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TRADE OPPORTUNITIES IN THE CHINA MARKET
A Guide to the Filipino Businessman
A Summary of Articles by: Consul General Luis T. Cruz
Philippine Consulate General, Guangzhou
(Source: Seminar paper delivered by Li Yong, Vice President, Leading Development and Trade Corporation, during a 1993 trade seminar in Manila)
Generally speaking, China’s imports are generated from two levels of the economic hierarchy, namely, imports originating from the central plans; and imports of localities. In the past, when central planning dominated the economy, the country's imports, which were based on the economic planning of the government, took a lion’s share in China’s total import. The dominant position central imports has been gradually eroded by the development of economic reforms, particularly the adoption of market economy in China and are reduced to a limited number of commodities such as grains, crude oil, steel and other products of key importance to the national economy.
State-designated national foreign trade corporations usually handle central imports. Orders for such import are in most cases channeled to clients with whom the national corporations have already had long-term and stable relations. Except in the case that the terms of contract are very competitive and the sources of supply convincingly reliable, new clients cannot get such orders through a few exchanges of business letters or personal contacts.
With respect to the local imports that are generated largely at the discretion of local development and market demand, the degree of monopoly is relatively low. Normally, decision to import is made by either the local governments or the foreign trade corporations, depending on the types and sources of foreign exchange used for the imports. Foreign trade corporations carry out these imports and orders for such imports will be sent to those who may possibly supply the required imports. Chinese trade corporations are inclined to maintain good business relations with existing clients and, therefore, priority is often given to old clients when considering import orders.
In China, the right to handle import and export businesses has to be approved by relevant authorities. Not all end-users can do the import and export on their own. Some end-users do have import and export rights, though they are confined to businesses directly related to their own production. For example, a large electronics manufacturer can only import parts and components needed in their production and export the products they have produced.
Foreign trade corporations, on the other hand, have wider range of business scope in terms of products and services. In the past, they were classified by product groups and their businesses were confined to prescribed scope. For example, China National Chemical Import and Export Corporation was only allowed to deal in chemical-related imports and exports.
At present, the regulations regarding the business scopes of foreign trade corporations have been lifted and, with the exceptions of a few kinds that can only be handled by state designated corporations, there is no restrictions on products that corporations can deal in. This move by the relevant authorities is intended to create efficiency through competition.
However, it is important for a foreign exporter to note the fact that those import and export corporations that used to be classified by product groups inherited the strengths from their past businesses and are experienced in dealing the import and export of their particular line of products. They tend to have import orders related to their past business scopes.
There are several types of what we call import and export enterprises, which are described here below:
The names of such corporations often have the words "China National". These corporations used to be the backbone of China’s foreign trade system and are mostly state-designated corporations to handle state-planned imports and implement certain inter-governmental trade agreements. They also handle import and export of other products, usually on commission basis. In case of needs, these national corporations may also have self-financed imports.
Most of these corporations used to be the branches and sub-branches of the national corporation. At present, some of them have disintegrated from the national corporations and become provincial or municipal foreign trade corporations. Some still maintain the parent-and-son relation with the national corporations. These local corporations implement local import plans and act as agencies for local buyers of foreign products. They also make import decisions on the basis of their judgment on market demand and supply.
These corporations were mostly established in the 1980’s. They are under the industrial departments both at central and local levels. Some of them have established a nation-wide network. Their imports are basically industry-related.
These enterprises are large-sized manufacturers, whose products are export-oriented. They are authorized to import their production-related products from foreign markets. Some of them have become very powerful and have investment in foreign countries.
Joint venture companies in China are allowed to import their venture-related products, such as materials and equipment.
The role of end-users is important, though, in initiating import requirements, It is the import and export corporations that sign contracts with foreign sellers. In this sense, the end-users only have indirect relations with the foreign sellers. However, the role of end-users in an import business can not be ignored in the sense that the end-users have the right to recommend the products of a particular supplier and choose the import and export corporations that they are willing to entrust their import orders. In addition, end-users normally have a say in determining the accepted prices for the import items.
One important source of sales opportunities is China’s overseas trade branches. There are representative offices and branches of China’s trade corporations in most of the commercial centers of the world. A large concentration of them is in Hong Kong. These overseas offices and branches have special knowledge about the market in which they are stationed and normally know the whereabouts of certain kind of products. On the other hand, these branches can often receive import orders from their parent office and their contacts at home.
For a foreign exporter, the following questions should be considered when identifying the market opportunities:
After these questions have been answered, the exporter will have an idea of the size of the import, target market, contact corporations, positions of competitors, total market size, future outlook of the market. It will not be difficult to know what your position is in the market and where the opportunities are. These considerations will have to rely on a market research. In China, there are many of these market research organizations that will help the exporter do the research.
