Zhang Xiaoqiang: U.S.-China Relations, Opening up and Foreign Capital

(A speech delivered by CCIEE Executive Vice Chairman Zhang Xiaoqiang at the Annual Meeting On Government Affairs of the American Chamber of Commerce in China)

I. The Current U.S.-China Relations

The current U.S.-China relations and the U.S.-China economic and trade relations face great challenges. Some experts believe that the purpose of America’s 301trade policy is not to solve the trade deficit with China, but to undermine China’s “Made in China 2025” strategy and prevent China from mastering certain core technologies. The U.S. national security report, which was released at the end of last year stated that China is a revisionist country. In his State of the Union address made at the beginning of this year, President Trump sees China as a strategic adversary of America’s national security, economic interests and values. In March, Trump started a trade war. What is more? He signed the “Taiwan Travel Act”, sent high-level officials to visit Taiwan, the U.S. State Department announced that it will allow the submarine technology to be sold to Taiwan, and the U.S. naval ships entered the 12-nautical-mile of the South China Sea again. All these measures made some Chinese experts believe that the United States has made major strategic adjustments and began to treat China as its main opponent.

The 19th National Congress of the Communist Party of China pointed out that China has entered a new era, it will achieve socialist modernization by 2035 and become a modernized socialist power by 2050. To this end, we must strengthen the leadership of the party, build a modern economic system and accelerate the formation of an open economy. Furthermore, we need to accomplish the historic tasks of realizing the unification of the motherland and building a common community of shared future for all mankind. The report of the 19th National Congress proposes that we should adhere to the road of peaceful development, abandon the cold war mentality and power politics, and choose partnership over alliance, dialogue over confrontation. We must respect the diversity of world civilizations, promote exchanges, learn from each other and ensure the coexistence of various civilizations.

China’s development does not pose any threat to any country and it will never seek hegemony and will never engage in expansion regardless of its development. All these important statements clarify the basic principles China will follow when establishing relations with other nations, including the United States. China has repeatedly emphasized that the U.S.-China relations are the most important bilateral relations and the two countries need to build a new model of major-country relationship. During his visit to the US in April 2017 after President Trump took office, President Xi said that the U.S.-China relations have made historic progress and brought tremendous benefits to the people of the two countries despite the ups and downs. How will the U.S.-China relations develop in the future depends on the political decisions of the two leaders and cooperation is the only correct choice for China and the United States.

President Trump once said that as two big nations, the United States and China have great responsibilities. At that time, the two sides agreed to establish four high-level dialogues and cooperation mechanisms, including a diplomatic security dialogue and a comprehensive economic dialogue. Moreover, they proposed to handle sensitive issues properly and control divergences appropriately. Afterwards, the “100-day plan” for economic and trade cooperation has been launched. In June, the U.S. beef entered the Chinese market after a lapse of thirteen years. Later on, the U.S. government sent representatives to participate in the Belt and Road Forum for International Cooperation. All these are the results of the “100-day plan.”

In November 2017, President Trump paid a state visit to China. President Xi pointed out that the U.S.-China relations have now become a community of shared interests, and the strategic significance and global influence of the U.S.-China relations have been further promoted to a higher level. President Trump noted that both the United States and China are important countries in the world and they are important trade partners to each other. They have extensive common interests and broad prospects for cooperation and thus, it is necessary to strengthen dialogue and cooperation between the two countries. President Xi pointed out that China and the United States should become partners rather than rivals. As the world’s top economies and leaders in global economic growth, China and the U.S. should expand cooperation in trade and investment. The challenges facing the U.S.-China relations are limited but the potential for development is unlimited. President Trump said that the United States and China have better opportunities than ever to strengthen the bilateral relations and the United States is willing to develop fair, mutually beneficial and strong economic and trade relations with China. One of the highlights of this visit is the signing of a number of trade agreements, which worth US$253.5 billion and involve different fields and the two-way trade and investment. I believe that China will continue to ensure that the U.S.-China relations are moving in a steady and healthy direction, but the U.S. must respond positively and goes in the same direction.

