Q & A: Mark Duval on Doing Business in China
As President of the American Chamber of Commerce in the People’s Republic of China (AmCham China), Mark Duval is a close observer of the business and political environment in China. Duval has graciously agreed to discuss doing business in China. Duval oversees the general administration of AmCham China, a nonprofit organization which represents U.S. companies and individuals doing business in China. More than 3,800 individuals from more than 1,000 companies are members of AmCham China. The headquarters of AmCham China are in Beijing.
The following question and answer with Duval was originally published as part of Edition #11 of my newsletter on October 30, 2013. Duval’s focus on the fundamentals with respect to doing business in China are as relevant today as when he originally made these observations.
Q: China’s State Council recently approved the creation of and announced rules for a pilot free trade zone for Shanghai. While details are still to come, the action may allow, among other things, freer Yuan convertibility, the liberalization of interest rates and the relaxation of restrictions on foreign investment. What are the most significant opportunities you see arising from the new free trade zone? What does this development represent for China’s future financial and trade liberalization more generally?
A: This may well be the third most important milestone in China’s modern economic reform story.
After 30 years of blistering growth, the current Chinese economic model is approaching breaking point, with severe strains manifesting in ways well explored by the international media. I’m mostly convinced the new leadership fully understands – possibly even more urgently than external observers do – that the current economic structure has to shift dramatically, and that the country has to move away from dependence on investment and exports to a more market oriented, self-sustaining, significantly less capital intensive model – with service sector and financial liberalization at the core.
However, beneficiaries of the current system are many and resistant, making rapid change inconceivably difficult. The SHFTZ is a dramatic thrust against these resistant forces and towards economic change and represents an historic opportunity for future financial, trade and investment liberalization.
Q: What differences do you see with respect to US companies’ businesses and operations in China since the Xi Jinping Administration came to power?
A: Leadership change brings uncertainty and anxiety, and in this particular case US companies in China are both anxious and hopeful.
Anxious due to the unpredictable, opaque, and often heavy handed ways the new government is pursuing its current agenda. For example, the current crackdown on corruption in business – welcome as such an initiative is – appears to focus on certain sectors and participants and ignores others with shifting rationale and occasional nationalistic fervor.
In this unpredictable political environment US companies feel threatened yet remain hopeful due to the frequent signals from Beijing that dramatic market oriented reforms in the service sector, agricultural markets and overall investment environment are imminent.
Q: With the cost of labor rising in China, low-cost labor and exports will probably play a less central role in China’s future economic growth and development. What policy changes (e.g., with respect to foreign investment, transparency, standards and/or intellectual property rights) should China make in order to foster a more productive and innovative workforce and economy?
A: The SHFTZ stated ambitions are an excellent proxy for the national policy changes required to drive China’s future economic growth and development, however policy change is only a part of the equation. Fundamental deep-rooted hurdles remain in the areas of systemic corruption and the challenges associated with consistent nationwide enforcement of laws and regulations. In my view this will be the ultimate challenge for overcoming the middle income trap and realizing sustained long term economic growth in China.
Q: Environmental issues are an ongoing concern in China. What opportunities are there for US companies to help address air quality issues in China? Water quality issues? Other environmental issues?
A: Addressing environmental issues is high on the agenda of the Xi Administration particularly in areas most visible to the public, so air and water related environmental technologies will have the greater opportunities - specifically, large scale upstream industrial technologies. On the consumer side, household oriented filtration and cleansing solutions will find rapidly growing markets.
Q: The success of high-speed inter-city passenger rail service in China has exceeded the expectations of many people. Prime Minister Li Keqiang recently said that China would invest $100 billion a year in its train system for years to come, mainly on high-speed rail. What opportunities does the continuing development of high-speed rail create for US companies doing business in China? How is the increasing availability of high-speed transportation in China affecting how business is conducted in China?
A: Infrastructure and system providers currently enjoying the build out of the passenger rail system in China will continue to benefit from continued strong growth but the real story is how high speed interconnectivity is transforming the horizontality of China. As a phenomenon it’s still early in development but the increasing high speed mobility of businesspeople across the country will accelerate overall service sector development and particularly fuel the growth of national consumer product brands – particularly benefiting local and regional Chinese companies.
Q: Companies that cater to China’s rapidly growing middle class, including fast food chains and a wide variety of retail brands, are finding success in China. What advice do you have for companies wishing to build a presence and increase consumer-orientated sales in China?
A: American retail and consumer brands are highly valued by China’s middle class – the opportunities are endless and growing. Invest carefully but invest now.
Q: Six large US and UK hedge fund organizations are set to receive regulatory approval to raise money from institutions within China for investing overseas. The hedge funds are expected to be permitted to raise about $50 million each under the pilot Qualified Domestic Limited Partner program. The move is seen as a small but significant step in opening China’s capital account and removing barriers separating China from international financial markets. What are the implications of this new policy? Do you expect Chinese regulators to continue their practice of making incremental changes to the regulation of financial markets and to broaden this program in the future?
A: I anticipate significant change in China’s financial market environment over the next 18 months. The SHFTZ will be a leading indicator but other incremental reforms to open China’s capital account, generally open the financial marketplace to foreign investors and accelerate the convertibility of the Yuan will play out steadily.
Q: China’s economic growth is backed by the “three carriages” (investment, export and consumption). How do you see US companies supporting these three growth areas looking forward?
A: Existing participants in investment and exports arenas will continue to benefit from related growth but significantly, as Chinese service sector and consumer oriented growth accelerates as a share of GDP, the US competitive advantage in these areas should provide accelerating opportunities for US business.
Q: In addition to the issues discussed above, what are the principal concerns of members of AmCham China with respect to doing business in China today?
A: Investing in China has great potential for US business and there are many success stories, but it’s still much more of a gamble than in many other parts of the world. In particular, the opaque and uneven enforcement of laws and regulations across the country significantly undermines the confidence of the business community.
Overall our members are looking for clear policy and consistent, transparent application of the rule of law, including allowing companies to legitimately defend themselves and their intellectual property. These fundamental prerequisites to building a fair and predictable business environment so that our businesses can invest, operate and expand with confidence remain elusive and continue to present the greatest challenge to sustainably do business in China.
Q: Beijing is known for its restaurants. What are your favorite restaurants in Beijing?
A: It’s true, Beijing has a phenomenal range of restaurants featuring cuisines from all over the world - my favorites however remain off-the-beaten-expat-path local venues offering spicy Sichuan, Hunan and Yunnan adventures.
Q: What is your favorite thing to do on the weekend in Beijing?
A: With the recent birth of my second son I’m enjoying precious time with my family – but family and weather permitting you’ll find me searching through the rough on one of Beijing’s finest golf courses.
Thank you, Mark.