China’s Trade Deficit May Put a Curb on Deals : Foreign Exchange Reserves High Now, but U.S. Firms Expect Problems in Future
A visiting American business consultant, sitting on a hotel balcony on a warm summer evening, morosely reviewed the results of a fact-finding mission to China.
“I’m depressed,” he confessed, asking that his name not be used in print. “I’d be hard-pressed to recommend China for a while as a place to invest. To the extent that funds have dried up--and they seem to have--that’s going to make it exceedingly difficult to develop new projects here.”
In the air-conditioned office of Paccar China Ltd., in a hotel on another side of town, representatives of Portland-based Wagner Mining Equipment Co., a Paccar Inc. subsidiary, were far more upbeat.
“We think our prospects are very bright,” said Richard S. Roland, Wagner’s regional sales manager for Pacific Rim countries. “Our business in China generally is very cyclical, with very steep differences from year to year. This year, it was established that considerable foreign exchange would be allocated to mining. And we’re seeing that. It appears to us that the actual ‘turmoil time,’ if you will, has had no influence on this.”
Two months after martial law troops violently ended seven weeks of pro-democracy demonstrations--and in the process provoked a wave of international criticism, sanctions and doubts about China’s political stability--foreign business people examining prospects for trade and investment here see a deeply troubled economy, but one that still offers some opportunities for profitable deals.
‘Lean Environment’
“Most foreign businesses are really taking a wait-and-see attitude,” said a Beijing-based consultant, who spoke on condition that he not be identified by name. “They’re saying, ‘We’re not sure about sanctions, we’re not sure about financing, we’re not sure about the Chinese political and economic situation.’ ”
“You’re looking at a lean business environment for the next year or so,” commented John Frisbie, director of the Beijing office of the U.S.-China Business Council, an association of American companies involved in trade or investment in China. “That’s in general. There’s going to continue to be sales. Companies already here are still making some deals. It’s not a complete shutdown right now.”
The Chinese economy faced serious difficulties even before the weekend of June 3-4, when the Chinese army stunned the world by shooting its way into central Beijing, killing hundreds, perhaps thousands, of unarmed demonstrators who sought to block its path.
Although China’s GNP growth rate was an impressive 11% last year, this came at the cost of worsening inflation and increasingly severe strains on the economic infrastructure, including transportation, communications and raw materials supply.
Inflation, which ran at an official annual rate of 26% last year, and incidents of panic-buying and bank runs during the summer of 1988 provoked China’s leaders to institute an increasingly severe economic retrenchment policy. Credit was tightened, and urban construction projects were slashed.
Inflation remains high, but in recent months the government-promoted slowdown has begun to show some effects. Industrial growth rates have fallen, especially for state enterprises. Inflation is no longer accelerating, and according to some reports it, too, has begun to fall.
The events of early June added a serious foreign exchange squeeze to this picture. The imposition of martial law in Beijing and the June 3-4 massacre have crippled tourism for an indefinite period, provoked the World Bank and other international lending organizations to suspend consideration of new loans and raised doubts among commercial bankers about investment in China.
Then in July, Chinese Customs announced a $5.8-billion trade deficit for the first six months of this year. The Ministry of Foreign Economic Relations and Trade (Mofert), which calculates trade figures according to a different set of rules, soon released its own more reassuring figures, showing a $2.29-billion trade surplus. But foreign diplomats, consultants and business people in Beijing tend to pay more attention to the Customs figures.
“With decentralization, Mofert does not have the full control of trade it used to, and therefore it does not get full reporting,” Frisbie said. “The reason we prefer Customs statistics is that they’re complete. They cover everything.”
Frisbie and others say there is no immediate crisis in China’s foreign exchange dealings but that the business climate is affected by the trade deficit and other factors that put pressure on Beijing’s reserves.
