are tired of living in the concrete jungle of cities and long for what nature has to offer.

Small fashion stores in Shenzhen may change hands a year or so after opening for business, but stores selling tents, mountain-climbing outfits, water canteens and other outdoor goods are tending to be under more durable management. That's because the shops concentrating on the niche sports goods market are doing great business, in spite of their usually small size. Many have indeed attracted a steadily growing following.

Specialist stores for outdoor goods are quite unique in their mode of operation.

Most proprietors of these specialist stores are enthusiastic outdoor devotees themselves, some being experts in the activities that interest them.

Since people who are keen on outdoor activities have the habit of communicating on the Internet, there is no need for them to set up business in prime districts. They can reduce costs by making money online.

According to the owner of one such store, invitations are often sent out on the Internet - and staff take part in the activities themselves. Getting to know one's customers well through these activities is an important factor for success in the sporting goods business.

This proprietor runs a store at the junction of Hongling Road and Binhe Road, Shenzhen, which costs 50% less in operating expenses than in Huaqiang Road north. Another reason he chose Binhe Road is that most destinations for outdoor activities in Shenzhen are in the eastern part of the city, and his store is on the way for people heading east. Shoppers can pick up whatever they need as they see it.

The owner of another store, called Just So Easy, is an outdoor sports enthusiast himself. He took out a lease for a two-unit shop in a reasonably quiet district and set up his own website under the same name. The site provides a centre for people who love outdoor sports and travel, and generates a lot of business for his shop.

Better service for bigger profits

According to people in this business, nearly half of the profits of these small operations come from using one's professional expertise to organise outings for Internet-based clubs or organizations.

The charge for joining a tour is about Rmb800 (HK$754.7) for a trip to Yangshuo and can make a profit of Rmb200 (HK$188.6) per head. Day trips to places like Yangmeikeng cost about Rmb50 (HK$47.1) each. The operators provide the itineraries and vehicles.

A weekend trip is not a bad idea for salaried workers, combining relaxation with shopping.

In Just So Easy, half the shop is used for the sale of outdoor sporting goods, such as hiking boots, backpacks, tents, sleeping bags, air beds, mats, camping equipment, mountaineering equipment, outdoor outfits and travel books. The other half is turned into a lounge with tables and chairs, TV and DVD player, where customers can stop by for a drink, read a little or have a chat. It is a clubhouse as well as a means of marketing.

Although these outdoor shops are small, their yield is quite acceptable. An average shop can make a profit of between Rmb10,000 and Rmb20,000 a month, (HK$9,433.9 and HK$18,867.9) and can increase profits by providing travel and other services.

After building up their reputation, stores are usually tempted to set up chain operations. Outdoor sports is developing .

Guangzhou turns up the promotion for CEPA

CEPA "streets", CEPA Hong Kong "cities" and Macau "streets" are all the kind of promotions that are gearing up in different parts of Guangdong Province.

Apart from the Hong Kong Zero-Tariff Products City, which is already in operation, the Xinsui Hong Kong City in Dongshan district, the CEPA Growth Enterprise Park on Shangjiu-Xiajiu Road Pedestrian Street in Liwan district, and the Hong Kong Brand-Name City in Xinguang City Plaza, on Kangwang Road, will all be opening for business in Guangzhou soon.

Shenzhen, Zhognshan, Foshan and Shantou will also be building their own Hong Kong brand-name "streets" and Hong Kong products markets.

Guangdong and cities in the province are now promulgating investment facilitation measures under CEPA for 18 services from Hong Kong and Macau, and actively promote cooperation.

The first of Guangdong's three priorities under CEPA in the first half of this year is to make new breakthroughs and achieve results in cooperation on services.

The direction and objectives for future cooperation among Guangdong, Hong Kong and Macau have been set.

In the next 10 to 20 years, efforts will be made to further develop the Greater Pearl River Delta, which encompasses Guangdong, Hong Kong and Macau, into one of the world's most prosperous and dynamic economic centres.

Guangdong is earmarked as the important manufacturing base; Hong Kong as the services centre with modern logistics and banking playing a leading role, while Macau continues to be envisaged as an attractive gambling and tourism centre, as well as a regional platform for commercial services.

In the first six months of 2004, priority is to be given to 15 projects involving Guangdong-Hong Kong cooperation.

These include giving support to enterprises, especially privately invested vehicles, in extending their business to Hong Kong, building the cross-border highway bridge at Shatoukok, and building the subway port and cross-border pedestrian bridge at Huanggang, Shenzhen.

In furthering Guangdong-Macau cooperation, efforts are to be made to further strengthen cooperation between small and medium-sized enterprises.

Foreign-Invested Commercial Enterprises to be Liberalized in Late 2004

Under its WTO commitments, China will further open its commercial sector by lifting geographical, equity and quantitative restrictions on foreign-invested commercial enterprises before 11 December this year, said China's vice minister of commerce Zhang Zhigang on 16 March.

At a national work conference on the reform and development of the commodity circulation system, Zhang Zhigang disclosed that between 1992 and September 2003, the utilized amount of foreign investment in the commercial sector totalled US$3 billion. During this period, China approved the establishment of 264 foreign-invested commercial enterprises and 2,200 branches, most of which were new modes of circulation. The entry of foreign investment is instrumental to the modernisation of China's product distribution system and promotes the development of domestic distribution enterprises by exposing them to the most advanced managerial experience, marketing techniques and modes of operation in the world.

Experts noted the low level of foreign capital utilization in China's commercial sector, where the utilised amount only accounted for 0.6% of the national total. Foreign-invested commercial enterprises contributed to less than 3.5% of the total sales of consumer goods in China. Foreign-invested commerce mainly operates in central cities in affluent eastern China and in new modes of business like hypermarkets. More foreign investors will enter China's central and western regions and other modes of business as China further opens its commercial sector to the outside world.

Car care services should grow in China

According to results of a recent market survey, over 60% of private owners of top-end vehicles in China regularly give their cars external maintenance. Continuing along this theme of auto maintenance, over 30% of private owners of lower-end cars are beginning to do the same.

When you consider (quoting the same survey) that over 30% of top-end official cars are regularly maintained, while over 50% of private car owners are willing to do their own maintenance after acquiring the basic techniques, it is clear that demand for auto services is very much there on the Chinese mainland, and the potential is huge.

The car maintenance business in Shenzhen remains in a primitive cycle, consisting of car washing, polishing and delivery.

Passing off substandard parts for good ones, a poor quality of service, disorderly price competition and frauds all prevail.

For a city like Shenzhen, with one of the largest concentrations of cars in China, this regrettable situation also suggests that there are plenty of opportunities - and that it is entirely possible to develop services to capture the market.

China's car maintenance industry, which has yet to develop acceptable trade standards and services, should be able to generate enormous interest from the right companies. Foreign firms, for example, are given access to the car maintenance business under China's WTO commitments.

Many foreign companies are interested in the China market, although have not yet embarked on large-scale ventures.

It is entirely possible for Hong Kong car service providers to take advantage of their leading edge and relevant preferential policies to clinch a share of the mainland market with brand-name services.

Mobile DVD players join the buzz

Mobile DVD players are becoming the must-get devices for tech-savvy people in Shenzhen. Since market leaders Shinco, Bubugao and Malata announced their plans to produce mobile DVD players in 2002, other manufacturers have followed suit, producing light and handy DVD products. Mobile DVD players look like notebook computers, but their main function is for playing DVDs.

Mobile DVD players mainly target young people who go after the latest gadgets, as well as people who follow the latest fashions and executives.

For car owners and commuters, they are devices for watching movies (passengers only) or listening to music while on the road.

For trendy young people, they are the answer to keeping in with the latest music, with the huge choice and storage capacity that these players can potentially provide.

According to people in the industry, market acceptance for mobile DVD players will see a big jump as people learn more about the product.

In February 2004, Malata announced its decision to venture into the mobile DVD player market and launched four new models of such players nationwide, with seven- and eight-inch monitors.

Shinco also announced a grand plan to integrate different series of mobile DVD players and create a nationwide pricing, marketing, sales and servicing opportunity.

Earlier, in September 2003, Amoisonic also launched its first mobile DVD players. Despite the publicity generated by domestic enterprises, joint venture products continue to dominate the scene.

With their technological lead in consumer electronics, DVD products produced by Japan's Sony and Panasonic, as well as South Korea's Samsung, have an obvious edge in appearance and technological content.

Although many enterprises are in the business of manufacturing mobile DVD players, they are unable to produce in mass quantities. This prevents them from lowering the price of their products.

The fact that the market is still virgin is partly to blame, but the "drawbacks" of some product are self-evident. The main problem with some models is the fact that they have no use other than playing DVDs.

Singular function and high price are two main reasons why mobile DVD players do not managed to make it on to the hot seller list.

Experienced hands in the trade predict that the prices of mobile DVD players may fall somewhat in the near future because of these negative aspects.

A big question is whether creative companies will be able design or produce mobile DVD players with multiple functions and an understanding of listening and storage patterns among the younger set on the Chinese mainland. A market of great potential awaits the most ingenious.

New Subcontracting Rules of Ministry of Construction Take Effect on 1 April

The Ministry of Construction recently issued new measures on the administration of subcontracting for housing construction and urban infrastructure engineering projects. Under the new rules, subcontracting is punishable by law after 1 April 2004.
Arrears in the payment of engineering fees and workers' wages have long been a thorny issue in the building construction sector. One of the main reasons for unpaid fees and wages is multi-layered subcontracting, which is widely practised in the industry.

Subcontracting in the construction sector is a practice whereby a construction enterprise subcontracts to other enterprises professional jobs or labor services of projects for which it has contracted. In actual practice, the jobs are often subcontracted to units without the necessary qualifications. For this reason, the Ministry of Construction clearly stipulates in its latest rules that construction units may not directly appoint subcontractors, and no unit or individual may interfere in subcontracting carried out in accordance with law. Subcontractors must have the necessary qualifications and are forbidden to farm out or illegally subcontract their contracted projects.

The new rules also make clear provisions for engineering fees and payments for labor services. A contract must be signed between the subcontracting employer and the contracting party in accordance with law. The contract must clearly spell out the time and settlement method for the payment of engineering fees and wages for labor services, as well as measures for ensuring the prompt payment of fees and wages. In the opinion of many experts, what is most promising about the new rules is that they encourage the development of enterprises for project contracting and labor services subcontracting.

Shenzhen decoration industry a painted path for Hong Kong firms

The Shenzhen Decoration Industry Association, canvassing 201 member enterprises, says the sector grossed Rmb8.7 billion in 2003 (HK$8.2 billion), up 50% from 2002. Of this, Rmb6.6 billion (HK$6.2 billion) was generated by interior decoration.

In the study, as many as 16 enterprises in Shenzhen reported an annual turnover of over Rmb200 million (HK$188 million), including two companies which grossed more than Rmb500 million (HK$471 million) and one which grossed Rmb400 million (HK$377.3 million).

A major opportunity has been presented by mushrooming hotel development - there were 175 five-star establishments in China at the end of 2002.

Two companies, Shenzhen's Hongtao Decoration Co and Great Wall Furniture and Decoration Co, decorated 19 of these five-star hotels over the past two years, or 10.8% of the total number of such hotels in the country.

Another outfit, Shenzhen Decoration Group, has developed a rosy reputation on behalf of Shenzhen's decoration industry, through its work on the Beijing Concert Hall, a key national cultural project which was repeatedly hailed in the Beijing media. The group has also won contracts to decorate underground stations in 10 cities, including Beijing, Tianjin and Nanjing. These projects alone generated a turnover of over Rmb100 million (HK$94.3 million).

China's commitment to architectural services under the Hong Kong-Mainland Closer Economic Partnership Arrangement, CEPA, is to allow Hong Kong companies to provide architectural design, urban planning and landscape design in the form of wholly-owned operations.

Particularly worthy of attention is the specific commitment to allow Hong Kong service suppliers to acquire construction enterprises on the mainland, while also permitting Hong Kong enterprises that have acquired construction qualification certification to bid for construction projects in all parts of the mainland.

Hong Kong's architectural and decoration industry has extensive contact with the outside world, and is famous on the mainland for its design concepts and building materials. Its designers are familiar with international practices as well as many Chinese cultural and aesthetic values.

Hong Kong has accumulated considerable experience of required professional standards, and is often seen as a focus for China's reform and opening up. The Shenzhen market is not very large within itself, but its industry penetration nationwide is impressive, and an international plank can see the business rise to greater heights.

Hong Kong companies are soon expected to take advantage of CEPA to form equity or contractual joint ventures with mainland enterprises with good potential or a large market share, or embark on mergers and acquisitions. Suppliers of decoration and other consumer products will also benefit from the arrangement.

Big business for small hairclips in Wuhan

As with many small commodities, hairclips and other headwear are marketed in Wuhan, Hubei Province, at three levels: at shopping centres, special stores and street stalls. They each have their specific target and position - and all centres are doing good business.

Wuhan Plaza is the largest shopping centre in Wuhan, where there are more than 10 counters for small ornaments on the sixth floor. These sell hairclips and broaches that come from disparate sources in France, Denmark and Guangdong (including Shenzhen and Dongguan) but all types of hair wear are heavily in demand.

Most French hairclips have a unit price of between Rmb100 and Rmb300 (HK$94.3 and HK$283) each, while those made in Denmark are priced at between Rmb200 and Rmb300 (HK$188.6 and HK$283).

Hairclips from Guangdong are mostly within the Rmb80 and Rmb160 range (HK$75.4 and HK$150.9). Some are as cheap as Rmb40 or Rmb50 each (HK$37.7 and HK$47.1), and the most expensive ones have price tags of between Rmb400 and Rmb500 (HK$377.3 and HK$471.6), but it is the ones within the Rmb100 range that are selling the best.

Customers are said to be quite selective, and pay great attention to workmanship and style.

There are several hairclip stores along Hangkong Road. At one of these small stores, the cheapest hairclips are sold at three hairclips for 10 yuan (HK$9.4). Even the highest priced pieces cost no more than Rmb50 each (HK$47.1). Those priced around Rmb10 are selling best.

One businesswoman, Ms Li, recently rented a 10 sqm shop front next to Sun Yat-sen Park to set up business selling hairclips and scarves. This is one the busiest parts of Wuhan and the monthly rent for the store is Rmb4,000 (HK$3,773.5). To most people, it is incredible paying such a high rent for a shop selling hairclips.

