China curtain's up for more Western trade

At times, China's bamboo curtain has seemed more like solid rock to Charles Diodosio, director of special projects for Beatrice Companies Inc. Last month, the $14 billion Chicago conglomerate finally opened its joint-venture food processing plant in Guangzhou, a south-China city gearing itself up for foreign investment. The project was in the works for four years - or rather, for part of those years. At one point, China dropped the curtain on the joint venture. Snacks and juices lost their appeal; heavy industry was more appetizing.

After that, ''some (consumer) companies got discouraged and left,'' says Mr. Diodosio. ''We hung in there, kept talking. Eventually the doors started opening again. We went through some low periods and some high periods. Now we're back in the high.''

Diodosio feels even better about the long-term opportunities for Beatrice now that China has officially announced a plan to stimulate freer, market-driven urban economies. The plan, broadly outlined two weeks ago, confirms this American businessman's opinion that ''over a period of time, you're going to see that country turn capitalistic.'' And that, he adds, ''is very positive for Beatrice.''

Just how capitalistic China will become, and how long it will take to get there, is up for debate. But trade officials, academics, and managers all seem to be echoing Diodosio's view that if China can pull off its domestic plan, those American enterprises that do business with the People's Republic will benefit.

''In the long run, it (the plan) will very much open up and ease trade between our two countries, because it will allow things to operate much more efficiently,'' says Mark Uhrich, manager of the China program for Digital Equipment Corporation. That efficiency will attract more American businesses, give them more opportunities to expand in China, and make them more profitable, experts believe.

These are long-run expectations - if China can work through this reform successfully. The 30-page decentralization plan, which came as little surprise to American business people, outlines broad goals: increased productivity in manufacturing, less strict price controls, more manager autonomy, an economy driven by supply and demand. It doesn't, however, provide details on how to reach those goals.

Nicholas Lardy, an economist at the University of Washington's Henry M. Jackson School of International Studies in Seattle, likens this ''vision'' to China's first stab at agrarian reform in 1978:

''If in '78 the Central Committee had voted on a program that is similar to what's taking place in agriculture today, they would have voted it down,'' he says. ''Once the program began to unfold, it went far beyond (the original plan). Once it began to be successful, it had so much momentum, there was no turning back.''

In the next few years, American companies, and for that matter any other foreign businesses, should not be surprised if they run into additional slow-ups and red tape as the Chinese try to carry out their reform, cautions Rosalie Tung , who teaches international management at the Wharton Business School.

''Some people in China are still cautious regarding changes,'' says Dr. Tung. ''I have seen people - bright, intellectual people - who because the situation changed often, don't want to be caught (at some future point) as the first person to make those kinds of changes,'' she says. At the same time, change will be slow simply because of inexperience in managing cost-effective enterprises.

Since US-China trade got off the ground in the early '70s, it has had a record of ups and downs, often moving with the political climate (see graph). The frustrations involved with investing in China - mountains of red tape, cultural differences as big as Mongolia, commercial law that changes or is nonexistent, currency conversion problems - have held foreigners back.

Indeed, ''China has been extremely disappointed with the amount of investment it has been able to attract,'' comments Mr. Lardy at the University of Washington.

Total foreign investment from 1979 through 1983 amounts to $6.6 billion, with oil exploration accounting for about $2 billion of that. Of the total, American investment was valued at $588 million, according to the National Council for US-China Trade, a major nonprofit membership group that facilitates trade and investment between the two countries. The equity joint venture, an arrangement gem China particularly seeks, is a small part of these figures: $340 million for total foreign investment and $85 million for US investment.

Recently, ''China has taken positive measures to make foreign investment more attractive,'' Mr. Lardy continues. This year it added 14 coastal cities to its list of areas that give foreign investments preferential economic treatment, such as tax breaks. It has worked on ''the little things'' that take the hassle out of business trips. Says Richard B. Stoner, vice-chairman of Cummins Engine, which has a licensing agreement with China, ''It's much easier getting in and out as far as passports are concerned, and there are more hotels and better accommodations.''

By far the biggest leap forward has been in China's development of commercial law. ''There has been a flurry of legislation,'' says Jamie Horsley, a New York lawyer with Paul, Weiss, Rifkind, Wharton & Garrison. Ms. Horsley, who returned from China last March after a two-year stay, says China now has fairly complete tax laws, a more protective trademark law, and a patent law that will take effect in April. On the domestic side, they have established contract laws and set up an economic court system, which she feels will eventually benefit the foreign community.

But ''the regulations are still not keeping pace with the forms of business'' springing up there, she says, and the inexperience of China in these areas ''leads to inconsistent practice.'' Meanwhile, there are key problems with currency. The Chinese currency is not traded on world markets, so there is no way for US companies to convert currency from domestic sales to dollars unless the Chinese government does the conversion - and that is only done by special agreement and for major corporations, Horsley says. The push is still strong there to have joint ventures with foreigners that will earn foreign currency for China through exports.

In the area of political relations, experts see the situation as stable. ''We're definitely at a good point in our relations with the Chinese, despite the latest textile thing (China's protest over country-of-origin rules that would curtail their essential textile exports),'' says Scott Seligman, at the National Council for US-China Trade. Key issues that were getting in the way of trade, such as arms sales to Taiwan and tight American technology export controls, have been quieted and loosened, respectively.

Mr. Seligman expects this year's exports to China to top last year's, reversing a downward trend. What's pushing the trade trend back up, he says, ''is the obvious point that in order to fuel modernization, the Chinese need a lot of foreign investment and equipment that the US is competitive in.'' He adds that the United States is becoming less dependent on agricultural exports to the Chinese and instead playing an increasingly larger role in supplying the Chinese with industrial equipment and technology. (Unresolved, and held up in the State Department, is a policy that would allow American companies to export technology for China's nuclear energy development.)

There are still long-term risks. Dr. Tung, at Wharton, is concerned the new economic plan could backfire if it generates heavy inflation or creates a wider gap between ''advanced'' and less advanced factories in China. She also cautions that China is developing an elite educated class and that raises a possibility of social unrest.

Still, she says, ''now is the time'' for American companies to work on their relationships with China. ''If US investors wait until the Chinese economic system settles down, they won't likely get the best opportunities. The Chinese are always appreciative of people that have helped them when things got tough,'' she explains, adding that ''firms that have helped them in the past are firms that will get the good deals.''

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