II. China’s Opening up

Opening up is a basic national policy of China and this has been reaffirmed at many important meetings, from the Third Plenary Session of the 18th CPC Central Committee, to the 19th National Congress of the Communist Party of China, and to President Xi’s speech at the Boao Forum for Asia. Undoubtedly, China will continue to promote its opening up and ease market access, and further open the service industry. All the enterprises registered in China should be treated equally. During his speech made on April 10, President Xi proposed to create a more favorable investment environment, strengthen the protection of intellectual property rights, and put these policies into practice as soon as possible. On April 17, the National Development and Reform Commission(NDRC) formally announced the timetable for the relaxation of foreign-invested equity ratio restrictions in the fields of automobile, aircraft, and shipping industries. Since December 1, 2017, China has lowered the tariffs on 187 consumer goods, and the average tax rate has dropped from 17.3% to 7.7%. In the past three months, the imports in general trade reached 34.5 billion yuan, up 20.1% from the same period of last year. In accordance with the new tariff, the tax was 880 million yuan, 1.68 billion yuan less than calculating with the previous tariff. In his speech made at the Boao Forum for Asia, President Xi hopes that the developed countries would stop restricting the appropriate exports of high-tech products to China. Unfortunately, the United States announced the sanctions against ZTE on April 14, which seems to be a direct negative response to China. As a result, the Chinese Ministry of Commerce immediately issued a statement on April 17, announcing the preliminary ruling on the anti-dumping investigation against the imported grain sorghum originating in the US.

A key sign of China’s opening up is China’s accession to the World Trade Organization (WTO) and I would like to talk about two things.

(1) All the commitments China made when it joined the WTO have been fully honored, according to the official evaluation of the WTO. Taking the finance, automobile and telecommunications as examples, the tariffs on imported vehicle fell to 25%, Chinese companies are the major shareholders in the auto factory and telecommunications, and foreign companies can hold no more than 25% of the shares when acquiring a Chinese-funded bank. It is wrong to claim that China did not fulfill its promises. On the contrary, the United States, Europe, and Japan have violated the WTO agreement on the “fifteen articles”.

As China continues to develop, it has actively expanded its opening up, especially in the new agreements on electronic information products and environmental protection products. As can be seen from the following new policies and measures, the level of China’s opening up is much higher than the agreement it signed with the WTO: the Free Trade Pilot Zone started in 2013, the document issued by the State Council in 2017 to actively use foreign capital, the new financial liberalization announced by China during President Trump visit at the end of last year, and the Guidance on supporting Hainan Province to comprehensively deepen reform and opening up released by the Central Committee of the Communist Party of China and the State Council. The “Belt and Road” initiative proposed by President Xi in 2013 have received great support from the United Nations and more than one hundred countries. The United States and Japan also sent representatives to the summit last May. This year marks the 40th anniversary of China’s reform and opening up, and China will continue to introduce a number of new measures to expand its opening up.

（2）The policy of opening up is established according to China’s will and the trend of world development. For decades, China has devoted itself to reform and opening-up and remarkable progress has been made under the multilateral frameworks such as the WTO, the International Monetary Fund (IMF) and the United Nations (UN). Therefore, China does not accept the idea of using unilateralist protection measures and putting the rules of the WTO and other international organization away when it comes to deal with frictions and problems in the areas of economy and trade.

The Washington Post stated that the United States has agreed with the WTO to negotiate the issue of levying tariffs on Chinese goods, but the US will not change its position. I hope that the two sides can resolve the conflicts appropriately. Forcing China to make compromises by pointing a gun at China is not going to work, and China will not be intimidated. Chinese leaders and relevant departments have recently made this very clear on many occasions. China has already become the world’s second largest economy, the largest trader in goods, the biggest holder of foreign exchange reserves, and the biggest manufacturer. China’s share of the world’s GDP increased from 4.85% in 2005 to 15% in 2017. In 2005, China’s GDP was only $2.3 trillion, or 17.5% of the US GDP. In 2017, this figure increased to $12.2 trillion, which was 63% of the US GDP. In terms of GDP per capita, scientific and technological development, and comprehensive national strength, China is still behind the United States and remains to be the biggest developing country. China has the world’s largest population and the largest market and it will do whatever it can to safeguard its national interest and defend itself. At the same time, China adheres to the concept of people-centered development and it will counter the wrong policy of the U.S. government, not the American people.

In short, China is committed to conduct further opening up, speed up the establishment of an open and new economic system, and welcome countries who is willing to cooperate.

III. The Use of Foreign Capital

This is an important part of China’s national policy of opening up. During the past 40 years, the foreign capital has played a positive role in China’s development and reform. In 2001 and 2011, the Foreign Direct Investment(FDI) was US$46.9 billion and US$116 billion respectively. In 2017, China’s FDI grew by 7.9% to reach US$131 billion, making it one of the largest FDI receivers while the global FDI declined by 16%. In the first quarter of this year, the contracted FDI amounted to US$97.1 billion, a year-on-year increase of 28%; while the actual figure was US$34.5 billion, increased by 2.1% comparing with the previous year. All these figures can be seen as a great response to whether or not China welcomes foreign investment, and if the foreign investment environment in China deteriorates. According to a survey issued by the American Chamber of Commerce in China on January 30 this year, nearly 75% of the U.S. companies are profitable, 60% of them list China as one of the top three global investment destinations, and one-third of them plan to increase their investment by more than 10%.

