By Long Guoqiang

The share of the electromechanical products of foreign-invested firms in the national export has exceeded 60 percent, yet problems persist, such as ignorance of the true picture of the exports of the electromechanical products of the foreign-funded enterprises, each department acting on its own and lack of policy coordination. For a healthy progress in this regard, a research group was set up by the Development Research Center of the State Council to hold enterprise forums or conduct questionnaire inquiries on an extensive scale in Beijing, Shanghai, Guangdong Province and other places in the hope of widening our acquaintance with the relevant situation. On the basis of investigations, a report for the reference of decision making is hereby submitted for enhancing the macro-economic benefits from the exports of electromechanical products of foreign-funded enterprises.

I. Evident macro-economic benefits from the exports of electromechanical products by foreign investors

1. Offering a big contribution to the national total export of electromechanical products.
From 1993 to 1999, exports of foreign-funded enterprises increased by 33.6% annually on average, by far outstripping the corresponding average annual growth rate of similar exports by the domestic enterprises, 12.5%. In other words, the contribution rate of foreign-funded enterprises reached 70% of the national export in seven years.

Indeed equally remarkable was their contribution when measured against the increase in the export of the nation as a whole. Since 1990s, such contribution rate averaged 36.6% annually. Especially noteworthy is the fact that when the export situation of China in 1998 was extremely severe under the shock waves of the Asian financial crisis, this export earned USD 5.79 billion, not only offsetting negative growth of USD 4.68 billion made by other sectors, but also realizing a net growth of USD 1.1 billion for the national export. This means a 521.6% high contribution rate to national exports, thus making important contribution toward assuring the success of the RMB non-devaluation policy.

2. Benefiting the realization of the international balance of payments for China.

The exports of electromechanical products of foreign-funded enterprises have positive effects on the international balance of payment of China, which can be seen in two respects. In terms of current account, in 1999, the imports of electromechanical products by foreign-invested enterprises was USD 46.39 billion, of which, USD 11.08 billion worth of equipment imported by the foreign investors were paid by direct investment of that year; whereas the exports of their electromechanical products amounted to USD 46.42 billion, thus leaving a surplus of some USD 11 billion. After the estimated profit remittances were deducted, the surplus under the current account for export-oriented foreign-funded enterprises engaged in electromechanical products still came to USD 9 to 10 billion.

As for the capital account, income was mainly composed of direct investments and loan capital while expenditure was made up of investment withdrawal and repayments of the principal of the loan. In 1999, there was an estimated surplus of USD 4-4.5 billion for such foreign-funded enterprises. Under the circulating funds, they constituted the number one main body of foreign loan borrowers with foreign borrowings rising annually. Since their borrowings were clearly more than repayments of the principal and payment of interests, a surplus of foreign exchange also existed.

In sum, with a surplus of international balance of payment over USD 15 billion in 1999, these foreign-funded enterprises played a positive role in ensuring our international balance of payments.

3. Promoting technological progress in China.

Firstly, these enterprises have brought new technologies and new products. The introduction of many projects has upgraded our technology by 15 to 30 years. Secondly, such enterprises possess capacity for technological development. Of the enterprises under surveyed, 33.9% are capable of providing most of the skills by their own technological development institutions and almost one third (29.9%) of the enterprises have their own R&D institutions. Obviously, these enterprises focus on technological development, with the proportion of R&D institutions not only much higher than the corresponding average of other large and medium-sized foreign-funded enterprises, but also higher than that of the domestic counterparts, public and non-public. In investigation, we found that some enterprises had shifted from the original equipment manufacturer (OEM) and upgraded to the original design manufacturer (ODM). Finally, the evident technological spill-over effect comes through three channels. The first channel is the spread and competition of their products. They have brought many new products, stimulated China''s domestic market demand and set examples for domestic enterprises to develop similar products. The Chinese enterprises are being forced to value product competitiveness under competition pressures. The second channel is the demand for orders from upstream enterprises. To reduce cost, many enterprises have adopted a variety of measure to raise the quality of Chinese-made parts and components, and some have even demanded Chinese upstream enterprises to operate in compliance with their technical standards by providing designs or sending technical personnel for on-the-spot-guidance. With their expanding purchasing on domestic market, these foreign-funded enterprises have not only enlarged production and marketing of the domestic enterprises, but more importantly elevated their technological levels by a big margin, raised the overall quality of domestic enterprises by strengthening their market-oriented concepts, such as stable product quality, timely delivery and so on. The third channel is concerned with their personnel training and flows. Our survey shows that 97.3% of the export-oriented foreign-funded enterprises related with electromechanical products have offered training to their Chinese employee. In addition experience gained from practice has also brought these employees new knowledge and ideas in technology and management. Many of them have flowed to domestic enterprises with other forms of ownership as China’s labor markets make incessant improvements, thus helping transfer technologies and management skills.