However, Ms Li is confident. "I used to run a street stall in this area, selling hairclips at two to three yuan each. Since this place has a heavy pedestrian flow, business is good. I can make a net profit of between Rmb400 and Rmb500 [between HK$377.3 and HK$471.6] on a good day. That's why I'm leasing this shop front, to expand business. With guaranteed pedestrian flow, I'm sure I wouldn't have any trouble running this business," she said.

There is a hairclip shop by the name of Trendy Beauty on Wansongyuan Road, which sells strictly Korean products. Its biggest attraction is that customers are offered a free hairstyling service after buying their hairclips.

The hairclips are priced at between Rmb20 and Rmb400 (between HK$18.8 and HK$377.3). Shop attendants will offer to fix stylish hairdos for customers.

Hairstyles developed by Trendy Beauty have some interesting names, such as "love birds", "moon bidding farewell" and "lady complex". Women feel relaxed in the easy-going atmosphere of the place as well as enjoying the tittle-tattle beyond business and beautiful hairdos.

"Price is not important as long as it looks nice," said Miss Qin, a customer.

Shop attendant Miss Chen said customers are entitled to free hairstyling for life after buying any products. This strategy started in Guangzhou and now the company has eight stores in Wuhan alone. The personalized service brings great business to this small shop and the business behind it. Very often, male customers drop in to buy a hairclip or two for their women friends.

The World Trade Plaza, next to Wuhan Plaza, has a different approach, putting all its hairclip counters on the first floor, where they sell mainly locally-made products priced at between Rmb55 and Rmb188 (HK$51 and HK$177.3). Nevertheless, they are doing very good business.

"If prices are the same, I would rather buy hairclips imported or from the coastal areas, which are of better style and quality and are more glossy. What is more important is that they are more trendy," said Miss Yang, who has come to the plaza to shop.

Miss Yang's view is representative of many city women. "What we want is to keep up with fashion trends. Local products are a long way behind in design and technology," said Miss Xu, a secondary school teacher.

Very few Hong Kong hair accessories are sold in Wuhan. Miss Zhang, a fan of Hong Kong movies and TV drama series, finds this regrettable. "Many of the trendy stuff we have here actually first appeared in Hong Kong TV series. We often have the fashionable clothing and hair accessories we saw in these series in mind when we go out to shop," she said.

Hairclips are no longer merely combs for fixing one's hair. Fashionable women use these to highlight their hairstyle and clothing. This never-ending quest for style and quality holds tremendous business opportunities.

Zoellick Warns Against US Protectionism Against China

Speaking at the Asia Society in New York on February 25th, US Trade Representative Robert Zoellick stressed that China, with its increasing economic power and global influence, must be fully integrated into the international community. In this context, Zoellick criticized growing protectionist sentiment in the US against China. These comments by President George W. Bush's chief trade negotiator signal an administration effort to deflect some of the negative headlines that have dominated the China-trade debate in the US in recent months.

Warning against China-directed protectionism, Zoellick stressed, "Just (when) the Chinese are learning the win-win nature of trade, Americans should not forget how the idea works". He added, "China is not another ¡¥Japan Inc' -- an export-driven machine that shunned imports and the participation of foreign business. China sells, but it also buys". Yet it is doubtful whether Zoellick's underlying positive message regarding the reality and potential of Sino-American trade relations is heard among America's general public, which is increasingly worried about the disappearance of manufacturing jobs.

After all, Zoellick did not dispense with criticism of China's World Trade Organization (WTO) implementation efforts altogether. He insisted that China must live up to its market-opening commitments. Zoellick noted, "For its part, China warrants respect, but needs to be careful not to trigger fears". For example, he warned that Beijing's failure to provide effective intellectual property rights (IPR) protection threatens "knowledge" industries and innovation around the world.

That said, Zoellick quashed US manufacturers' hopes for an investigation of China's exchange rate policy under Section 301 of the Trade Act of 1974, which could result in a WTO complaint. The Fair Currency Alliance, a group of some 40 trade associations and labor unions, is getting ready to file a Section 301 petition, but Zoellick poured cold water on the chances of success of such an action. He observed, "There is really no WTO obligation not to have a fixed exchange rate". He added pointedly, "You will recall the US had a fixed exchange rate until 1971, when we were a member of the GATT (General Agreement on Tariffs and Trade)".

Federal Reserve Board Chairman Alan Greenspan succinctly summarized the US government's concerns in regard to China's currency peg to the US dollar in a March 2nd address to the Economic Club of New York. Greenspan cautioned, "No one truly knows whether easing or ending capital controls would lessen pressure on the currency and, in the process, also eliminate inflows from speculation on a revaluation". The US central bank chief added, "Many in China, however, fear that an immediate ending of controls could induce capital outflows large enough to destabilize the nation's improving, but still fragile, banking system".

The Bush administration has made several half-hearted attempts to persuade China to float its currency, but has resisted taking stronger action. The implication of Zoellick's and Greenspan's comments is clearly that the Bush administration has no intention of pressuring China to float its currency at this time, as no one can quite predict what the effect might be. The US government also appears to have no desire to do anything to escalate trade frictions. In other words, after a steady stream of negative pronouncements dominating Sino-American trade news, in recent weeks the good news has outnumbered the bad, and that, by any measure, must be a much welcomed change.

Fitting nicely into this thaw, on February 23rd the Bush administration praised the Chinese government's approval of permanent safety certificates for several bio-engineered grains, such as soybeans as well as two corn and cotton products. In their joint statement, US Agriculture Secretary Ann Veneman and Zoellick stressed, "China's decision to approve permanent safety certificates for several biotechnology crops is another positive step for trade between our two countries and demonstrates the Chinese government's commitment to the WTO principle of using sound science to determine such issues".

For US farmers, biotechnology is an important issue. In 2003, US agricultural exports to China reached almost US$5 billion, largely attributable to record exports of soybeans worth nearly US$2.9 billion. And this growth is set to continue. US soybean exports to China reached 8.3 million metric tons in the first five months of the current marketing year, representing more than 33% of total US soybean exports. China is also the top foreign customer for US cotton.

China's decision to open its agricultural market to US biotechnology products goes a long way to counteract negative news stories that blame imports from China for the shrinking American manufacturing sector.

Still, there are some clouds on the horizon. Representatives of the Information Technology Industry Council, the National Association of Manufacturers and the US Chamber of Commerce announced on February 24th that they would ask the Bush administration to launch a WTO complaint against China if Beijing goes ahead, as planned, and imposes a new wireless technology standard.

In December 2003, China introduced a measure that would force foreign wireless network equipment makers to use encryption technology standards that are only available from Chinese companies. This would force all non-Chinese companies to enter into joint ventures with these Chinese entities to make products that meet the standard. The US industry views the US-China Joint Commission on Commerce and Trade (JCCT) meeting in late April, where this issue will be raised, as a deadline, of sorts. Should China impose the standard on June 1st, then the US industry is determined to pressure the Bush administration into taking China to the WTO over this issue.

On the textile trade front, the US textile industry continues to pile on the political pressure on the White House and Congress, but has had only limited success. Both the domestic industry and developing countries have called on the Bush administration to keep quotas in place after 1 January 2005, to curb China's ability to dominate the US market. By some estimates, China is expected to win more than 70% market share in the US after quotas are eliminated under the Uruguay Round Agreement on Textiles and Clothing (ATC).

However, the Bush administration has indicated that it has no intention of taking an active role in any effort to derail the quota elimination. Speaking at the Outlook Forum of the US Department of Agriculture on February 20th, James Leonard, US deputy assistant commerce secretary for textiles, apparel and consumer goods industries, has said that the US would be willing to participate in discussions at the WTO about extending the quotas, provided that this effort were spearheaded by developing countries. But he also said that the process has advanced too far to turn back the clock.

With regard to the US decision to impose textile safeguards on imports of Chinese knit fabric, dressing gowns and brassieres, Leonard said that the US and China will hold a second round of talks in Washington in March. Leonard stated that the meeting in mid-January was designed to familiarise the Chinese side with Washington's decision, whereas the upcoming discussions will be more substantive in nature. He expressed doubts that the issue could be resolved without the imposition of quotas.

Leonard also said that he expects that the US textile industry will file "a number" of China textile safeguard petitions next year. He noted, however, that such petitions would probably not be successful until after imports from China have actually increased sufficiently to cause market disruption. According to Leonard, US officials have suggested to their Chinese counterparts that Beijing should consider controlling its textile and apparel exports so as not to cause major disruptions when global quotas are eliminated, but China has rejected that suggestion.

The persistent disagreements over textile and apparel trade notwithstanding, the Bush administration's public pronouncements on China trade have been more positive in recent weeks than was the case in the past few months. This is important, as it is testimony to the profound desire of the White House to see Sino-American trade relations expand in the future.

However, it should not lull anyone into a false sense of security. There are potential roadblocks aplenty. On March 1st the Office of the US Trade Representative (USTR) sent to Congress its 2004 Trade Policy Agenda and the 2003 Annual Report of the President on the Trade Agreements Program, which outlines the Bush administration's trade initiatives for the year and reviews its work and accomplishments in 2003.

With regard to China, the agenda stresses ensuring a level playing field as a primary White House goal for 2004. To achieve this goal, the report promises that the US government would continue to use special safeguard procedures when they are deemed appropriate. Specifically, the USTR report notes, "The US continues to stand ready to use all available mechanisms to ease market disruptions when the facts of a particular case warrant". Areas on which US trade officials will focus include IPR protection, discriminatory taxation, meeting China's market access commitments and transparency issues affecting all parts of China's trade regime.

There is nothing new in any of this. Whether the Bush administration will stick to its declared policy of addressing such issues in low-key bilateral talks will depend on just how successful the Democratic Party is in establishing a connection in the American voters' minds between free-trade policies and the ongoing drain of manufacturing jobs. In the meantime, the more pragmatic and conciliatory tone in Washington's China-trade pronouncements should help clear the air, at least for the time being.

CBO Analyses Loss of US Manufacturing Jobs

On February 18th the Congressional Budget Office (CBO) released an Economic and Budget Issue Brief that analyses the causes of the ongoing loss of manufacturing sector jobs in the US. CBO summarises the fact that the US economy's manufacturing sector has experienced substantial job losses over the past several years. In January 2004, the number of manufacturing jobs was 14.3 million, down by 3.0 million jobs, or 17.5%, since July 2000, and 5.2 million below its historical peak in 1979. In fact, employment in manufacturing is currently at its lowest level since July 1950.

CBO stresses, "Much of the decline in manufacturing employment since 2000 reflects the recession that began in 2001 and the relatively weak recovery in demand that followed". CBO acknowledges that the cyclical job losses in manufacturing have persisted through the first two years of the recovery, but contends that the job losses are likely "to be at least partially reversed" as the economy expands in the next few years.

Yet, according to CBO, even a full economic recovery is unlikely to return manufacturing employment to pre-recession levels. Why? The drop in manufacturing employment reflects the weak US demand for capital goods and for weak demand for both capital and consumer goods among America's major trading partners. Moreover, CBO argues that productivity gains in manufacturing have increased at a consistently stronger pace, "so sales would have needed to expand even faster for employment to show any gains".

In addition, US manufacturers have faced competition from countries with lower labor costs. A portion of the long-term decline in manufacturing sector employment can be attributed to the expansion of trade. CBO concludes, "The gains from trade arise as nations specialise in the goods and services that they can produce efficiently relative to other countries. Thus, the expansion of trade necessarily involves changes in the mix of products". The brief adds, "The US has specialized in products requiring a highly skilled labour force even as lesser jobs have shifted to countries where labor is less skilled. In the apparel sector, for example, the number of jobs in this country has declined from over 900,000 in 1990 to less than 300,000 today".

In this context CBO raises the China trade issue and the fact that some analysts have attributed recent manufacturing job losses to a surge in the bilateral trade deficit with China. Here CBO observes, "However, much of the increase in imports from China reflects a shift away from imports from other Asian countries rather than an increase in total imports. In fact, while US imports attributable to China increased from 5% in 1992 to 12% in 2003, the share of imports from other Pacific Rim countries declined from 34% to 21%".

There are other factors as well. According to CBO, the share of consumer spending devoted to manufactured goods has declined over the past decade in all industrialized countries, the US included. As incomes have risen, industrialized country consumers have increased their purchases of goods but boosted their spending on services even more, medical care in particular.

Bush Denies Section 421 Safeguards for Ductile Iron Waterworks Fittings

On March 3rd President George W. Bush rejected imposing safeguards to protect domestic producers against imports of ductile iron waterworks fittings from China. Justifying his decision in investigation TA-421-4, the president said that import relief would not be in the national economic interest of the US. The investigation was initiated under Section 421 of the Trade Act of 1974, which was added to US trade law by the US-China Relations Act of 2000 and implements the transitional product-specific safeguard contained in China's World Trade Organization (WTO) accession agreement. Under this provision domestic producers may obtain import relief if the USITC finds that Chinese products are being imported into the US in such increased quantities or under such conditions as to cause or threaten to cause market disruption.

The US International Trade Commission (USITC) had proposed the following remedies: Three USITC commissioners had proposed tariff-rate quotas (TRQs) for a three-year period: an additional 50% tariff would have been imposed on imports exceeding 14,324 short tons in the first year; down to 40% on imports exceeding 15,398 short tons in the second year; and 30% tariff on imports exceeding 16,553 short tons in the third year. Another commissioner's proposal had called for the imposition of a quota for a three-year period, starting with 14,324 short tons in the first year, 15,398 short tons in the second and 16,553 short tons in the third. The last commissioner would have imposed a tariff increase for a three-year period at the following levels: 50% in the first year, 40% in the second and 30% in the third.

The decision not to provide import relief in this fourth Section 421 investigation marks the third time that President Bush has denied such relief in the past two years. In this case, the White House argued that safeguards would only have encouraged imports from third countries, such as Brazil, South Korea and Mexico, without providing any help for the US industry. After all, existing inventories of US importers would likely cover demand for approximately six to twelve months, which means that curtailing imports from China would not lead to significant additional demand for domestic manufacturers. In addition, import relief would cost US consumers substantially more than the increased income that could be realized by domestic producers.

To date, a total of five Section 421 cases have been initiated. Among those, four have been completed and the domestic US industry has yet to score its first victory. The USITC issued one negative determination, terminating the case; and the other three were rejected by President Bush. Another product-specific safeguard case involving innersprings is still pending.