However, some U.S. companies also complain about the complex approval and China’s policy lacks of transparency. Recently, some former U.S. officials said that the U.S. industrial and commercial circles have been an important force in promoting the development of the U.S.-China trade and investment relations for many years. However, there have been changes. Many business people think that the business environment in China has deteriorated and foreign companies are subject to discrimination, therefore, they support the U.S. government to put pressure on China. They hope that this kind of pressure will give them more room for development in China and gain more profits, I think that they do not want to see the U.S. and China confront each other. According to the report of the Wall Street Journal on April 12, the business coalition opposing White House plans to levy tariffs against Chinese goods has doubled to 107 trade groups. Retailers, farmers, General Electric, IBM, Goldman Sachs, Carlyle Group, Apple, Nike and other industry giants have raised objections to the White House. Today, I would like to talk about the following three issues concerning foreign investment.

(1) Intellectual Property Rights(IPR) Protection

Mr. Bannon said that the United States have no choice but to hand over its innovative technology to China. Mr. Lighthizer stated that the CEOs of large US companies are not satisfied with being forced to transfer their technology to Chinese joint venture partners and requested an enquiry into China’s alleged IPR theft under Section 301 of the US Trade Law. The main excuse used by the US to initiate a trade war is also the IPR. In my opinion, such arguments and measures are unreasonable and lack of substantial evidence.

First of all, China has done a lot of work in IPR protection in recent years and made significant progress, such as increasing the enforcement and punishment, setting up an IPR court, and so on. Comparing with five years or ten years ago, China’s IPR protection are much better now and the gap between China and the developed countries is narrowing.

Secondly, I do not understand why did they say that the U.S. companies hand the intellectual property over to China? The rapid scientific and technological progress made by China in recent years is by no means surrendered by the United States. China’s spending on research and development (R&D) increased from nearly RMB90 billion(0.89% of GDP) in 2000 to RMB 1.75 trillion in 2017(2.12% of GDP), higher than that of the 15 countries in the Eurozone, which is 2.1%. Over recent years, the number of scientific papers and patent applications of China has been among the highest in the world. In 2007, the State Intellectual Property Office of China accepted 1.3 million patent applications, ranking second in the world, and the patent rights for every ten thousand people was 9.8, nearly 5 times higher than that of 2010. The R&D spending of China’s key telecommunications companies and new energy auto companies accounted for 12% and 8% of their annual revenue respectively.

Due to the hard work of Chinese scientists and the huge R&D investment of Chinese companies, China has become one of the leaders in the fields of UHV transmission, high-speed railways, highway and bridge construction, renewable energy, new energy vehicles, smart terminals, 4G and 5G networks, e-commerce, mobile payments, Beidou satellites, and manned space flight. Certainly, China has paid a lot of money to bring technology into China from countries like the United States, the European Union, Japan, Russia, and South Korea, who have also gained huge profits from this technological transfer. No country will give its technology to another country for free! Some people even say that Chinese companies steal intellectual property from foreign companies, this is absolutely unacceptable and an insult to the Chinese people.

Thirdly, some people say that the US companies are forced to transfer technology to their joint venture partners in China. The spokesperson of the Ministry of Commerce of China has clarified this issue for many times. In the past decade or so, nearly 75% of China’s FDI are wholly foreign-owned, and the U.S. companies in China are more or less the same. About 3/4 of the investments do not have a joint venture partner. I wonder if Mr. Lighthizer knows about this very basic fact. In other words, only 1/4 of them are joint ventures or cooperative enterprises. The companies themselves will decide whether to adopt a joint venture or not, except for the industries that are subject to the “Catalogue of Industries for Guiding Foreign Investment”. To transfer or not, what technology should be transferred, and the price, are commercial behavior of the joint venture partners. Companies like the Intel, Microsoft, Caterpillar, Dell, and Hewlett-Packard all have a number of wholly-owned companies in China, and almost all the investment of Corning in China is wholly-owned.

I had participated in the drafting of the first Catalogue of Industries for Guiding Foreign Investment since it was published by the State Planning Commission and other departments in 1995. At that time, there were more than 200 restrictions and prohibitions. Later on, the Chinese government has continued to reduce these restrictions. In the past five years, the “Catalogue” has been revised twice and the restrictive measures for foreign investment have been reduced by 65%. The 2017 version has only 63 categories, of which 28 items are “forbidden” and only 35 items are concerned with share requirements. Furthermore, the “13th Five-Year Plan” issued in 2016 made it clear that China will implement the pre-establishment national treatment (PENT) with a negative list all over China by 2020. The U.S. government ignored all these progress made by China, and put pressure on China, this is totally unacceptable.