4. Contributing to creation of job opportunities.

Employment is one of the major contradictions in China’s economic and social life today. Processing trade has provided over 30 million job opportunities, thereby alleviating to a considerable extent employment pressure. The overwhelming majority of foreign-funded enterprises under review involve labor-intensive processing and are in need of massive employees. As the comprehensive statistics are not available at present, estimates based on incomplete statistics put the figure at several millions.

II. Existing problems

Our survey reveals a huge potential for enhancing the macro economic benefits in this respect. Yet for further prompting the export of electromechanical products of the foreign-funded enterprises to make bigger contribution to national economy, we must focus our attention on tackling the following major issues.

1. Enhancing procurement ratio of domestic materials, components and spare parts.

Although China has had a considerable manufacturing capacity, weak international competitiveness due to a variety of factors makes it difficult for the products of many domestic enterprises to penetrate the global markets on their own. A shortcut, however, exists for them to go abroad through supplementing the exports of foreign-invested enterprises so as to “go overseas by borrowing their ships”. Such foreign-funded enterprises mostly adopt processing trade. But our survey reveals a low domestic procurement ratio, more than half of these enterprises with a procurement ratio below 25 percent. Major factors responsible for this are as follows. Firstly, domestic products present unstable quality, unpunctual delivery and clogged transportation. Secondly, the procurement right usually rests with the parent company of the foreign-invested enterprises. Our survey shows that 42% of the joint ventures with foreign investors holding the majority shares procure their raw material, components and spare parts from their parent company. Finally, long time and complicated procedures plague tax rebate. Settling and transferring accounts at different customs involve too much trouble. The domestic procurement for processing trade with supplied materials doesn’t enjoy tax rebate. All these policy factors hamper raising the ratio of domestic procurement.

A rise in such ratio would bring about enormous macro-economic benefits. A rise of ten percentage points would possibly help domestic industrial products worthy of RMB 50 billion enter international markets.

2. Elevating technical level and development capacity.

Insufficient R&D capacity prevails in technological development institutions set up by the foreign-funded enterprises engaged in the export of electromechanical products, their technological upgrading still depend on parent company or overseas purchases.

This shows they failed to transfer their technological development activities to China together with their production. This has something to do with their strict control over key technologies and their reluctance to foster potential rivals as well as our policy factors. Our survey finds many policy obstacles to R&D activities and new and high-tech production in China. Weak protection of intellectual property rights discourages many foreign-funded enterprises from making R&D efforts in China or transferring advanced technologies. Complicated procedures for customs clearance and commodities examination hinder production of high-tech products. Restrictions over imports of samples hamper development activities. To raise development capacity of these foreign-funde
d enterprises, we must give priority to removing the adverse factors in our existing policies which have hindered technological advance.

3. Gradually building up overseas marketing channels.

Marketing channels have become increasingly important with the advancement of economic globalization. After two decades, the foreign-funded enterprises engaged in the export of electromechanical products still regard China as a cheap production base with marketing outlets basically held in their own hands. They may turn to other countries when labor costs in China rise as a result of economic development. In that case many enterprises may move their production bases to other countries and the foreign-funded export-oriented processing business would become “rootless industry”. Since Chinese mainland can hardly expect to evolve into profit and operation center like Hong Kong or Taiwan, we should pay close attention to gradually building up overseas outlets for domestic enterprises.

4. Improving financing environment for foreign-funded enterprises.

Our investigation reveals some obstacles for foreign investors to acquire funds from local banks, only 33.4 % of foreign investors could obtain loans as their circulating funds and just 10.8% of them regard this loan as the sole source of their circulating funds (see the following table). The chief reason can be traced to restrictions on state-owned banks to offer loans to foreign capital.