Guangdong Goods Suspected to be Sold in CEPA Hong Kong City

In response to complaints from customers that fake “Hong Kong products” were sold at CEPA Hong Kong City, the departments concerned have ordered investigations to ensure that strictly Hong Kong goods are sold in the mall, TDC’s Guangzhou office has learned.
According to Guangzhou media reports, Hong Kong City on Beijing Road has received several complaints from customers a month since its opening. The reports said that some of the goods sold in the mall were from Guangdong instead of Hong Kong. Some people also complained about the lack of Chinese labels on some merchandise. After hearing these reports, Yuexiu district government and Beijing Road Pedestrian Street Management Committee called an emergency meeting and decided to conduct surprise inspections on cosmetics, food, clothing and other goods. Shops found to have committed serious violations will be ordered to suspend business. In future, regular inspections will be carried out daily, one in the morning and the other in the evening, to assure shoppers that they are buying Hong Kong goods.

Garments are the most questionable merchandise in Hong Kong City. Investigations revealed some shops to be selling garments from wholesalers in Guangzhou, Dongguan, Shenzhen and other Pearl River Delta cities rather than from Hong Kong, and most of the goods were also sold in nearby shops on Beijing Road. These shops were ordered to suspend operation immediately and asked to produce import documents to proof the origin of their goods.

For cosmetics and articles for daily use, a laser label will be affixed to the merchandise after quality inspection to reassure customers that what they buy are genuine Hong Kong products.

Yuexiu district government has erected a “three-tier quality pass” to safeguard the image of Hong Kong City.

(1) Hong Kong City will set up an owners’ committee consisting of 10 Hong Kong shop owners. The committee’s main duty is to lay down rules of penalty, carry out self-regulatory management and work out codes of professional ethnics. When over 60% of committee members found a particular shop owner to be selling substandard goods, it will be asked to suspend operation and even depart the premises. It is clearly stipulated in leases signed with Hong Kong City that Hong Kong goods must be sold on the premises. Hong Kong goods are (i) goods currently on sale in Hong Kong; (ii) goods manufactured on the mainland but have Hong Kong registered trademarks; and (iii) goods eligible for zero tariff under CEPA.

(2) The CEPA Affairs Centre of the Guangzhou Sub-Council of the China Council for the Promotion of International Trade and other specialized companies will be entrusted to exercise strict quality inspection. All shop owners must guarantee that they are selling products that fully comply with state quality standards. The centre will assist shop owners in centrally completing the relevant market formalities for small-volume goods imported from Hong Kong and ensure that they pass inspection by state entry-exit inspection and quarantine departments and obtain the CIQ label.

Traditional women's watches have a diameter of between 26mm and 28mm. However, the line between men's and ladies' watches is beginning to wear thin. That is particularly noticeable among young, fashion-conscious women in Shanghai, who sometimes seem more interested in wearing men's watches rather than those designed for a slim, elegant wrist.

Designers may be partially responsible for the new trend. For example, the latest models of ladies' watches launched by Omega, Tissot and other brands all have diameters exceeding 35mm, similar in size to supposed boys' sized watches, or even akin to watches for men.

Such models are indeed very popular among young women. From dainty gold watches which prevailed in our mothers' generation, ladies' watches have grown in size with fashion trends over the past 10 years.

The fashion-conscious also go after big watches - the bigger the better!

Watches with colorful dials and interesting straps indeed make very good fashion accessories. The ruggedness of the watch also accentuates the slimness of the wrist.

Gender difference is narrowing in big cities, as the distinction between men's and women's fashions becomes blurred. The values ascribed to modern women are also changing, so perhaps the fact that women are wearing men's watches as a fashion statement is but a reflection of this social change.

With a new school term, shops are losing no time rearranging their display shelves to attract the attention of youthful customers. Goods aimed at students are major sellers at shopping centres, supermarkets and stationery wholesale marts.

Stationery items are prominently displayed at wholesale stores and toy markets. These are packed with retailers coming to do their sourcing, and with students in their school uniform appearing to look for products that attract them.

Miss Sun of Hexi Co, which wholesales stationery and gift items, said her shop saw a striking turn for the better in business in recent weeks, with school bags, pencil boxes and notebooks selling particularly well. Shoppers who used to visit once a month now come at least twice a month to replenish their school materials.

At the stationery wholesale section of Xinmei Jinka Store, five customers came in and bought more than 100 book wrappers each when this reporter was present, within a matter of minutes. According to the shop owner, Mr Zhang, as many as 300 customers visited the shop on a good day in recent weeks, with some transactions exceeding Rmb1,000 (HK$943.3) in value. Turnover was two to three times normal.

At the Wanjiale Department Store, the display counter for students had pride of place right next to the escalator. The 20% discount offer attracted plenty of student customers, and store manager Zhao Hongning said turnover was between 30% and 40% higher than normal.

The cultural goods supermarket on the fourth floor of the Jingtian branch of Shirble Department Store is greeting the start of the new school term by offering a 12% discount on all digital products, student goods and school bags. Manager Mr Xu said more and more customers are coming to Shirble for student items and the store is particularly busy on weekends.

Shirble Department Store now grosses between Rmb7,000 and Rmb8,000 (between HK$6,603 and HK$7,547) a day and over Rmb10,000 (HK$9,433) on weekends - as opposed to between Rmb4,000 and Rmb5,000 (between HK$3,773.5 and HK$4,716) at usual times. Notebooks, pencils, pencil boxes and schoolbags are major sellers.

Compared with ordinary stationery, branded items with attractive images and fine workmanship appeal to students to a far greater degree. These youngsters cannot resist stationery bearing their favourite cartoon and comic book characters, such as Mickey Mouse, Chibi Maruko, Snoopy, Blue Cat and Sweet Bee.

Some students prefer only one cartoon character, and choose the same brand for book wrappers, pencils, pencil boxes, pencil sharpeners and schoolbags.

Sapphire, Melonboy, Mickey, Blue Cat and Soundy schoolbags are the most sought after. On a busy day, more than 30 of these change hands, with bags priced below Rmb100 (HK$94.3) the best sellers.

According to sales staff, students at different grades have differing preferences for brands and designs. Students at Primary 1 to 4 prefer bags that bear cartoon character motifs, while those in the fifth and sixth grades prefer schoolbags that are relatively simple in style and design.

But once they are in secondary school, students tend to go for backpacks instead.

Hong Kong companies have a distinctive edge in marketing international brands, and an eye to changing student trends can certainly pay dividends.

The response to the launch in Hong Kong of personal renminbi services last week has been positive.

The offer of renminbi deposits and currency exchange services by banks in Hong Kong got off to a very encouraging start a week ago. It is a tribute to the meticulous planning and execution by the participating banks and the clearing bank that all went smoothly. Throughout the past few working days, the volume of deposits has, as expected, been building up at a comfortable pace, at least to us, having regard to our responsibilities over our own currency, banking supervision, the financial infrastructure and the status of Hong Kong as an international financial centre. There was no noticeable impact on the Hong Kong dollar, which weakened as a result of the strengthening of the US dollar against other foreign currencies and under the influence of the very low interest return for the Hong Kong dollar. The participating banks are coping with the new business prudently and competitively, and the necessary risk management systems are in place. The addition of the renminbi to Hong Kong's financial infrastructure, in however modest a manner, is of strategic importance to the maintenance of the status of Hong Kong as an international financial centre.

As at the close of business on Wednesday 3 March, the total amount of renminbi deposits outstanding was approaching RMB1.5 billion among the 14 banks surveyed by the HKMA. There are two main sources for these deposits. The first source is the renminbi cash already in the hands of Hong Kong consumers. As intended, a part of this is being channeled into the banking system and properly accounted for. There will, of course, still be the desire on the part of Hong Kong consumers to hold renminbi banknotes, but this is likely to be the relatively small transaction balances. The second source is the exchange of Hong Kong dollars into renminbi, either in anticipation of future spending requirements in renminbi or as an alternative avenue for keeping savings. Market rumors about the possibility of an appreciation of the renminbi exchange rate may also have been a motive behind the switch, but this is unlikely to be significant. In any case, yield differentials and expectation on exchange rate changes, whether justified or not, are relevant factors that influence decisions on portfolio reallocations. And we are quite sure that the manner in which renminbi deposits and exchange business are now organized is not conducive to currency speculation - the RMB20,000 exchange limit per person per day should be quite an effective deterrent.

There has also been healthy price competition for the business. The range of interest rates offered is quite wide to begin with, but this is expected to narrow gradually as banks, in the light of experience, become better placed to price the service. It will be interesting to observe this process of price (interest rate) convergence through free market forces in the absence of any cartel arrangement. Small differences will probably remain because of differences in the cost structures of banks and differences in the delivery of the financial product. Early indications suggest that depositors are not particularly sensitive to small interest rate differentials. On the contrary, non-price competition seems to have played a significant role - the dedicated renminbi savings passbook has become a favourite collector's item and is preferred over the additional renminbi entry in the established multiple-currency savings passbook, at least initially.

Readers may have noticed the orthodox view on the roles of money that I have often referred to, as a medium of transaction, a store of wealth and a unit of accounting. The currency denomination of money, particularly as a medium of transaction, may have an important bearing on the economic activities underlying those transactions, in that the provision of a wider choice in currency denomination may raise the level of those economic activities. This is perhaps an important but often ignored dimension in which the matter should also be addressed, on top of the purely financial business considerations. There is also a need to ensure that further developments or experiments in the use of the renminbi - still not a freely convertible currency - outside of the Mainland should not carry the risk of undermining the effectiveness of monetary policy in the Mainland and the stability of the renminbi.

Joseph Yam
Chief Executive, Hong Kong Monetary Authority

Legal Interpretation for Telecommunications Law Coming Out Soon

The Ministry of Information Industry (MII)) is expediting the formulation and promulgation of China’s first Telecommunications Law, the draft of which will be submitted to the State Council for examination in March.
It is understood that the draft Telecommunications Law for solicitation of opinions is now being discussed by government departments concerned and by major telecoms operators, and that the draft for examination which incorporates the opinions collected will be submitted to the State Council and discussed at the Standing Committee of the National People’s Congress in March.

As disclosed by an MII official in charge of the drafting of this law, interconnection will be a key area of regulation in the draft, and clear provisions will be made for monitoring interconnection as well as collecting evidence and defining responsibilities for erecting interconnection obstacles.

The law will also make provisions for telecoms tariffs to avoid vicious price war and tariff violations.

In future, malpractices of vicious competition among telecoms operators, such as tariff violations, cutting the cables of other operators and creating interconnection obstacles will be punished according to law. With no laws to regulate the trade at present, consumers often experience poor connections when communicating between different networks. The MII also has to step out from time to time to stop vicious price cutting and price violations among rival network operators. Poor connections and fluctuating tariffs have done consumers a great disservice. All these should change following the promulgation of the Telecommunications Law.

Suzhou, Jiangsu Province: top choice for Taiwan investors

Huang Ching-tang, executive secretary general of the Taiwan Economic Ministry's Investment Commission, predicts that Taiwanese mainland investment will continue to grow this year, but that the rate will drop to below 10%, from 20% in 2003.

Predicting is indeed hard to do, given continuing shifting investment patterns.

A survey conducted by Taiwan's Fortune China Monthly publication, and carried out in 31 Chinese provinces, municipalities and major cities, showed that by mid-2003 there were 68,115 Taiwanese companies on the Chinese mainland.

Their contracted investment topped US$129.5 billion, the survey discovered, of which US$77.3 billion was utilized (which itself greatly exceeded the US$31.7 billion published by the Investment Commission).

Still more uncertain is discovering where investment funds end up, although top 10 recipients of Taiwan investment include Jiangsu, Guangdong, Fujian, Zhejiang, Shanghai, Shandong, Tianjin, Liaoning, Beijing and Jiangxi.

Together these centres received US$112.9 billion, or 87.1% of Taiwan's total investment in the 31 provinces and municipalities.

Centres with the largest number of registered Taiwanese companies include Guangdong, Jiangsu, Fujian, Shanghai, Zhejiang, Shandong, Liaoning, Beijing, Hubei and Tianjin.

In terms of utilised investment, the top 10 appear to be Guangdong, Jiangsu, Fujian, Zhejiang, Shanghai, Shandong, Tianjin, Liaoning, Hubei and Beijing, which received about US$67.6 billion, or 87.4% of total investment.

Of the cities receiving Taiwanese investment, Suzhou, Dongguan and Zhangzhou have secured the highest contracted investment figures - while Suzhou, Guangzhou and Dongguan have attracted the highest utilized investments.

Dongguan, Suzhou and Shenzhen also have the largest number of Taiwan companies.

Suzhou has indeed become the locomotive for Taiwan investment on the mainland, thanks to the westward advance of high-tech industries. The coastal provinces remain hot spots for Taiwan investors, who have switched from export processing in the early days to domestic sales.

Meanwhile, in northern China, the "Go West" campaign and revitalization drive for industrial bases have spurred Taiwan investment in the region.

Huang Ching-tang attributed the large discrepancy between the figures published in Fortune and official statistics to differences in the definitions of what constitutes an investment. He said the figures should include working capital, joint venture capital and reinvestment in a third location.

Although Taiwan's investment on the mainland should continue to grow this year, the magnitude is expected to drop because China has started to impose a credit squeezes and other contingency measures to prevent overheating of the economy.

Guangzhou and Panyu Authorized to Register FIEs

Guangzhou’s industrial and commercial bureau and its sub-bureau at Panyu are among the first batch of local industrial and commercial administrations to be given authorization to conduct registration of foreign-invested enterprises (FIEs). A total of 90 local industrial and commercial administrations across the mainland have been given such authorization, and two of these are in Guangdong province. Foreign investors wishing to set up business in Guangzhou and Panyu may now apply for registration locally.

In the past, the State Administration of Industry and Commerce (SAIC) was responsible for the registration of all FIEs. With the authorization, Guangzhou’s industrial and commercial bureau and its Panyu sub-bureau may now conduct the registration of Sino-foreign equity and contractual joint-venture enterprises, foreign enterprises, branches and resident representative offices of foreign (regional) enterprises, foreign (regional) enterprises engaged in production and operational activities in China, branches of FIEs, as well as enterprises subject to state foreign investment policies, within their jurisdiction.

The move will facilitate FIEs in going through various business formalities. Authorized local industrial and commercial bureaus will conduct preliminary examination of FIE registration, verification of capital contributions and initial examination of annual inspections within their jurisdiction and may directly investigate FIEs violating laws and regulations.

Guangdong Opens Financial Services Office in March

The setting up of an office for financial services is an integral part of the reform of government organs in Guangdong. According to government sources, the staff establishment and other preparations for the new office have been completed and its administrative functions have been confirmed, ready for official opening in March.
To be manned by 33 staff members, the office is divided into five sections, namely general affairs, finance, capital market, local financial assets, and policy and law. Built on the basis of the existing financial administration department under the General Office of the Guangdong Provincial Government, the new office will recruit one or two extra persons apart from absorbing the staff of the department. The office is likely to be located in Block Two of the provincial government offices compound.