(2) The deterioration of business environment in China. Despite the complaints made by foreign companies on China’s deteriorating business environment, the evaluation of the World Bank in the past two years shows that the ranking of China’s business environment increased by 18. The latest report of the American Chamber of Commerce in China mentioned the complex approvals, rising labor costs and shortage of professionals, inadequate information infrastructure and insufficient IPR protection, that are also facing Chinese companies. The Chinese government is working hard to improve them. We should take a bigger picture when talking about the decreasing profitability. The truth is that China has entered a relatively difficult period of transition and upgrading since 2013 and many Chinese companies are facing severe challenges.  (some US experts have even claimed several times that China’s economy will collapse). Let me introduce you two types of data. Firstly, the growth rate of China’s industrial added value and income profit rate changed from an increase of 9.7% and 6.6% in 2013, to a decrease of 6.6% and 5.9% in 2016, and rebounded to 6.6% and 6.5% in 2017. Another example is the profitability of ICBC, the world’s No. 1 commercial bank, whose profit increased by 10% in 2013 from the previous year, and then declined year after year. In 2016, the profit only increased by 0.2%s, and 3% in 2017. This is due to the fact that China has undergone a painful transition and has insufficient external demand. Apart from that, an open Chinese market has made the competition fiercer than ever. For instance, the once-influential Tianjin Xiali Automobile and Shenzhen Coolpad mobile phones are now on the verge of bankruptcy.

In the fast-growing express market, the share of the state-owned China Post EMS, the U.S. and European companies started to decrease, while the share of private companies began to increase. In the world’s largest car market (nearly 29 million vehicles were sold in China in 2017, 12 million more than the United States; 800,000 new energy vehicles were sold, four times more than the United States), the competition from foreign companies and brands is very tough. However, some companies managed to make a profit in China. For instance, General Motors (GM) increased its sales by 3.5% and 7.1% respectively in 2015 and 2016 and in 2017, it experienced a further increase of 4.4%. It sold 4.04 million vehicles in China, accounting for 45% of its global sales. On the contrary, Ford has a negative growth of 6.3% (global -1.3%) in sales last year because of its ineffective product launches and marketing strategies.

Procter & Gamble was the first American company investing in the Guangzhou Development Zone and in the middle of the 1990s, I visited this company and saw the workers were filling the latest Ginseng Tianqi Shampoo. From 1998 to 2013, its turnover in China increased nearly 6 times, accounting for 50% of China’s high-end haircare market. In recent years, however, Japanese, South Korean, European and Chinese companies have worked harder and come up with better products, while Procter & Gamble only adds two or three new products each year in China, and they do not engage in e-commerce. As a result, the sales revenue has dropped from a record high of 40 billion yuan to 20 billion yuan in recent years. The examples above show that the major challenges facing enterprises are market competition, technological advancement, and management, not the so-called discrimination against foreign-funded enterprises.

(3) Some U.S. government officials and entrepreneurs insist on “equal” opening up but China prefer “fair” opening up. Frankly speaking, it is not practical to achieve equal opening up in the two major countries, which have different national conditions and different stages of development. For example, the United States can have private television stations, private telecommunications companies and allows casinos, which will not be allowed in China. Some U.S. officials simply claim that China should open the same areas to foreign capital as the United States did, I am afraid this is not an effective way to resolve contradictions. China is very dissatisfied with the so-called “National Security Review in Foreign Investments” used by the U.S. to discriminate Chinese companies in the United States, and the fact that the U.S. government suppress Chinese enterprises such as Huawei and Lenovo. Many Chinese companies’ investments in the U.S. have been rejected due to the so-called national security review process, covering such sectors as semiconductors, 5G, photovoltaic power generation, and infrastructure facilities. This makes people feel that although the U.S. government did not list many restricted investment categories, the de-facto restrictions are no less than China.

The U.S.-China economic and trade relations have been referred to as the ballast stone, stabilizer, and propeller of the bilateral relations for many years. Recently, some experts said that the current bilateral economic and trade relations have become a booster for the deterioration of the bilateral relations. Objectively speaking, the mutual benefit and win-win foundation of the U.S.-China economic and trade relations remain unchanged. I believe that the Chinese and American business communities and people are still committed to the development of healthy and sustainable bilateral economic and trade relations. We should work together to find more common interests and actively resolve conflicts. We should use our actions to prove that the world’s largest developing and developed countries can overcome difficulties, respect each other, conduct dialogues and consultations, achieve win-win cooperation, and make new and greater achievements for the well-being of the people, and contribute to the peace, progress and prosperity of the world.