It is important to mention that China has adopted market economy and the interactions of demand and supply will become an increasingly important factor in determining imports.
6. Cultural Factors to Consider in Doing Business in China
Some practices and traditions in the Chinese market are culturally different from other countries. Identifying the market opportunities is in a way not difficult, but initiating business relations is not easy. Doing business is a matter of human relations and building relations between people of different cultures takes great patience and effort. Even if you are sure of product’s quality and competitive price, you may not always be successful in selling your products to the Chinese market. Many foreign business people do not realize that doing business in China means not only the price and products, but also the feeling and trust that go with it. If patience and effort create better understanding of how things are done in China, then a big step has been taken towards success in the market. When the Chinese ways of doing business are considered and followed, then entry and operation in the market are relatively safe.
There are a number of ways to find suitable trade partners in China, but no one can expect to get a contract after only one or two offers. An exporter should be prepared to take time to go through each of the following stages: a) informing a partner about your products; b) making sure that a partner is willing to handle the products you wish to sell; and c) getting end-users/consumers interested in buying your products. The following approaches are recommended when an exporter wishes to enter the Chinese market.
6.1 Initiating Business Contacts Through Correspondence
Initial contacts with the Chinese trade corporations are usually made by means of letter, fax, cable, e-mail or telex. Fax machines have been a popular means of business communication in China and most of the business organizations have fax machines. However, it is advisable to initiate contact by letter, for this can make matters clearer and is less expensive. In the letter, it is advised to provide an introduction of the line of business, product catalogues, specifications, and reference price. It is highly recommended to include a letter of reference issued by the bank, because this will clear the doubts, if any, about the bank credibility of the exporter and shorten the time in building mutual trust. If an exporter wishes to make an offer in the very first contact, be sure that all necessary information is included in the letter. If not, the recipient of the letter may find it difficult to consider the offer, on the one hand, he/she may also regard the offer as not serious.
Directories of China’s trading companies are available through China Council for the Promotion of International Trade (CCPIT).
6.2 Business Visits to China
Business visits to China are suggested when an exporter has had some kind of contacts with Chinese corporations. Invitations are always required if the exporter wishes to visit China for business. Before visiting China, it is necessary to inform the Chinese corporations of your visit, the purpose of your visit as well as the period of stay in China. A well-prepared visit will give the Chinese partner good impression and is conducive to future business. The invitation letter is also a requirement in securing visas from Chinese consulates abroad.
6.3 Inviting Chinese Trade Missions
If an exporter wants to export its products to the Chinese market, especially products like equipment, machinery, plants and other goods with complicated specifications, it is very important to get the Chinese buyers to know the products. This will enable the Chinese buyers to have a better idea of the products and will in turn help establish business relations between the two sides. It should be noted that this would normally happen when the two sides have entered into the material stage of the negotiation.
6.4 Contacting Chinese Trade Missions Abroad
Every year, a number of Chinese trade missions are dispatched abroad to market their products. Most often, sales and purchases are combined. Foreign companies should not miss the chance to get in touch with them because negotiations with these visiting missions may bring about transactions without making a trip to China. Even if no deals are concluded immediately, business ties will be established, which will serve to pave the way for future sales. An exporter may also take this opportunity to invite the trade mission to visit his company or factory. The information about the time and type of a Chinese trade mission’s visit can be obtained from the Commercial Office of the local Chinese Embassy.
6.5 Participating Exhibitions in China
Generally speaking, exhibitions help participants publicize their products in China and provide opportunities to contact directly end-users in China. Potential buyers make up a majority of the visitors to the exhibition. Although invitations are sent to Chinese organizations, it is always necessary to inform potential buyers of your participation in the exhibition.
6.6 Chinese Export Commodity Fair in Guangzhou
The Chinese Export Commodity Fair is held twice a year in Guangzhou. The spring fair starts from April 15, while the autumn fair October 15. Each session of the Fair will last 10 days. The Fair is primarily designed to promote China’s exports. However, Chinese trade corporations at the Fair also purchase goods. The Fair summons foreign trade corporations, manufacturers, joint ventures, end-users throughout the country, thus enabling foreign business people to make wider contacts. Business people desiring to participate in the Fair can contact the Commercial Office of the Chinese Embassy to obtain invitations.
6.7 Advertising
In recent years, advertising has become an effective means to promote the sales of foreign products in China. For those whose products have not yet entered the market, it is advisable to choose less expensive and specialized news media, such as specialized newspapers and magazines. Direct mail advertising has emerged to be a more effective and cost-efficient way of advertising in China.
6.8 Establishing Resident Offices in China
A resident office in China will enable a kind of day-to-day contact between the buyer and the seller. In addition, a resident office will be able to have first-hand information regarding the evolution of the market. An exporter with a long-term strategy towards China should consider establishing resident office in China.