Besides enforcing state and provincial laws, regulations and policies in relation to finance, the new office will also assist financial regulatory organs in monitoring and supervising financial institutions in the province. It will be responsible for formulating and coordinating relevant rules and regulations, rectifying and maintaining the financial order, preventing and alleviating financial risks, and coordinating the listing of enterprises in the province.

Energy-saving market set to run and run

In order to turn itself into a green and energy-saving city, Shenzhen is broadening its policies - and giving a boost to technological transformation projects aimed at cutting energy consumption. The city was believed to have been allocated Rmb30 million (HK$28.3 million) for energy-saving projects in 2003 alone.

Shenzhen's economic and trade bureau has identified the city's top 100 electricity consumers and plans to make special allocations from its energy fund to help them implement energy-saving schemes.

Another 18 units, including the highway lighting department, the Shenzhen High-Tech Exhibition Hall, libraries, hospitals and schools, will embark on model projects to transform their central air-conditioning, lighting and elevator systems.

According to estimates by the Shenzhen government, organs and government-subsidized units will consume 1.2 billion kwh of electricity in 2004, and the completion of these projects can help cut energy consumption by 20%, or 240 million kwh, translating into Rmb190 million (HK$179.2 million) savings in government expenditure.

It will take about Rmb380 million (HK$358.4 million) to conduct a complete energy-saving overhaul of government organs and subsidized units.

Energy-saving lighting appliances from China have basically bowed out from the EU market after anti-dumping proceedings were invoked against them three years ago.

However, recently Shenzhen CE Lighting's products have passed CSA, UL, FCC and other international certifications and obtained the CCC mark. The products are exported to over 50 countries and regions including Europe, the US, Asia-Pacific and Africa. Shenzhen CE Lighting signed a cooperation agreement with Shenzhen EBT Lighting, which has five national patents and one international patent for energy-saving lightings, to export products to the EU. Sales volumes are expected to exceed Rmb8 million (HK$7.5 million) this year.

The production of energy-saving lightings is a labor-intensive industry.

After the expiration of the patent right of the relevant production technologies, China, with its rich rare earth resources and availability of low-cost electronic parts and abundance of cheap labor, is set to become the most important manufacturing base for energy-saving lighting in the world.

Given their knowledge of international market operations and extensive client base, Hong Kong trading companies are well positioned to take advantage of this development by distributing Shenzhen's energy-saving products in the international market or investing in the production of energy-saving products with good potential.

A Turbulent Year Ahead in 2004 for China-US Trade Relations?

Trade is only one piece of the complex puzzle of China-US relations, but it is important one. In this regard, 2004 appears to be a year characterized by growing friction. Over the past decade bilateral trade has expanded dramatically. Along the way, the US trade deficit with China has grown from US$29.51 billion in 1994 to US$83.83 billion in 2000, US$103.06 billion in 2002 and US$114.09 billion in the first eleven months of last year alone. As a result, political pressure to stem the flood of imports from China continues to build, particularly with the looming presidential elections. After all, one issue confronting President George W. Bush in the election will be whether he can demonstrate that he cares about America's blue-collar workers. Therefore, increasing China-US trade friction is virtually pre-programmed.

This tension in trade is somewhat offset by the fact that other parts of the bilateral relationship are developing in positive ways. As Deputy Secretary of State Richard Armitage observed in a January 30th CNN interview in Beijing, "There is a host of international and some bilateral issues that pull" the US and China together. For example, Armitage praised China's role in the six-party talks on North Korea. Chinese Premier Wen Jiabao received a triumphant reception in Washington late last year.

Corporate America also remains committed to the strong trade and investment relationship that has developed over the past two decades. US business operations continue to expand in China. US exports have boomed in the past two years, as China continues to reduce duties on imported products, as mandated by its World Trade Organization (WTO) accession commitments. The US already is China's second largest trading partner, trailing only Japan.

However, these positive developments are overshadowed, at least in the public and political discourse in the US, by the growing trade deficit with China, particularly in the jobless recovery that the American economy is enduring.

What is more, this trend is unlikely to change, particularly because the US has issues with many facets of China's trade regime. Textile and apparel trade plays a central role in this equation. The US textile industry's paranoia is certain to scale ever-greater heights in anticipation of the elimination of quotas on 1 January 2005 under the Uruguay Round Agreement on Textiles and Clothing (ATC). Chinese textile and apparel manufacturers are expected to significantly increase their share of the American market when the quotas are eliminated. But the US Textile industry hopes to limit the impact.

In a rearguard action that appears to be gaining momentum, the US textile industry is pushing the Bush administration to negotiate a comprehensive agreement to restrain China's exports to the US. An ad hoc coalition of trade associations, including the American Textile Manufacturers Institute (ATMI), the American Manufacturing Trade Action Coalition (AMTAC) and the National Cotton Council (NCC), announced on January 29th that maintaining import restrictions on Chinese textiles and apparel would be the "make or break" political issue for the industry in 2004. As the US textile industry gears up to make China an issue in the presidential and congressional election campaigns, it requires no special analytical abilities to predict that textile and apparel trade is likely to remain a source of bilateral trade friction throughout the year and beyond.

Another case in point is the alleged discriminatory application of value-added tax (VAT) on imported semiconductors and integrated circuits. Both the World Semiconductor Council and the US Semiconductor Industry Association (SIA) have registered formal complaints against China. USTR's 2003 report to Congress, after a number of rounds of bilateral consultations on the issue, noted that "China appeared to have hardened its conviction" that such discriminatory VAT, which also occurs in the fertilizer sector, is consistent with its WTO commitments. USTR has indicated that it is prepared to lodge a WTO complaint against this practice in 2004.

China's WTO commitments on trading and distribution rights are likely to generate controversy as well. As of 11 December 2003 majority foreign-owned joint ventures were to receive trading and distribution rights, and wholly foreign-owned companies are scheduled to receive such rights by 11 December 2004. While recent draft revisions appear to address US concerns on trading rights, the US government and corporate America remain concerned over the approval procedures required for retailers and other distribution functions.

Yet another issue that may turn into a WTO dispute settlement case is China's foreign exchange policy. Some US manufacturers allege that China has manipulated its currency with a 15-40% undervaluation of the yuan, which confers an insurmountable competitive advantage to Chinese manufacturers and costs American jobs.

A number of US industries are in the process of readying Section 301 petitions to investigate China's "currency manipulation". The Fair Currency Alliance, a group of approximately 40 trade associations and labour unions, announced on January 29th that it has retained the services of the law firm of Collier Shannon Scott whose team will include Robert Cassidy, USTR's negotiator during China's WTO accession talks. Moreover, the National Association of Manufacturers (NAM) is readying a Section 301 investigation of its own. In the final analysis, however, it is not very likely that these initiatives will actually result in a Section 301 investigation, particularly since the US Treasury Department reported as recently as last autumn that China is not engaging in currency manipulation.

Exacerbating the political pressure on the White House is the fact that five senators—Charles Schumer (Democrat-New York), Lindsey Graham (Republican-South Carolina), Jim Bunning (Republican-Kentucky), Richard Durbin (Democrat-Illinois) and Christopher Dodd (Democrat-Connecticut)—have renewed their push for trade sanctions on China in a January 22nd letter to Vice President Richard Cheney. Schumer is the chief sponsor of legislation (S 1586) that would impose across-the-board tariffs of 27.5% on imports from China unless Beijing floats its currency. It is not likely that this bill or similar pieces of legislation could win congressional passage. All the same, Section 301 petitions and congressional activities will keep the issue alive in the US media, which could poison the atmosphere between Washington and Beijing.

Meanwhile, US officials are increasingly concerned with the enforcement of intellectual property rights (IPR) protection in China. USTR believes that the lack of transparency and co-ordination among Chinese government agencies, local protectionism, and lack of training hamper IPR enforcement. Here too the Bush administration is under increasing industry and congressional pressure to launch a WTO complaint.

It is questionable whether the current set of problems will lead to high-profile WTO disputes although conventional wisdom has it that the Bush administration will launch at least one WTO complaint against China this year. The Bush administration is also likely to make extensive use of US trade remedy laws to appease American manufacturers and organised labour. However, while anti-dumping cases and safeguard measures lend themselves to headlines, they affect only a miniscule portion of bilateral trade, and should not, no matter how painful they may be for individual Chinese manufacturers, disrupt the overall positive development of commercial ties. Many US manufacturers, and not just multinational corporations, are now sourcing in China, and that trend continues to gather momentum, which in turn feeds the prevailing China-bashing atmosphere.

The oddity of the current politically driven China trade debate in the US is amply illustrated by the anti-dumping case targeting Chinese-made wooden bedroom furniture. Some of the US petitioners actually import a substantial amount of their products from China. That fact apparently did not stop them from targeting their own suppliers. Some US companies simply felt that they had no choice but to go along with the dumping case in light of continued US manufacturing job losses. Yet, paradoxically, such US firms have no intention of reducing their imports from China, particularly because their profits increasingly depend on such imports. America's multinational corporations also show no signs of wanting to reduce their investments in China. Large US companies are still lining up for ever-larger investments as China continues to open its market.

In other words, while the year 2004 promises to be turbulent on the surface, the fundamental underpinnings of the evolving economic relationship between the US and China are not likely to change in any meaningful way.

CBP Steps Up Textile Trade Enforcement

The US Association of Importers of Textiles and Apparel (USA-ITA) has reported that the Bureau of Customs and Border Protection (CBP) has plans to conduct another document blitz at various US ports of entry. The primary purpose of this operation, which is scheduled for March, is to determine whether textile and apparel articles are misclassified to avoid quotas. In addition, CBP will target illegal transhipment, focusing on counterfeit documents, specifically origin statements. CBP will require paper filings during the blitz, even though many of these entries are paperless. It is likely that Categories 350 and 650 will be among the apparel articles targeted.
The most recent blitz took place in June 2003, and CBP reported a rejection rate of 13%, of which some 60% was attributable to simple clerical errors. Less than 2% of the entries were subject to some form of enforcement action. CBP said at the time that the operation had resulted in the recovery of US$1.2 million in duties.

US-China Business Mediation Centre Established

On 22 January 2004 the CPR Institute for Dispute Resolution and the China Council for Promotion of International Trade agreed to create a US-China Business Mediation Centre. The agreement was signed at the CPR national conference in New York on January 29th. The centre is designed to help resolve disputes involving US and Chinese businesses. It will have offices in both New York and Beijing.
Thomas Stipanowich, the president and chief executive officer of the CPR Institute, underlined, "This landmark program holds enormous potential to effectively resolve international business disputes and promoting greater understanding between China and the United States". Stipanowich added, "Leading US companies have become aware of the tremendous advantages of mediated negotiation over litigation, and our counterparts in China have long understood the benefits of conciliated settlement. Together, we are now creating a common framework for helping businesses solve problems in ways that promote business goals".

The CPR Institute is a non-profit alliance of 500 of the largest global corporations, law firms, scholars and public institutions.

Guangzhou to Better Police Taxation of Real Estate Agencies

Efforts will be made to better police the taxation of real estate agencies in Guangzhou, TDC Guangzhou office has learned from the local taxation bureau.
According to tax officials, greater efforts will be made to monitor the sector, with emphasis on the levying of taxes on planning fees, sales commission and intermediary service fees.

Chargeable on property buyers, intermediary service fees are collected in the name of providing mortgage advice, surveying service and legal service. Buyers are normally charged a few hundred to over 1,000 yuan for the purchase of a flat. It is understood that invoices are seldom issued for these fees. In most cases, receipts are issued instead of invoices to avoid payment of business tax, corporate income tax, and other related taxes and levies. The local taxation bureau has become increasingly concerned about the situation and is determined to take measures to plug the loophole.

"Motor stores" gear up to promise of sales in Shenzhen

So-called 4S stores are retail outlets that deal in the sales, spare parts, services and surveys of particular brands of cars. The potential market is huge for incoming enterprises able to offer the best services contracts under this sector of the market.

Mazda's sales centre at Meilinguan in Shenzhen is one example. A clean and neat maintenance area, modern equipment and management, highly professional ambience, impressive service facilities, ample supply of spare parts and swift follow-up services make it a favorite location for car owners.

4S stores are also intensifying competition on the Chinese mainland. Consumer demand becomes is diversifying and people are becoming more demanding with the products and services they pay for. The old dealership system can no longer meet market and consumer needs.

The emergence of 4S stores is apparently the answer to these needs. 4S stores seem to help cultivate consumers' faith in particular brands and increase their sales.

Mr Zhang, a traditional car dealer, admitted that his company's recent drop in sales was due to competition from 4S stores. It seems to suggest that conventional car dealers fail to provide the kind of personalised "quality service" that 4S stores have to offer.

However, it is unlikely that 4S stores will mushroom immediately, unless they are able to absorb an investment of over Rmb10 million (HK$9.4 million). Since these outlets charge quite highly for services beyond the warranty period, the conventional mode of sales and maintenance still has a comparative advantage for the time being.

Yet many dealers are eager to observe the popularity of the 4S mode, even though to date they have only managed to imitate the form, rather than the spirit of the service mentality that drives them.

Car sales have close profit margins and dealers mainly rely on after-sale service for their profits. After selling a car, they have to woo buyers into bringing it back for maintenance by offering a better service.

Gone are the days when a dealer can beat off competitors with better prices.

SAIC-Chery is offering a "one-to-one" consultancy service in its marketing. Shanghai-GM-Wuling has introduced a package of personal service covering services before, during and after the sale of its products. Shanghai Volkswagen's philosophy is to sell not only products but also services. First Automotive Works (FAW) even comes up with the slogan of "FAW Auto, FAW Partner", treating its customers in a more user-friendly way.

After China's WTO accession, the leading edge of China's car industry, with its localized services, faces the impact of foreign car manufacturers with their related service mentality.

General Motors, the largest carmaker in the world, played the service card when it launched Opel and other imported brands into the China market. Its offer of a two-year or 40,000-kilometre free warranty is the best there is in the mainland foreign car market.

Shenzhen imported 8,680 cars worth US$280 million between January and June 2003, up 2.02% and up 26% year-on-year respectively.

Among these, 1,978 cars were mid-to-high-end vehicles with a cylinder capacity exceeding 2,500 cc and a total worth of US$114 million, up 38.13% and 61.29% respectively.

The growth in the import of upmarket cars saw the unit price of imported cars soaring. In the first six months of 2003, the unit price of imported cars in Shenzhen was US$32,300, up 23.5%.