“Because China has high foreign exchange reserves, and there are already loans in the pipeline and direct investment in the pipeline . . . we don’t see a real problem this year in their payments,” Frisbie said. “It’s looking ahead to next year, or the next two years, where the potential problems lie. The balance of payments problem isn’t going to be a big problem for them this year . . . but it does have implications for foreign businessmen.”
Among these implications are difficulties in arranging financing for joint venture projects and reduced opportunities for marketing of many products in China.
Areas of Hope
The picture is not entirely bleak, however. As part of the economic retrenchment program launched late last year, the Chinese government is trying to steer investment toward key areas of infrastructure, including the development of port facilities, railroads and energy supplies. Many state enterprises or government agencies in these fields still have access to foreign exchange.
“Energy, transportation, communication--I think those are the three real biggies,” commented the Beijing-based consultant. “I think those areas are going to receive top state support and are the kind of projects that are going to remain eligible for World Bank financing when that gets back on track.”
Paradoxically, Chinese fears of an impending foreign exchange crunch are even leading to increased purchases in some areas.
In the energy sector, for example, some government agencies or state enterprises with budget allocations for imported equipment “are panicked now, uncertain of the future, fearful of new import controls--so they’re on a buying spree,” a Western diplomat said. “Some are doing end-of-the-year business in July and August.”
Buzz Barnes, the Beijing-based Asia manager for Wagner Mining Equipment Co., said that although he was away from Beijing from May 15 to July 15, with only Chinese staff in the office, his firm concluded two spare-parts contracts during that period, one for $6,000 and another for $110,000. Necessary documents were sent to headquarters in Portland for signing, he explained.
Barnes said his office, acting a few days ago on behalf of Kenworth Truck Co., another Paccar subsidiary, submitted a sealed bid for the sale of 40 heavy-duty logging trucks and other equipment for use in a World Bank-financed timber salvage project.
Wagner Mining is also negotiating during the first half of August on three large spare-parts contracts and two orders for mining vehicles and accompanying spare parts, with total values of about $4 million, Barnes said.
Deciding to Return
Barnes said his Chinese business acquaintances seem to deeply appreciate his return to Beijing.
“These are good friends we’ve been working with for 10 years,” Barnes said. “The people that we work with closely, including my office staff, have said, ‘We’re really happy that you’re back.’ We find the people in Beijing want to get on with their lives and get on with their business.”
For many foreign executives with business ties in China, it is a difficult decision whether to return at this time.
One factor is that a U.S. State Department travel advisory against trips to China is still in effect. Such warnings are not binding, however, and many foreigners in Beijing feel that the city is basically safe. In most of the rest of China, there is even less worry about safety.
But martial law soldiers armed with semiautomatic rifles still stand guard at many intersections and bridges in Beijing, as well as outside many embassies and foreign residential compounds, and few foreigners totally dismiss the possibility of something unexpected happening.
“I would have great difficulty putting in writing that you should come,” the Beijing-based consultant said. “I have never felt any personal danger, but the situation is such that you have people with guns on the street. You have the potential for accidents, misunderstandings, not to mention sabotage.”
There is also a question, for some business people, whether they want to deal with a government that so recently shot down so many pro-democracy demonstrators.
“It’s a very tough issue,” the consultant said. “If the hope is to change China, then it seems to me that continued interaction is the best way to bring about that change. On the other hand, there’s also a strong case that can be made that there is an international community with certain standards of behavior, and that countries that want to participate in that system should be held to certain standards.”
Slightly more than half of the member companies contacted in a poll by the U.S.-China Business Council had sent at least one expatriate back to Beijing by late July.
“It remains too early to gauge the ultimate effect of the crisis on new business,” the council said in a report on its poll. “Only three of 45 companies with plans for new projects say those plans are now canceled. The others intend to continue to negotiate and will carefully watch how the situation evolves.
“However, several firms indicated they intend to delay and prolong the negotiation phase, to avoid any additional capital commitments until the situation more fully develops. Many companies have also downgraded the priority of their Chinese operations.”