6.9 Setting Up Joint Ventures in China
As explained earlier, joint ventures have authorized import and export rights. Setting up a joint venture in China may bring about exports to China. Joint ventures are mostly exported-oriented according to relevant regulations. Products of joint venture enterprises are also allowed to be sold in China’s domestic market. Raw materials and other commodities can be imported for the production of joint ventures. This will not only stimulate the export of foreign partners but also get a share of China’s domestic market.
Whatever approaches an exporter choose to make in his bid to enter the China market, it takes time and patience to build up mutual understanding and trust between the seller and buyer, on the basis which both sides could possibly enter into material stage of business. Once a foreign exporter gets an order from a Chinese corporation, and maintains the spirit of goodwill in the course of cooperation, the exporter will normally have the support and cooperation in future businesses. This is one of the main reasons why Chinese corporations attach great importance to the existing business relation with "old clients".
7. Rules of the Game
When an exporter is about to come to terms with his Chinese partner, it is important to know the rules of the game in Chinese import transactions. Import contracts are normally printed contract forms. For new clients, the contracts used by the Chinese corporations are usually with detailed terms and conditions. When buying from old clients, the Chinese corporations often use kind of simpler contract forms only with major terms and conditions, as other terms and conditions are regarded as accepted. The terms and conditions on a full contract form are supposed to be non-negotiable because they are stipulated in compliance with international practices. The clauses of key importance in commonly used contracts are explained below.
7.1 The Terms of Price and Shipment
In import contracts, the Chinese side would prefer to have FOB prices. C.& F. and C.I.F. prices are also accepted. Contract concluded on the basis of different terms of price will result in different stipulations on shipment. The shipment clause under F.O.B. conditions will normally include the time of shipment, port of loading, loading notice, and advice of shipment. Once the time of shipment is determined in the contract, the buyer will make arrangement for chartering the ship or book shipping space. No changes are supposed to be made with regard to the time of shipment. If time of shipment has to be changed, the responsible party will bear the consequences. With respect to the port of loading, the Chinese side would normally accept only one port of loading. If more than one port of loading has to be named, the Chinese buyers may accept on condition that the seller has to advice the final port of loading well in advance allowing enough time for the buyer to made shipping arrangements. The seller should also pay special attention to the stipulations regarding the loading notice and the advice of shipment. Failure in conforming to the stipulations may result in losses.
7.2 Terms of Payment
The payment for imports by Chinese corporations is usually in the form of letter of credit. The letter of credit opened by the Bank of China is internationally accepted. A letter of credit is opened on the basis of the contract signed between the seller and the buyer. But once a L/C is opened, it becomes a contract independent of the one signed by the seller and the buyer. In this contract, the bank undertakes the responsibility of making payment regardless of the trade contract. In such case, the performance of the bank’s responsibility to make payment has nothing to do with the performance of the trade contract. If the documents submitted by the seller are in strict conformity with the stipulations of the L/C, the bank will have to pay. If not, the bank will refuse to make payment. This feature of letter of credit entails careful attention when the seller receives the L/C. If the stipulations in the L/C do not conform to those in the trade contract, the seller should waste no time in asking the Chinese buyer to make amendment. This is particularly important because once the beneficiary accepted the terms and conditions in the L/C, it may possibly mean that the trade contract has been amended.
7.3 Inspection and Claims
Quality and quantity are the subject matter of an important contract. Disputes and claims often arise from quality and quantity. In China’s import contract, it is often stipulated that the certificate of inspection issued by the manufacturer or a public surveyor in seller’s country shall be part of the documents for negotiation of payment. At the same time, re-inspection is also stipulated in the contract as a counteractive measure in case the quality or quantity of the contracted goods is not in conformity with the contract. The results from the re-inspection will serve as the evidence for subsequent claim except that the responsibility lies with the shipping company or insurance company.
7.4 Arbitration
In the import contract of Chinese corporations, the Chinese side usually stipulates that all disputes, if not settled through friendly consultation, shall be subject to arbitration in China. Arbitration in the third country or in the country of the domicile of the defendant may be accepted but rarely seen in the Chinese import contracts. In China, the China International Economic and Trade Arbitration Commission of China Council for the Promotion of International Trade conduct the arbitration in accordance with the Rules of Arbitration. The arbitration in China is characterized by a combined measure of conciliation and arbitrage award. Most of the foreign sellers accept the clause of arbitration in China.
China, with a population of more than one billion, is an attractive market. With the development of China’s economy, the economic ties between China and the Philippines will be strengthened in the years to come. The visit of former Philippine President Ramos to China in 1993 and the return visit to Manila of Chinese President Jiang Zemin in 1996 will mark a new era in China-Philippine trade relations.