Among these, the average price of cars with a cylinder capacity of over 2,500 cc was US$57,900, up 16.8%, while that of cross-country cars was US$28,500, up 21.6%.

Shanghai jade opportunities shine

Chinese people have always loved jade, a precious stone which epitomizes the spirit of Chinese culture. Jade gives people a sense of pleasure, tranquility and satisfaction with its beautiful form, rich color, fine craftsmanship and auspicious and artistic qualities.

Perceptions are just as important as price in the choice of gifts. After the gold and diamond craze it is jade, with its profound cultural background and rich auspicious meaning, which became a top choice as a token of love, affection and benevolence for the Chinese New Year 2004.

Investment in jade also promises great prospects. Giving friends or family members a good quality jade as a present not only shows how much one cares but also gives them something to stow away against inflation.

For this reason, the sale of jade reached a new high with the approach of the Year of the Monkey.

Sales were soaring at leading jewelry shops and people were buying jade as gifts, as well as for themselves.

China's jewelry industry is entering the fast lane of development.

The country has become the largest jade market in the world, as jewelry sales soar.

Shanghai is now striving to turn itself into a distribution centre as well as a processing and import/export base for the jewellery trade.

The first Jade Festival was held in the Shanghai Jade Palace in the Chenghuangmiao Temple shopping area from 10th January to 6th February 2004, displaying hundreds of jade gifts, jade carvings, good luck charms and jewelry, and attracting many buyers.

China Introduces Quality Mark for Silks

China will introduce the quality mark for silks in March or April 2004. The mark will be used on all fine silk scarves, ties and garments. According to sources in the China Silk Association, quality certification is all ready and is just awaiting the approval of the State Trademark Office.
The introduction of the quality mark for silks is of great significance to the development of the silk industry in China and the world at large. It is an important step marking China’s shift from a volume to a quality silk producer. The move has aroused the close attention of foreign companies in the trade. The promotion of the quality mark suggests that China is actively fostering and developing its silk products as an international brand name. In the view of the trade, the introduction of the quality mark indicates that China’s silk industry is entering the top end of the industry chain, moving from competition in the raw materials market to competition in end products and branding. For example, in Europe, a pure silk georgette scarf can fetch tens of Euros or over 200 Euros if it is a good brand, while a silk tie can cost up to 100 Euros. Yet, they are much cheaper in China. Shengzhou, dubbed the “Hometown of Neckties”, exports some 500 million ties annually, about a third of the world’s total sales, but the unit price is only Rmb20.

The launch of the quality mark for silks will help Chinese silk enterprises strengthen their brand awareness and move towards branding. However, as China lags behind advanced international standards in silk finishing after printing and dyeing, whether its products can keep up with international trends is a matter worth pondering for people in the industry.

Fair wind for China's yachting industry

Shenzhen has one yacht club, and there are also others in Guangzhou, Dongguan, Shanghai and Qingdao. While there is said to be on average one yacht for every 171 people in developed countries, yacht clubs are few and far between in China.

According to the South China Ship, a company dealing in new and old ships, a private yacht can fetch anything from Rmb200,000 (HK$188,679) to over Rmb10 million (HK$9.4 million).

The most sought-after vessels in the market are medium-sized yachts measuring 36 ft by 60 ft, with prices ranging from Rmb400,000 (HK$377,358) to Rmb1.8 million (HK$1.698 million).

A Regal brand yacht costs about Rmb1 million (HK$943,000), while large luxury yachts have price tags of over Rmb10 million. The most expensive pleasure boat sold by the company last year had a price tag of over Rmb4 million (HK$3.7 million).

The yacht industry has high added value besides providing a leisure facility. Annual transactions of US$20 billion have been registered in the sale of luxury yachts in the international market since the early 1980s, and sales figures have been kept at a steady US$25 billion in recent years.

Today, global sales of yachts and water sports equipment approach US$40 billion, exceeding the annual sales of merchant steamers and ocean-going ships.

China has an extensive coastline and most of the coastal cities are quite affluent. With the rise of private enterprises in recent years, more and more high-income earners can afford top-end leisure commodities.

The yacht club and yachting business looks as if they are on a steady course for expansion, with the appropriate investment and the right supply industries.

Shops make Year of the Monkey work for sales

Shopworn sales gimmicks ceased to give shoppers any surprises, as the end of the past year tailed off. Consumers were getting tired of discounts, supposed bargains and the "buy one get one free" style of promotion. Even the scrolls of "happiness, prosperity and longevity" which had hung in shops throughout the year were getting tatty and shoppers were fatigued by the sameness of the sales pitch.

New ideas had to start springing up with the New Year celebrations, and the Year of the Monkey was as good a place to start as any.

Under Chinese custom, people born under the sign of the current "animal year" have the option to wear red underwear. So, although shops started selling red underwear a few months ago, the colour red became more and more prevalent with the approach of the Spring Festival.

Even foreign brands adopted the Chinese approach by giving red underwear the pride of place on their counters.

Some shops played up the animal notion by setting up counters to sell red underwear carrying different brands. Red knickers bearing the embroidered symbol of "happiness", and slickly packed in red boxes, looked both auspicious and presentable to many shoppers. They turned out to be great as gifts, without being too expensive, so it was little wonder that these counters were packed with customers.

Gold ornaments depicting the monkey were also hot sellers, even though the price of gold had soared to between Rmb4 and Rmb5 (HK$3.7 to HK$4.7) per gram.

Some shops have been selling more than 10 gold monkeys a day, with a price tag of several thousand yuan each.

Dainty commemorative gold bars for the Year of the Monkey were considered good value too for a while. As the sales pitch went, animal year gold items turned out to be stylish as gifts and as additions to collections.

The gold monkeys came with a longevity peach or good-luck gold ingot in hand. They proved to be very popular among many shoppers, particularly those who wanted to ensure that whatever luck was going was good!

Gold bars were more down-to-earth purchases, easier to store and prices were Rmb12 (HK$11.3) lower than for the monkey, costing about Rmb120 (HK$113.2) per gram.

Wearing red undergarments and buying gold of one's astrological sign may be seen as customs, but coffee turned out also to be an auspicious purchase.

On sale at one of the hypermarkets has been a certain brand of coffee with the eye-catching character "monkey" printed on its red packaging. Many people ended up choosing this coffee with the "monkey" sign, perhaps as another means of attracting good luck. Products of the same brand, flavour and price - but in different packaging - conspicuously lagged in sales.

China will speed up the reform of three major taxes in 2004, namely corporate income tax, individual income tax and value-added tax (VAT). Among these, unification of the different corporate income tax rates between domestic and foreign enterprises and the shift of VAT from production-based to consumption-based are the main concerns. As for individual income tax, the threshold will be raised.

Guangdong and Hong Kong have worked out their development targets for the next 10 to 20 years on the basis on cooperation: while Guangdong will further develop itself into one of the world's leading manufacturing bases, Hong Kong aims to become a premier services centre whose core competencies lie in modern logistics and financial services. Different PRD cities will formulate specific measures according to their actual conditions.

US Electronic Advance Manifest Requirements Likely to Increase Costs, Effectiveness Uncertain

On 5 December 2003, the US Department of Homeland Security's Bureau of Customs and Border Protection (CBP) published the final advance manifest rules required by the Trade Act of 2002. The US government views advance cargo information as a cornerstone of its efforts to protect the country against future terrorists attacks while ensuring that international trade is not unnecessarily hampered. The rules outline how CBP intends to collect advance cargo information to identify high-risk shipments before they reach US soil. They take the US beyond the maritime 24-hour rule, requiring advance electronic information for both incoming and outgoing shipments. These rules took effect on 5 January 2004, but will be phased in over time depending on the mode of transportation.

In light of resource and personnel constraints, the volume of trade that flows into and out of the US, which precludes the inspection of each and every container, requires CBP to use risk management strategies to identify cargo that poses the greatest risk before it enters the US. This objective gains urgency when seen in the context that an inspection of a container in which a nuclear device is hidden at a US port of entry would likely be too late. Because of this reality, it is also essential that CBP receive this information in advance of a shipment's arrival.

Under the rule for ocean-borne freight, vessels travelling to the US have to file cargo information 24 hours before lading. The rule does not change the 24-hour rule, which has been in force for the past year, it simply mandates that the filing be electronic.

A CBP report released in November 2003 states that more than 700 non-vessel-operating common carriers (NVOCCs) and 147 shipping lines are currently filing manifest information electronically. According to CBP, virtually all US-owned and US-flagged carriers are currently filing cargo information electronically. Furthermore, CBP has been able to identify only approximately 100 foreign carriers that move cargo into US ports without using the Automated Manifest System (AMS). In other words, the new rules will have little impact on ocean shipping beyond the changes that have been made as the result of the 24-hour rule. Meanwhile, US-bound air cargo manifest information will have to be submitted no later than the time of take-off, or "wheels up", for airports in North America, Central America, the Caribbean and South America north of the equator. For air cargo originating anywhere else in the world, the manifest data has to be submitted to CBP no later than 4 hours prior to its arrival in the US. This means that the data must be transmitted when the plane is already in transit.

CBP believes that the rule will affect the air carriers in three possible ways: (1) they will have to implement AMS; (2) they will need to provide cargo information not previously submitted; and (3) they may have to adjust their operating practices to accommodate the new filing requirements. Beyond these factors, the 4-hour prior to arrival rule is not likely to have any impact because transoceanic flight times are usually more than six hours. For the same reason, it is also unlikely to have an impact on flights from South America below the equator.

CBP Increases Apparel Detentions

In recent weeks US importers have experienced a marked increase in detentions of apparel from various countries/economies. This does not come as a surprise. Textile enforcement will dramatically increase in 2004. Late last year, the US Department of Homeland Security's Bureau of Customs and Border Protection (CBP) warned that 2004 would be "the year of quota shenanigans" in anticipation of the quota elimination on 1 January 2005 under the 1994 Uruguay Round Agreement on Textiles and Clothing. In recent months, CBP has seen increased incidents of transhipment and counterfeit documents. As a result, US apparel importers are experiencing a slow-down in CBP's clearance process. Also, CBP is resorting to seizing shipments that are illegally transhipped in cases in which a foreign government confirms that a country-of-origin certificate is counterfeit.

US apparel importers have been warned to expect delays of up to 30 days. CBP is particularly scrutinizing shipments if import documents are not in order or look suspicious from:

AGOA textile trade beneficiary countries
Andean Trade Preference Act countries
Hong Kong
India
Kazakhstan
Macau
Pakistan
Russia
South Korea
Sri Lanka
Taiwan
Uzbekistan
Vietnam

There are other countries of concern as well. Meanwhile, CBP jump teams will focus on "high risk" factories abroad. It is unlikely that shipments from factories that have been visited by such jump teams will be released by CBP. As a result of these developments, US textile and apparel importers will likely try to change their purchase agreements, making payment conditional upon CBP clearance of shipments. Moreover, US importers will likely try to hold vendors liable for failing to provide correct country-of-origin declarations or for maintaining insufficient production records that preclude clearance of cargo.

USTR Solicits Comments on IPR Violations

The Office of the US Trade Representative (USTR) has called for public comment, to be submitted no latter than mid-day on February 13th, concerning information on countries that deny adequate protection of intellectual property rights (IPR) or market access to US entities that rely on IPR protection. USTR is required to identify annually which countries should be considered "priority foreign countries" because they have the most egregious practices that harm US interests. Thereafter, USTR may conduct an investigation under Section 301 to determine whether to take action against these practices. However, USTR may not identify a country as a "priority foreign country" if it is entering into good faith negotiations, or making significant progress in bilateral or multilateral negotiations, to provide adequate and effective IPR protection.

USTR requests that, where relevant, submissions mention particular regions, provinces or states of a country whose acts deserve special highlighting in this year's report. Such mention may be positive or negative, so long as it deviates from the general norm in that country. The information collected is also likely to be used in USTR's National Trade Estimates Report (NTE), which is prepared annually by March 30th. Designations of countries as "priority foreign countries" are made within 30 days after the publication of the NTE.

Shenzhen Clarifies Departure Date of Tax-Refundable Export Goods

Shenzhen’s foreign trade and economic cooperation bureau, economic and trade bureau, customs and state taxation bureau recently gave their clarifications on the date of departure of tax-refundable export goods, saying that it must accord with the date indicated on the export declaration form. Unified arrangement is necessary because of confusion over the date of departure in the past.

Under the circular issued by the Ministry of Finance and State Administration of Taxation on adjusting the export rebate rates, starting1 January 2004, all companies will implement the export rebate rates set in the circular for goods exported in whatever mode of trade. The specific date of implementation must accord with the date of departure indicated by Customs on the export declaration form.

The circular clearly stipulates that enterprises in Shenzhen with goods declared for export in whatever mode of trade or transport must accord with the date of departure confirmed by Customs on the export declaration form, and state taxation departments must handle the tax rebate examination and verification procedures according to the departure date confirmed by Customs. Export goods declared before 2400 hours on 31 December 2003 but still remain in the mainland territory (in customs-supervised warehouses or bonded areas) will be subject to the 2004 export tax rebate rates.

Shenzhen Customs has quite a number of entry-exit ports under its jurisdiction. Large export volume means that it takes time to complete the export inspection procedures. The circular urges enterprises not to make customs declaration at the same time to avoid congestion, which will make it impossible for Customs to complete the formalities in time. In a bid to ensure that the principle put forward in the export tax rebate reform that “new rebates will not be delayed and old rebates will be paid” is put into practice, the State Administration of Taxation requires local tax offices to settle all 2003 export tax rebates and file all incomplete documents for the record before 15 January 2004. Local tax offices must also handle all export tax rebate applications, examination and verification for the year 2003 before 31 March 2004 and accurately work out tax rebate amounts to be carried forward to the following year. Late submissions will not be entertained.

"Green" trend for Shanghai children's wear

The green theme in children's clothing.
Wahaha and other popular brands of children's clothing have been imbued with a new concept for children's wear: environmentally-friendly clothes seem to be the answer to health and comfort, and therefore to sales and profits.

Dingguagua, an upcoming new brand in Jinhua, Zhejiang, will be marketing a series of children's wear made of natural, colored cotton. The theory is that children's wear is much like a second skin, and the "green" theme puts children's health first.

A 60 sqm specialty store for children's clothing is all ready to open for business at newly-opened Raffles City in central Shanghai.

All decoration materials are recommended by the Shanghai Building Materials Association and are environmentally certified. The shop, specializing in clothes for infants, has an independent air-conditioning and ventilation system and an automatic glass door that separates the store from the rest of the mall to ensure reasonable air quality.

