U.S.- China accord delights exporters

Press, 17 January 1979, Page 14

U.S.- China accord delights exporters

By

DAVID LASCELLES

in the “Financial

Times,” London

Few Americans greeted the new diplomatic accord between the United States and China more eagerly than the business and financial community, whose attitude was pithilly summed up by Mr Donald Regan, chairman of Merrill Lynch: “Any nation of over 950 M people growing at the rate of 18M a year is a tremendous market.” And why not? Just before the announcement, half a dozen large United States metals companies won orders totalling over $1 billion to develop China’s metallurgical industry. Engineering companies got contracts to build factories and develop energy supplies. And to show that they also care for creature comforts, the Chinese invited in McDonalds hamburgers and Intercontinental hotels. Full normalisation was achieved a few days later when in the space of 24 hours it was announced that Coca-Cola is to go on sale in

China later this month, that the Chinese national airline is to buy up to five Jumbo jets, and that Pan-Am is to start direct flights to Peking as soon as practicable. . All this in less than three weeks. But as more United States businessmen scramble to take advantage of China’s new pragmatic economic policies, others urge a more cautious approach. They recollect the similar rush that followed the Soviet bloc’s trade overtures to the United States nearly 10 years ago, only to founder on the Soviets’ debts and Congress’s trade laws. Even so, there are many positive forces at work. Apart from the new Chinese leadership’s evident determination to catch up with the West, even if it means chipping away some Maoist precepts, trade between the United States and China is unnaturally low. This year, United States exports are expected to be just under $1

billion and imports S3SOM, putting total turnover at onesixth of United States-Taiwan trade, and well behind other Western countries. The United States is also well-placed because of the size and scope of its engineering industries to meet China’s needs, which are mainly in the raw material and basic industrial developmen areas, along with transport and energy (the Coke and hamburgers seem destined to satisfy the appetites of foreigners rather than the Chinese). The West in general also benefits from the fact that China wants to buy from the United States rather than in the Soviet Union, which would be able to supply much metallurgical, energy and transport equipment—inferior possibly, but cheaper. Another impetus comes from China’s surprising willingness to talk trade in terms that Westerners understand. Among its most striking announcements was a decision to permit foreigners a 49 per cent stake in domestic

joint ventures, with the possibility of repatriating profits. In some cases, it seems, a foreign majority holding might even be possible.

This contrasts strongly with Communist practice elsewhere, where foreign control is normally barred. Intercontinental’s deal to build 5000 hotel rooms in China, starting with a 1000-room hotel in Peking, effectively gives the Americans control over the running of the hotels. Yet when Intercontinental tried to negotiate a similar deal with the Soviet Union some years back, the talks broke down because the Soviets insisted on controlling the hotels themselves. This spirit of pragmatism also extends to the realm of finance where China has dropped its reluctance to accept inter-governmental loans and appears set greatly to increase its dependence on foreign funding, to the extent of “several tens of billions of dollars,” according to Mr Li Jiang, Foreign Trade Minister. Bank of America estimates China’s

foreign credit needs at $35-40 billion up to 1985, which is roughly what the Soviet Union has borrowed since 1970. But though conditions seem ripe for a sharp increase in United States - Chinese trade, several hurdles have yet to be negotiated before steady growth is assured. The main one is finance. The majority of United States banks are willing to lend to China. Indeed, they have joined the scramble by setting up correspondent relationships with the Bank of China. But many of them recall their experiences with the Soviet Union in the early 1970 s when they agreed to easy terms in order to gain a share of what then seemed a burgeoning market, only to see growth peter out. As a country risk analyst commented at one of the major New York banks where a China evaluation programme is underway: “We are going to proceed a bit more carefully this time.” There is also the problem of information. The Chinese

are even more secretive than the Soviets, and the banks are likely to insist on proper documentation before they lend big money. Going by what little is known of China’s resources at the moment, the banks are primarily interested in the country’s oil. But though this could become an important foreign currency earner, it poses some problems: much of it is either offshore or close to the sensitive border with the Soviet Union while its composition makes it costly to refine. Even so, China’s creditworthiness is not doubted. The country has always paid its bills on time so far, and it is believed to run a surplus on its hard currency account, mainly as a result of the services it sells to Hong Kong. Where it could all end is still anyone’s guess, but one of the more authoritative came a few days ago from Mr Christopher Phillips, president of the the national council for United States - China trade, who predicted a doubling in turnover by 1981.