Source of circulating funds for foreign-funded enterprises engaged in the export of electromechanical products

Government preferential loans	3.5%
Local bank loans	33.4%
Foreign bank loans	14.9%
Parent company	27.7%
Equity capital of the enterprise	55.2%

Note: multiple sources result in the aggregate figure exceeding 100%.

Source: enterprise survey undertaken by the research group of the Research Department of Foreign Economic Relations, the Development Research Center of the State Council.

Our survey suggests performances of such foreign-funded enterprises are quite good with only 12.6 % of them in the red, 10.1% breaking even and the rest 77.3% earning profits. It means that bigger loans to them will not only improve the loan quality of the local banks, thus reducing their financial risks, but also enable local banks to share the fruits of business development of foreign-funded enterprises.

III. Policy proposals

For enhancing macro-economic benefits from the exports of electromechanical products of foreign-invested enterprises, we need to reform relevant policies and management system so as to raise their domestic procurement ratio, accelerate technological advance and dissemination, and gradually establish overseas marketing channels for domestic enterprises.

1. Strengthening coordination and unification of relevant policies. The policies for export of electromechanical products of foreign-funded enterprises are formulated separately by many different departments, the absence of an effective institution responsible for policy coordination has resulted in poor mutual supplementation. Moreover, some policy measures in line with prevailing international practices have yet to benefit these enterprises, it is remarkably incompatible with their 60% share in national exports of electromechanical products. Therefore, we should make an overall assessment of the existing policies, perfecting the policy framework and erecting mechanisms for cross-department policy coordination and handling complaints from foreign investors.

2. Boosting application of financial tools. Our survey reveals that frequent preferential treatment in taxation to foreign investors has achieved good results, but financial devices are insufficient, in need of policy readjustments in the immediate future. Our banks need to offer foreign investors national treatment in supplying loans as circulating funds, thus solving their difficulties in obtaining loans, while bringing benefits to them through policy-related financial incentives to boost electromechanical exports.

3. Improving policies aimed at raising the domestic procurement ratio of foreign-funded enterprises. Firstly, we need to initiate tax rebate for the transferred value in the electromechanical products generated by home-made equipments. Secondly, we need to pay more attention to tax rebate for components and spare parts purchased on the domestic markets by simplifying procedures, raising efficiency and shortening handling time. Finally, we should reduce the complicated procedures for settling and transferring accounts in customs clearance for re-exporting the imported intermediate goods processed in China, lengthen the domestic production chain of intermediate inputs and raise their added-value ratio.

4. Readjusting policies hampering technological advance to promote technical upgrading. Firstly, in response to the rapid changes in international markets for new and high-tech products, the customs clearance should be speeded up for new and high-tech parts and components for processing trade. Meanwhile, time for commodity examination should also be shortened to ensure that processing trade can conduct on the basis of “zero stock”. Secondly, management measures should be formulated to relax import restrictions on R&D-oriented samples used by foreign-invested enterprises engaged in the exports of electromechanical products. Thirdly, management measures should be formulated in light of international norms for calculation, bonded system and customs transit for new and high-tech imports. Finally, reduction or exemption of tariff and value-added taxes should be introduced for import of consumable intermediate inputs in export-oriented processing by taking into consideration the need for a larger amount of inputs in processing new and high-tech products.

5. Improving supervision. Firstly, exploring a new way of thinking for supervision. Considering the importance of supervision in customs inspection and commodity examination, we should handle properly the contradiction between strengthened supervision and enhanced efficiency. The multitude and dispersion of processing sites for the exports of electromechanical product of foreign-funded enterprises have posed a highly challenging demand on supervision. As it is, we need to discard the traditional notion of overall supervision for a new way of thinking suited to the current situation. Secondly, simplify procedures in the existing bonded system, especially those related to settling and transferring accounts for goods in transit from a customhouse or region to another. Thirdly, strengthen coordination and unification among different customhouses and regions to avoid repeated customs clearances. Fourthly, reduce commodity examination charges and improve its methods. Finally, strengthen service awareness among staff and workers in customhouses and commodity examination bureaus so as to improve their service.

Research group on "An empirical study of the exports of electromechanical products of foreign-invested enterprises"

Group leader: Zhang Xiaoji

Person in charge: Long Guoqiang

September 2001