Most clothing goes through fabric processing, printing, dyeing, bleaching and after-treatment in production, with many processing enterprises making use of potentially harmful technologies like chlorine bleaching and formaldehyde after-treatment.

In the production of green clothing, enterprises are required to reduce these harmful substances by scientific means in the course of production, and ensure that the products do not become health hazards.

The green theme in children's clothing also finds expression in the improvement of fabrics. Natural materials such as pure cotton, wool, silk and linen are becoming increasingly popular in the production of children's wear, as people become more aware of the importance of environmental protection.

These eco-friendly fabrics are supple, absorbent, porous, non-toxic and non-pollutant - and are therefore a plus for children's health.

Green children's wear is not only the product of technology but is fashionable in design, aiming to be simple and casual to ensure free movement. Clothes are soft and light in color to avoid excess use of dyes, and also have anti ultra violet functions.

The Children's Wear Commission says infant clothing sold at the Raffles Place special store must pass five national standard tests, including formaldehyde content for textiles, standards for children's wear or school uniforms, and must accept periodic inspections, including submission of reports to different departments.

So far, only two brands have been approved for sale at the store. The reason is that very few domestic brands could meet the stringent requirements.

The store also sets strict standards for itself. It not only makes sure that environmentally-friendly materials are used in the products but also sees to it that the entire shopping environment is "green".

The shelves and storage spaces are made of eco-friendly materials and even the uniforms of the sales staff must measure up to the formaldehyde standards for baby garments, to prevent the absorbent infant clothing from being contaminated.

The green concept is also extended to logistics links. There are special vehicles for the transport of baby clothes.

Children in China are treasured as pearls these days, and their health is of paramount concern to parents.

Strict quality standards have posed new requirements to traditional children's wear manufacturers. Nonetheless, talented entrepreneurs should still find considerable room for development in this business.

China to Blacklist Imports With Safety or Health Problems

China will start to blacklist imported goods and enterprises repeatedly found to cause safety or health problems. The list may be published when necessary

Li Changjiang, director of the State Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), disclosed this news at a national conference of entry-exit inspection and quarantine bureau chiefs held at the end of December 2003.

According to Li, the administration plans to improve the registration and filing system for major imported goods this year. Special efforts will be made to intensify inspection and quarantine on eight categories of imported goods, including cotton, used machinery and electrical equipment, waste materials, steel, textiles, soy bean, timber and wood packaging, and animal-derived food.

The administration will promulgate the quality standards for major imported goods as well as the market access requirements and technical measures for follow-up inspections based on the results of relevant tests.

Zhuhai marks out CEPA retail

Jewelry a major CEPA category.
As the Closer Economic Partnership Arrangement (CEPA) moves into operational mode, the special economic zone of Zuhai is gearing up for greater shopping opportunities for Hong Kong goods and services.

The city's first five-A grade shopping mall, Guomao (International Trade) Shopping Centre, is the first CEPA shopping facility, with an area of over 5,000 sqm.

Hong Kong and Macau permanent residents who are Chinese nationals are able to apply to open retail shops in the Guomao Centre to sell the five major categories of products benefiting from zero tariff, such as jewelry, watches and clocks.

Shop rentals are to be calculated on the basis of turnover, which means that business risks have been greatly reduced at the outset - although to what extent that approach actually promotes business remains to be seen.

Located at the junction of Jingshan Road and Haibin Road in Jida, Zhuhai, Guomao Shopping Centre is adjacent to the Zhuhai General Merchandise Fair and Duty-Free Emporium to the southwest and to Jida Road to the south.

Jiuzhou City, Zhuhai's popular shopping district for locals and tourists, is also in the vicinity.

Guomao offers a thematic commercial environment combining shopping, leisure, dining, entertainment, sightseeing and tourism, as well as dedicated zones for performances, leisure activities and other small-scale events. It also features the latest electronic gaming equipment and digital movie circuits, to provide cultural and entertainment experiences.

The two halls feature glass ceilings, custom built for staging various shows, including fashion and branding events.

Guomao also features food streets providing various themes and restaurants with many different cuisines.

The three-storey Guomao Shopping Centre has a total floor area of 42,000 sqm, which is exclusively for lease. Space on the first and second floors was quickly snapped up when it first came on to the market, with monthly rentals at between about Rmb300 and 400 (HK$283 and HK$377) per sqm.

The 5,027-sqm third floor will be dedicated for zero-tariff goods from Hong Kong and Macau under CEPA. Five zones are planned, to feature watches and clocks, jewelry, cosmetics, textiles and garments, and pharmaceuticals.

Much Ado About Nothing?

Of all the issues Hong Kong Chief Executive Tung Chee-Hwa addressed in his policy speech on Wednesday, the local and international media predictably chose to focus on his "failure" to set a timetable for further democratization. Ever since the handover in 1997, journalists have been waiting for signs of Beijing’s intent to thwart Hong Kong’s aspirations for greater political openness – it is an easy story that plays on the world’s stereotypes of Chinese authoritarianism and makes for good headlines.

But focusing too much on the political reform debate diverts attention from the very real and exciting economic recovery that is taking hold in Hong Kong, and casts the city in an unduly negative light as it prepares to enter the Year of the Monkey.

As one South China Morning Post writer noted, Tung’s speech was for the most part unremarkable, especially his comments on the economy. And after a year that saw SARS turn Hong Kong into an international pariah, pushing unemployment to record levels and plunging the economy back into recession, perhaps that was the most remarkable thing of all.

Hong Kong’s GDP growth is forecast at 3% for 2003 (up from just 2.3% the previous year), despite a sharp contraction in the second quarter. Exports have been strong all year, and tourist arrivals and consumer spending have picked up substantially in the wake of the SARS outbreak. As a result, the unemployment rate fell to 7.5% in the three months ending in November, down from its mid-year peak of 8.7%.

This relatively rosy economic news does not completely overshadow Hong Kong’s ongoing political reform debate. A deep current of dissatisfaction is clearly running through the local population, as evidenced by protest marches that brought 500,000 people into the street on July 1 and another 100,000 on January 1.

It is impossible to gauge how much of this discontent is related to Hong Kong’s political structure, and how much to the personalities currently in power. Tung and his government have shown little imagination or leadership over the past six years, as Hong Kong struggled through a prolonged period of economic stagnation. In their public statements, they have repeatedly displayed arrogance and insensitivity to popular opinion, even as they have bumbled along from one scandal to the next.

But the primary question for many in the business community is: How does all of this affect Hong Kong’s standing as an international commercial centre?

The principle of "one country, two systems" involves much more than just the electoral system. Many of Hong Kong’s competitive advantages are based on aspects of its political and economic systems that remain distinct and separate from the Mainland. These include a common-law legal system with a respected, independent judiciary; a world-class, competitive, privately owned banking system with free flow of capital; and a unique, low-rate, onshore-offshore tax structure.

Beijing has shown no signs of interfering in any of these areas. Quite the contrary, as they are all in fact essential to China’s prosperity. Hong Kong’s tax structure has played an important role in developing the Pearl River Delta’s export-manufacturing capacity. Its financial system and capital markets are vital sources of investment capital. And increasing numbers of companies on the Mainland are making use of Hong Kong’s arbitration centre to resolve commercial disputes.

Beyond that, we should be clear about the real stakes involved in the political reform debate. Beijing has shown itself to be nervous about the pace and nature of reform in Hong Kong – factors that affect the city’s divergence from China under the "one country, two systems" arrangement. As a result, the Chinese government has said that it must be consulted in advance, and will likely try to slow this process.

But at no time have Chinese officials argued for actual convergence, or suggested that Hong Kong should adopt any aspects of the Mainland’s current political system. And despite occasional rhetoric to the contrary, Mainland leaders have generally shown themselves to be flexible and pragmatic about letting Hong Kong’s political system develop gradually.

To the extent that opening the political system would bring about more accountable government, it should help Hong Kong weather future economic ups and downs. But in the short term, the alternative is not direct rule by Beijing, but merely the status quo. And the status quo has provided an excellent environment for international business over the years, even when the domestic economy has struggled.

It is ironic that the commentators who lament Hong Kong’s prospects if Beijing plays even the slightest role in local politics are the same ones who contend Hong Kong has no commercial future in the face of "competition" from Shanghai. These arguments show little consistency on the question of whether the Chinese system is truly conducive to international business, but the one common element is that Hong Kong loses either way.

In our experience, Hong Kong’s legal, tax and regulatory frameworks, as well as its overall business climate, give it a marked advantage over the Mainland, and the gap should remain for many years to come. This is borne out by the large numbers of companies – from small businesses to huge corporations – that continue to use Hong Kong as a platform for their business in China.

Perhaps people have been waiting for something bad to happen in Hong Kong so long that they can no longer recognize a good thing when they see it. Look a bit more closely, and it is easy to see that Hong Kong is continuing to build on its strengths, and stands poised for an exceptional year in 2004.

Reprint with Permission from David Peters ICS TRUST www.icstrust.com

(Business Alert-China) - Grading System Mulled for Foreign Investment Administration

According to sources from the Ministry of Commerce (MOFCOM), China is considering introducing a grading system for the administration of foreign investment. Foreign-invested enterprises (FIEs) will be given ratings such as AA, BB and CC. A CC-rated commercial FIE may have its qualification cancelled for opening shop in the mainland. As the proposed change has huge potential ramifications, a senior source in MOFCOM says it is still being mooted and no final decision has been reached.

(Business Alert-China) Joining Forces to Explore PRD Software Market

As one of the new and high-tech industries being encouraged by the mainland authorities, software development offers enormous untapped potential. While the information industry in Guangdong is the most advanced among all mainland regions, the PRD software industrial base boasts the highest output value in the country. Software products are not only in strong demand in the PRD but also keenly sought after across the mainland and in international markets.

Hong Kong and Mainland Customs to Implement Unified Road Cargo Manifests

Starting from 1 January 2004, Hong Kong and Shenzhen Customs will implement unified road cargo manifests to facilitate cross-boundary cargo flow and for the convenience of truck drivers.

After thorough discussions among themselves and consultation with industry players, the Customs General Administration (CGA) of China, CGA Guangdong Sub-administration and HKSAR Customs have reached a consensus on the content and format of the unified manifests. Each set of the manifest comprises six copies. The first two copies are for submission to the Mainland Customs, the third copy for the Hong Kong Customs, and the fourth and fifth copies for the Trade and Industry Department and the Census and Statistics Department respectively. The sixth copy is for the driver's retention.

As Hong Kong Customs explains, the biggest advantage of the new measure is that the drivers or carriers need to compile just one set of road cargo manifests for both Customs, instead of one for each.

Both the old and new road cargo manifests are accepted during the six-month transitional period.

For enquires about the implementation of unified road cargo manifests, the industry can call the Lok Ma Chau Control Point (Tel: 011 852 2482 8812).

Revised Franchising Rules Soon to Come Out

According to the China Chainstore and Franchising Association (the Association), the State Council's Legislative Affairs Office is expected to promulgate the Regulations on the Administration of Franchising (the Regulations) in early 2004. Industry players should take note of the upcoming changes.

Fei Liang, Secretary-General of the Association, said the Regulations represent the extension and enhancement of the Measures for the Administration of Franchising released in 1997. The Regulations will cover four additional areas, giving better protection to prospective franchisees.

First, the Regulations will carry more detailed stipulations regarding the information disclosure requirements of franchising companies, especially concerning the scope of information to be disclosed. At present, some franchising companies make profit pledges to prospective franchisees without offering a successful track record for the brand concerned. This practice will be regulated.

Second, in terms of supervision, applications of franchising operations are currently filed with the Association. In future, they have to register with the respective industry departments instead. Mr. Fei pointed out that at present franchising enterprises offer wildly varying standards of business opportunities, with some even engaged in illegal acts under the disguise of franchising. Stricter supervision is therefore necessary. Unqualified enterprises will face restrictions in running franchise operations.

Third, the Regulations will clearly spell out the penalties. The existing rules do not specify how and to what extent an enterprise will be punished for breaking the rules. As a result, there is no legal basis for damages to be claimed in the event of dispute. The Regulations will provide clear stipulation in this respect.

Fourth, foreign brands operating franchise business in China will be more clearly defined. As more foreign brands are entering the mainland market, the Regulations will increase the number of approvals and procedures required for their establishment. For those already operating in the market, they have to undergo certain additional procedures under the Regulations.

Increasing US Trade Remedy Use Targeting China Likely Despite Maturing of Sino-American Relation

Some observers had feared that Chinese Premier Wen Jiabao's visit to Washington could have a negative effect on relations between the US and China. After all, Sino-American trade relations have become acrimonious in recent months. As it turned out, these concerns were misplaced. The visit was a resounding success. Wen and Bush played down the current trade spat over Chinese textiles, televisions and exchange-rate policy, demonstrating that the bilateral relationship has matured over the past two years. However, it is unlikely that the newfound rapport between Washington and Beijing will remove the spectre of US protectionism. On the contrary, additional trade remedy actions to staunch the flow of Chinese goods may be expected in the coming months.

Bilateral two-way trade between the US and China is projected to top US$170 billion this year, but the US trade deficit with China, which hit US$103.3 billion after ten months, thus surpassing last year's total, is on track to exceed US$120 billion. Meanwhile, the US manufacturing sector continues to lose jobs. As a result, Americans increasingly blame China for the loss of US jobs, notwithstanding the fact that the vast majority of these job losses have occurred in industries in which Chinese firms are not yet internationally competitive, such as in transportation equipment and heavy machinery.

The US textile industry has railed for years against China's unfair trading practices, without much success. However, now that other industries have joined the US textile industry in charging that China's unfair trading practices are hurting the US economy, the China trade issue seems to resonate. Evidently, America's political class has determined that China-bashing could be a winning strategy in next year's elections.

A host of bills have been introduced in the US Congress that threaten to impose punitive tariffs on Chinese goods if Beijing does not float the yuan. Other bills are demanding that China open its market faster to US exports. It is immaterial in this context whether any of these measures have either teeth or a chance of winning passage. Most of them have neither. They make for good politics, and there is little that China can do about it, other than to grin and bear it.

During his stay in Washington, Wen made most of the right noises in this regard. He promised that Beijing will not overreact to the recent US trade actions. Wen stressed, "I have come to this country to seek friendship and co-operation, not to fight a trade war". He also emphasized that China takes the existing trade disputes seriously, adding that these problems "can be ironed out gradually... and should not, and will not, stand in the way of the larger interests of US-China trade". To this end, Wen urged the US "not to politicize economic and trade issues".

However, the administration of US trade laws is a political process. As a result, a slew of new US trade remedy measures can be expected, targeting China's textile and apparel exports as well as other products that have made significant gains in US market share. For example, on December 11th the US Department of Commerce (DOC) initiated an anti-dumping investigation into imports of wooden bedroom furniture from China. This is the largest anti-dumping case China has ever faced. US imports of wooden bedroom furniture from China jumped from US$358.8 million in 2000 to US$817.3 million in 2002 and are projected to exceed US$1 billion this year.

A number of US industry groups have threatened to request a Section 301 investigation of China's currency policies. At a hearing of the Senate Governmental Affairs Oversight of Government Management, the Federal Workforce and the District of Columbia Subcommittee on December 9th, Senator George Voinovich (Republican-Ohio) said that he and Senator Richard Lugar (Republican-Indiana) had been in the process of preparing a resolution calling on USTR to self-initiate such a Section 301 investigation, but that their effort was derailed by opposition from the US Treasury Department. US Deputy Assistant Trade Representative Charles Freeman confirmed that USTR does not plan to undertake a Section 301 investigation on its own, but would consider a request from the private sector.

Freeman also testified that China's implementation of World Trade Organization (WTO) rules has been uneven, with recurring problems in market access for US agricultural exports, intellectual property rights (IPR) enforcement and trade regime transparency, to name only a few. He stressed that China's WTO implementation record is "too fraught with inconsistencies to allow definitive statements on Chinese progress toward the rule of law".

This is a significant departure from the US government's position of not too long ago. In February 2003 the Office of the US Trade Representative (USTR) transmitted to the US Congress a report that concluded that China was not living up to its WTO accession commitments. At the time, USTR did not appear to be unduly alarmed, however, stressing that despite some shortcomings "most private sector representatives remain enthusiastic about the actual and potential benefits for the US as a result of China's WTO membership". In recent months, the Bush administration has changed its tune. US Commerce Secretary Donald Evans has warned that China's failure to open its markets has created an "unlevel playing field" and that the Bush administration is prepared to take retaliatory action.

China's trade-restricting practices include the use of some dubious food safety standards--most notably for US soybeans--as well as burdensome licensing procedures and tariff-rate quotas (TRQs) for US exports such as wheat, corn and cotton. Freeman also highlighted other concerns citing the frustration of many US service providers with China's restrictive regulations as well as US exporters' concerns regarding China's apparent discriminatory value-added tax (VAT) policies.

Addressing the same Senate panel, US Assistant Commerce Secretary James Jochum stressed that China must go beyond the initial changes to bring its trade regime into compliance with WTO rules. Jochum noted that the DOC's International Trade Administration (ITA), whose mission it is to fight unfair trade practices, has initiated more anti-dumping investigations and placed more anti-dumping orders on China than on any other country during the past three years. In 2003, six of the eleven new anti-dumping duty orders, i.e., more than 50%, have been imposed on China. The DOC is also establishing a special office devoted exclusively to cases involving Chinese imports, which will further cultivate the expertise necessary to address the unique problems encountered in the Chinese market.

Despite all of this focus on China's shortcomings, most of America's corporate giants oppose US protectionism. A trade war is the last thing they want. For the moment corporate America's voices still hold sway in Washington, drowning out the US textile industry and small manufacturers that have borne the brunt of globalization. America's biggest firms undoubtedly agreed with China's premier when he said that reducing Chinese exports to the US "is not a good answer", as that would do nothing to bring back lost American jobs. After all, many Chinese exports to the US are products of US multinational corporations. Undoubtedly America's multinationals and the Bush administration also took note of Wen's thinly veiled warning that increasing US protectionism "will seriously harm the interests of millions of American consumers and US firms operating in China". Wen suggested, "A more realistic solution is for the US to expand its exports to China".

Yet it is unclear what steps US industry and government might take next. A Section 301 case filed by industry is still probable, but unlikely to produce the desired results for the US industry. Congress is also likely to make a great deal of noise about China's "currency manipulation", but when all is said and done, none of the pieces of legislation that have been introduced to date is likely to win passage. In other words, it will all have been much ado about nothing, other than to afford members of Congress the opportunity to show that they care about America's manufacturing sector and its workers.

Additional product-specific safeguards are also likely to be filed. The US international trade community is watching with bated breath what will come of the fourth Section 421 case regarding ductile iron waterworks. To date, there is a perception that efforts to stem Chinese imports via the product-specific safeguard are less likely to result in relief for the domestic industry than filing a regular anti-dumping case. That is one reason why the manufacturers of wooden bedroom furniture chose going the anti-dumping route rather than filing a case under Section 421. But this perception could change. As the elimination of quotas on 1 January 2005 under the Uruguay Round Agreement on Textiles and Clothing (ATC) approaches, the US textile industry is expected to file additional petitions under the special textile safeguard. Socks and gloves are among the first products to be targeted, but others are sure to follow.

All of this means that Sino-American trade relations are destined to remain tense for the foreseeable future. Nonetheless, it is also important to recognize that as disruptive as the various US trade remedy measures and political rhetoric are, they affect only a tiny amount of the total bilateral trade volume. This may be small consolation for Chinese companies that are directly affected by these measures, but it should be remembered that the future of Sino-American trade relations continues to be bright, small bumps in the road notwithstanding.

Textile and Apparel Trade Issues Remain High on Congressional Agenda

On December 8th Congressman Robin Hayes (Republican-North Carolina) introduced the Illegal Transhipments Enforcement Act of 2003 (HR 3661). This measure is designed to amend the Tariff Act of 1930 to provide for the seizure, forfeiture and destruction of textile and apparel articles imported in violation of certain US laws. Its purpose is "to increase and broaden the scope of certain penalties relating to illegal imports and cargo theft" to more effectively deter commercial fraud. The bill is based on the assumption that the US industry is suffering serious injury as the result of smuggling and transhipment of textile and apparel products from abroad. In this context the bill asserts, "China and other major Asian exporters have a decades-long history of illegally shipping textile and apparel goods to the United States".
Under the measure, the Bureau of Customs and Border Protection (CBP) could seize goods in the first instance of transhipment, whereas current policy requires three violations prior to seizure. In addition, CBP would have the authority to seize and forfeit merchandise "for which the importer has received written notices that previous importations of merchandise from the same supplier" had false country-of-origin markings. Currently, CBP's seizure and forfeiture authority is limited to merchandise that is "identical" to merchandise that was previously found to have been marked incorrectly. Another provision would increase penalties to US$100,000 for each violation by customs brokers. Currently, that fine stands at US$30,000.

The bill has been referred to the House Ways and Means and the Judiciary Committees. It is too early to tell whether this measure stands a chance of winning passage next year. In all probability, however, the legislation's chances are very limited, but it serves notice that the textile and apparel trade issues will remain relatively high on the congressional agenda in 2004.

Another indication is the letter that leading House Democrats wrote to President George W. Bush on December 11th, which called on the administration to develop policies to address the consequences of the elimination of textile and apparel quotas under the Agreement on Textiles and Clothing (ATC). To this end, they asked the administration to convene an international textile trade summit which would bring together "all of the significant interests in the US and all global actors that may be able to play a role in a solution". The European Union (EU) held a similar meeting in Brussels in May 2003, in which a number of US government officials participated.

A central focus of the letter is the elimination of quotas on 1 January 2005. The US textile industry is likely suffer "substantial adverse economic consequences" as a consequence. Moreover, the quota elimination is likely to cause a "profound transformation" in world textile and apparel trade. In this context the letter emphasizes "the possibility of significant economic contraction and the loss of millions of jobs in developing countries". Despite this prospect, the letter observes, "Yet, just slightly more than thirteen months prior to this truly momentous shift, it does not appear that there has been any concerted and comprehensive effort--within the affected countries, the United States or internationally--to confront the consequences of quota elimination".

The letter stresses that "piecemeal and sporadic efforts", such as recent expansions of US trade preference programmes, "are insufficient to address the gravity of the problems that may arise". The authors also used this opportunity to complain once again that a report on the effects of the quota elimination by the US International Trade Commission (USITC), which was completed in June 2003, remains classified as the result of US Trade Representative Robert Zoellick's order. The letter charged that keeping the report secret is both "unwarranted and harmful".

It is unclear how the Bush administration will respond to the issues raised in the Democratic leaders' letter, but there appears to be growing bipartisan support for the domestic textile industry in Congress. This development could turn into a significant problem for Chinese manufacturers, particularly since the US industry is expected to file a number of safeguard petitions in the coming months.

On 12 December 2003, a set of crucial Food and Drug Administration (FDA) rules relating to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 will come into force. The rules require domestic and foreign food facilities to register with the FDA and to give "prior notice" of food shipments to the US. These FDA rules are interim final regulations, and comments will be accepted by 24 December 2003. Anticipating further criticism, the FDA has announced that it intends to implement and enforce the rules in stages over the course of several months.
Facility Registration Requirement

Under the FDA's registration rule, owners, operators and agents in charge of domestic American and foreign facilities that manufacture/process, pack or hold food for human or animal consumption in the US must register their facilities with the FDA, and in the case of foreign companies appoint a US agent.

While the rules require foreign companies to appoint a US agent, they provide no specific guidance on who may serve as a US agent other than that it may be an individual or a business in the US. Representatives of foreign governments are discouraged from serving as a US agent.

Paper registration may be submitted to the FDA via regular mail or facsimile. However, the FDA is encouraging electronic registration because it is faster and more efficient. For this purpose, the FDA has set up a new electronic registration system, which became operational on 16 October 2003. Each firm that registers on-line will instantly receive a unique registration number, which will be required for doing business in the US. This registration system is available on-line at http://www.cfsan.fda.gov/~furls/ovffreg.html.

"Prior Notice" Requirement

The FDA's "prior notice" requirement is in addition to the advance manifest rules issued by the Bureau of Customs and Border Protection (CBP) of the US Department of Homeland Security. Under the FDA rule, "prior notice" may be submitted via either the agency's own on-line Prior Notice System Interface or CBP's Automated Broker Interface (ABI) of the Automated Commercial System (ACS). It must be submitted two hours before the arrival of articles entering the US by road, four hours for articles arriving by air or rail and eight hours for articles arriving by water. For international mail, prior notice must be submitted before the mail is sent.

The FDA has published an on-line guidance document that includes a list of Harmonised Tariff Schedule of the US numbers, which have been "flagged" by CBP to indicate that "prior notice" may be required when these goods are imported into the US. The document can be found on-line at http://www.cfsan.fda.gov/~dms/htsguide.html.

What to Do?

The FDA has recently has added to its web site two new guidance documents, which restate the FDA's rules in simplified format and language. "What You Need to Know About Registration of Food Facilities" can be found on-line at http://www.cfsan.fda.gov/~acrobat/fsbtreg.pdf and "What You Need to Know About Prior Notice of Imported Food Shipments" at http://www.cfsan.fda.gov/~acrobat/fsbtpn.pdf.

Enforcement

The US government has indicated that it will phase-in its enforcement efforts. Moreover, after an initial period, the US international trade community will have the opportunity to comment on the operation of the bio-terror rules. Changes may then be made based on practical operating experience.

In the initial phase of enforcement, both CBP and the FDA will try to ensure that filers provide the key data elements. Both agencies will pursue enforcement in a gradual manner, using informed compliance, dialogue with account managers, warning letters, holds, penalties and other measures. For example, the FDA plans to point out specific problems to affected filers and intends to publish a list of general problems that may be encountered.

Should a food article be refused at the US port of entry, the FDA and CBP will advise the carrier of this decision. The carrier is responsible for communicating the US government's rejection decision to the other parties involved in the shipment. Refused articles will be considered and treated as general order merchandise. However, they may be moved under bond to the port of ultimate destination. The refused articles may also be segregated from other items in a consolidated shipment.

Guangzhou Opens "Green Lane" for Hong Kong Investors

The government of Guangzhou will adopt a series of measures to facilitate the implementation of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA), including opening a "green lane" for Hong Kong investors.
Guangzhou's industrial and commercial administration bureau will set up special windows at all its registration offices providing services for Hong Kong enterprises and residents coming to invest in the city.

Under CEPA, Hong Kong permanent residents with Chinese citizenship may set up individually-owned retail stores in Guangdong. In this connection, Guangzhou has drawn up relevant regulations and registration procedures for Hong Kong residents setting up individually-owned businesses in the city. Prior approval is not necessary for setting up stores with an area of less than 300 sqm. To apply for business registration, Hong Kong residents should first go to the industrial and commercial administration sub-bureau in the locality where they intend to set up business to do a name search, bringing with them their identity card or HKSAR passport or home-visiting certificate. Upon verification of the name of their store, they should furnish proofs for the use of the business venue and other relevant documents to complete the registration procedures.

Rock around the clock with (small) table-top hi-fi

Mini hi-fi units with their comical or compact appearance, excellent sound quality and diverse functions, have become cool listening for Shanghai consumers.

The shelves of leading electrical appliance chains like Suning, Gome and Yongle, in Shanghai, are now dominated by a large selection of these mini table-top systems. Gone are traditional components that stand on the floor in stacks of black boxes.

Glass, wood, plastic, stainless steel and other state-of-the-art materials are incorporated into design. They come in all kinds of shapes, such as flying saucers, cars and shoes, and are no longer sold as seperates or in hi-fi cabinets. The latest mini-systems are hung on the wall to become part of the furniture - to enhance home decoration.

Unlike closed boxes of the past, new table-top systems have much more open and transparent designs. CD players have glass covers through which can be seen the fast-spinning disc. The use of fluorescent tubes allows the system to be visible even in the dark. Designs are used, simply, to turn hi-fis into boxes of household magic.

The absence of stand-alone amplifiers has not affected the sound effect of mini systems much. Their acoustic range is comparable to that of ordinary amplifiers thanks to the use of the latest electronic acoustic technologies, which can automatically adjust the sound effect according to the environment.

It is no longer necessary to make complicated adjustments to the sound equaliser to change the sound effect. All that's needed is to select the playing mode to achieve the pre-set pop, rock, jazz, anything for the best sound and effect.

Some new table-top hi-fi systems launched in 2002 not only have traditional CD, cassette and radio functions but have the latest digital features. Many of them can play MP3, WMA and other Internet audio formats. Some even have MD players for playing MDs.

The latest products have broadband connections for playing radio programmes. Traditional cassette decks are being gradually phased out and are no longer compatible with the new generation of products.

Table-top hi-fi systems come in a wide range of prices, starting from between Rmb300 and Rmb500 (between HK$283 and HK$471), all the way up to ranges of between Rmb5,000 and Rmb6,000 (HK$4,716 and HK$5,660).

A Rmb1,000 (HK$943) set can basically satisfy the musical needs of the entire family.

There are numerous brands of table-top systems on the market. Domestic brands are available for less than Rmb1,000.

Foreign brands like JVC, Aiwa, Sanyo and Sharp are more expensive, but are popular nonetheless, partly because they have better sound quality and partly because of brand attraction.

Table-top hi-fi systems are likely to take over traditional component systems altogether as family systems, and seem to have huge potential.

New Foreign Exchange Control Measures for Offshore Investment

China’s State Administration of Foreign Exchange (SAFE) has recently introduced new measures to enhance control over foreign exchange for offshore investment. The following new rules took effect in November 2003.

The ceiling of foreign exchange administration sub-bureaus in pilot cities to examine foreign exchange sources is increased from US$1 million to US$3 million.

For offshore investment projects involving foreign exchange investment by the Chinese party of not more than US$3 million, foreign exchange administration sub-bureaus may directly issue the foreign exchange sources examination report. Remittance of initial outlays for offshore investment projects is allowed in pilot cities.

With the approval of SAFE, investors in pilot cities making investment abroad may remit the initial outlays for the project before the offshore enterprise in which the investment is made is incorporated. Further clarification is also given on the documents required for the examination of the sources of foreign exchange for acquisitions and increased investments offshore.

For acquisitions of offshore assets or equities, in addition to documents normally required, the investor must also submit detailed documents on the assets or equities it intends to acquire as well as the acquisition agreement, evaluation report by an intermediary on the object of acquisition and other relevant documents to the local foreign exchange administration. The registration system of foreign exchange for offshore investment will be improved.

In a move to strengthen monitoring of business statistics on offshore investment, for offshore investment projects which have not gone through the required foreign exchange registration formalities, the investor must complete the necessary registration or filing procedures at the local foreign exchange administration before 31 May 2004.

Since 1 October 2002, SAFE has been experimenting in 14 pilot provinces and cities (including Zhejiang, Guangdong and Fujian) reforms of foreign exchange control over offshore investment. Notable results have been achieved. SAFE will continue to draw on experience and enlarge the coverage of the pilot program in accordance with the principle of “granting approval to pilot cities one by one where conditions are ripe”. Selected measures of the experiment will be implemented nationwide to deepen the reform.

China's television manufacturing sector could be set back by as much as two years if Washington goes ahead with provisional anti-dumping measures announced this week, state media reported yesterday. A decision to slap stiff duties on TV sets from China is likely to benefit other foreign manufacturers rather than American ones, as there is now very little TV production in the US, according to industry analysts. On Monday, the US Commerce Department ruled that TV sets from certain Chinese firms were being sold in the US at less than fair value and announced anti-dumping duties of 28 to 46 per cent.

The duties 'are designed not to protect production in the US, because it is fairly small', said Mr. Erik Autor, international trade counsel at the National Retail Federation. 'It is more designed to protect certain other foreign manufacturers in Mexico, Indonesia and Thailand.' A US-based TV company, Apex Digital, is likely to be hurt because almost all its products are made in China. Its suppliers include Sichuan Changhong Electronic, which is named as a violator in the Commerce Department report. A few Japanese companies that have factories in the US, such as Sony and Toshiba, are likely to benefit if Chinese imports become more expensive, analysts say.

US imports of bras made in China shot up 230 per cent. The same happened with imports of other Chinese-made apparel. As a result, the US clothing industry witnessed a catastrophic downturn and hundreds of thousands of jobs were lost. President Bush came under increasing pressure to do something about it. Since he came to power in January 2001, the US has lost almost three million jobs. Textile manufacturing states like North Carolina, South Carolina, Georgia and Virginia now have among the highest unemployment rates in the country.

Last week, Mr. Bush decided to act. The consensus in Washington is that Mr Bush imposed the import restrictions for domestic political purposes, namely to secure votes in manufacturing districts that may hold the key to next year's presidential election.

China is expected to tread softly at a meeting of Asean nations starting today, reassuring its neighbors that its growing economic might is not a threat and proposing greater regional co-operation. The highlight of the summit of the 10-member Association of Southeast Asian Nations in Bali will be the formal inclusion of China and India in the Treaty of Amity and Co-operation. The treaty, signed by Asean leaders in 1976, commits members to respect each other's sovereignty, renounce the threat or use of force, and seek settlement of disputes by peaceful means.

(Left) Financial Secretary Antony Leung and Vice-Minister of Commerce An Min exchange CEPA documents as Premier Wen Jiabao (5th from left) and CE Tung Chee-Hwa applaud.

International firms targeting China's market could enjoy special treatment under the newly-announced Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Chinese mainland. CEPA offers early market access to qualified Hong Kong-based companies in a way that improves on China's existing timetable for liberalization as a member of the World Trade Organization. From January 2004, countless local and international companies in Hong Kong stand to benefit from CEPA's accelerated pace of market opening, for goods and services, regardless of nationality or size.

To be eligible for this enhanced "first mover advantage", they must have substantive activity in Hong Kong. In other words, they must be incorporated in Hong Kong for a period of three-to-five years, pay profits tax, own or rent business premises here and employ 50 per cent of their staff locally.

Overseas firms not yet in Hong Kong will be able to take advantage of CEPA by partnering with eligible companies based here or by acquiring them.

Overseas chambers of commerce in Hong Kong have responded positively to the opportunities presented by CEPA and to the inclusiveness of its eligibility criteria. For many, it was an even better agreement than expected (click here for comments by international chamber leaders).

Apart from improved market access of Hong Kong products and Hong Kong companies, CEPA will enhance Hong Kong's role as an international financial centre and trade platform.

CEPA is the first bilateral Free Trade Agreement (FTA) for both the Chinese mainland and Hong Kong. It abides fully by the WTO's requirements on FTAs. While the agreement eliminates substantial trade and investment barriers between Hong Kong and the Chinese mainland, it does not raise any new obstacles for other economies' access to the two markets.

CEPA provisions on "first mover" market access for Hong Kong companies cover the following 17 services industries: management consultant services, exhibitions and conventions, advertising, accounting, construction and real estate, medical and dental services, distribution services, logistics services, freight forwarding agency services, storage and warehousing services, transport services, tourism services, audiovisual services, legal services, banking, securities and insurance.

Although exact requirements for a company to be qualified vary from industry to industry, the assessment is on an objective and non-discriminatory basis. A foreign-owned company in Hong Kong that fulfills the above criteria will be eligible to benefit.

Foreign manufacturers with production in Hong Kong and products designated "made in Hong Kong" under country of origin rules, will also stand to benefit from CEPA.

From 1st January 2004, some 270 types of products made in Hong Kong can be exported to the mainland free of tariff. For other categories of "made in Hong Kong" products, zero tariffs will be applied by January 2006 at the latest.

According to the Chief Economist of the Hong Kong Trade Development Council, Mr Edward Leung, CEPA will leverage the institutional strengths of Hong Kong under "one country, two systems" and the huge market potential in the mainland.

"Given the eased market access to the mainland and the stringent protection of intellectual property rights in Hong Kong, the city should be the first choice of foreign companies wishing to enter China's market with products and services that have high intellectual property content."

Overseas users can choose to have the web conference at their own desktops or at any of the selected Hong Kong Trade Development Council (HKTDC) offices in London, Frankfurt, New York, Los Angeles and Tokyo. Overseas users can also request for the service to get connected with their Hong Kong suppliers. Bookings can be made through their nearest TDC offices.

THE World Trade Organization's chief, Dr Supachai Panitchpakdi, is putting on a brave face when confronted with adversity. He says the WTO's failure to meet the March 31 deadline for an agreement on a negotiating framework to liberalize farm trade was disappointing but not disastrous. Whatever it is, his assessment on the progress of the Doha Round of multilateral talks to free up world trade brings no cheer. More trouble lies ahead unless the big trading powers, notably the United States and the European Union, find the political will to push the stalled negotiations forward. Dr Supachai is now pinning his hopes on the next ministerial conference at Cancun, Mexico, in September to clear the roadblocks.

The knottiest problem is agriculture, a politically-sensitive sector. Failure to open up the farm trade threatens to torpedo the Doha Round. Dr Supachai notes that agricultural subsidies and import barriers in the rich countries are a major obstacle to alleviating poverty in the developing world, where more than 97 per cent of the people are engaged in agriculture. Yet the EU, a big culprit, continues to provide massive support for its farmers, who make up less than 3 per cent of its population. Poor countries stand to gain hugely if tariffs are lowered and the US$300 billion (S$533 billion) in subsidies that rich countries lavish on their farmers annually are slashed. The World Bank estimates that scrapping trade-distorting subsidies and barriers could raise annual rural income in developing nations by US$60 billion - a sum exceeding total development aid handed out globally each year. Alas, the world is not about to see an end to subsidies. The EU's refusal to make radical changes to its Common Agricultural Policy means there will be no breakthrough in the talks. With the EU setting a poor example, other farm protectionists like Switzerland, Norway, Japan and South Korea have jumped on the bandwagon.

The Doha Round was launched in 2001 with much fanfare as a development round, meaning that Third World countries which got a raw deal from the preceding Uruguay Round would be compensated this time with freer trade in farm produce. This is not going to happen anytime soon. At the rate things are going, it is unrealistic to expect the Doha Round to be concluded by January 2005, the target date. Several important WTO deadlines to liberalise trade have already been missed in the past year, and more WTO members are getting frustrated. The sour mood could have an adverse effect on the other areas of negotiation, notably services, lower tariffs on industrial goods, and new rules on anti-dumping. As a way out of the impasse, the US and the EU are seeking bilateral and regional deals with their key trading partners. Washington's free trade pact with Singapore is an example of this. Delays in the WTO have pushed open economies such as Singapore's in this direction. As long as such deals do not result in exclusive trading blocs, they are a solution to the problem. In any case, such pacts should supplement, not supplant, the multilateral trading system. Ultimately, any failure to speed up the WTO talks will not only retard world trade. It will also mean more disputes and protectionism. It is thus crucial to get the Doha talks back on track quickly. Trade negotiations are all about give-and-take. WTO members will gain eventually with freer global trade. The likes of America's protectionist steel makers and the EU's farmers must not be allowed to call the shots. If they do, woe betide the world's trading system.

HKCHCC (October 13, 2001) Issues Expected as US Implements WTO Agreements for China

The complete terms of China's protocol of accession have not been released to the public. However, it is likely that the provisions stipulated in the US-China bilateral agreement with regard to textiles and apparel will be contained in the final protocol. The bilateral agreement states that the quotas to be notified and used as a base level would be those quotas that were in effect the "day prior to the date of accession of China to the WTO". This provision supersedes other WTO agreement provisions which deem the date prior to the entry into force of the agreement, or December 31, 1994, as the point of reference.

For example, the agreement establishing the WTO specifically states that WTO members agree to "implement those concessions and obligations in the Multilateral Trade Agreements that are to be implemented over a period of time starting with the entry into force of this Agreement as if it had accepted this Agreement on the date of its entry into force." In addition, the ATC states that "all such restrictions maintained between GATT contracting parties and in place on the day before such entry into force, shall be governed by the provisions of this Agreement", As negotiated, the US-China bilateral agreement made an exception to these provisions.

Thus, although the US notified China's quotas to the WTO in 1994, those limits would not be considered to be the base level when China enters the WTO. Under the current scenario, if China were to become a WTO member by 1 January 2002, the quotas implemented by the US in 2001 would serve as the base levels. The issue that could be contentious is the application of accelerated quota growth.

The ATC provides that all quotas on textiles and apparel will be eliminated 1 January 2005. During the 10-year period leading up to quota elimination, the US committed to liberalise its apparel trade in two ways: 1) integrate, or remove from quota, a percentage of trade in four stages, and 2) grant accelerated annual growth to remaining quotas.

For the integration schedule, quotas are to be removed in four phases: 16% of total 1990 US imports were integrated on 1 January 1995, 17% were integrated on 1 January 1998, 18% will be integrated on 1 January 2002, and the remaining 49% will be integrated on 1 January 2005. The US integration schedule maintains restrictions on the most sensitive apparel products using the integration of nonessential products as a means to meet the percentage requirements. Effectively, no significant quotas will be removed until the final stage. The US-China WTO bilateral agreement does not contradict this integration schedule and sources indicate that the US could remove quotas on Chinese goods for all products that have already been implemented for all other WTO members.

For the accelerated growth schedule, during the 10-year period, quotas that remain in place are to be increased at accelerated levels in three stages: Stage 1) annual quota growth rate increased by 16% for the first three years; Stage 2) the growth rate of Stage 1 increased by 25% for the next four years; and Stage 3) the growth rate of Stage 2 increased by 27% for the remaining three years. How this accelerated annual growth rate is applied to China's quotas upon its accession could be an issue based on the language of the US-China WTO bilateral agreement.

According to sources, the US is inclined to apply the accelerated growth rate of Stage 3 (or 27%) only to the annual growth rate in effect upon China's accession (or the growth rate in effect during 2001). For example, currently, cotton knit shirts in category 338/339 have an annual growth rate of 0.5%. The US may increase 0.5% by 27% for China to arrive at an accelerated growth rate of 0.635%. The US may then increase the 2001 base level for category 338/339 by 0.635% for a 2002 quota of 2,507,035 dozen.

However, an argument could be made that the growth rate should be increased to 0.9298% based on the language of the ATC, which states that for 2002, the growth rate will be "the growth rate for the respective restrictions during Stage 2 increased by 27 per cent". In this example, the 2001 quota growth rate would be accelerated as if it had been applied since 1995. The retroactive acceleration would yield a growth rate of 0.9298%. This rate would then be applied to the 2001 base level for a 2002 quota of 2,574,408 dozen. The difference would be 67,373 dozen. An across the board application of the lower growth rates could have a large impact on China's overall access to the US market. For competing suppliers, the lower quotas would work in their favour.

Further, the US-China WTO bilateral allows the US to impose quotas on China after 2005 using minimum standards through 2008. It is likely the US will continue to impose quotas on China while trade from other countries is liberated. Such action is expected to be controversial as well.

Taiwan's membership in the WTO is also expected soon. Although the terms of Taiwan's protocol of accession have not been released, there is no indication that the US negotiated a provision on textiles and apparel similar to that with China. Thus, Taiwan may benefit from retroactive quota growth. Most of Taiwan's quotas have larger annual growth rates than the Chinese mainland's and in some instances, greater than Hong Kong's. For example, the accelerated growth rate in category 338/339 in 2002 for Hong Kong will be 0.9208% while the growth rate for Taiwan could be 2.7623%.