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China WTO Proposal Is Disappointing for Foreign Multinationals

Date 19/12/2012 - 15:28:00 | 161 views
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More than a decade after joining the World Trade Organization, China is still holding out on a follow-up agreement that would open up government contracts to foreign firms.

The issue came up again on Dec. 5, when China made its fourth offer to join the WTO's Government Procurement Agreement.
The terms Beijing is offering have already generated public criticism from Europeans and are likely to leave other trading partners dissatisfied.
The proposal would allow foreign companies to bid on government contracts for cars, photocopiers and even the paint for new office interiors, the 1,700-member European Chamber of Commerce in China calculates.
But that's just a grain in the potential cement mixer of projects that foreign multinationals could bid on if China went as far as some of its WTO peers want. Projects like airports and high-speed rail lines.
China's latest proposal would exclude foreign companies from building infrastructure, which is already largely off-limits for nationalistic and security-related reasons (meaning you might not get a permit even if you won a procurement bid).
Infrastructure falls under China's Tendering and Bidding Law rather than its Government Procurement Law, keeping foreign companies outside the gate.
Calling Beijing's latest offer "highly disappointing," the European Chamber of Commerce in China estimates that it would open up just 2% of China's procurement market, worth as much as 1 trillion euros and 20% of the country's GDP.
For now, then, your investments in the likes of Bombardier (BBD.B:Toronto) and Siemens (SI)should carry on much as before, lacking a lift from China.
Bombardier might have gotten more railway and urban mass transit projects. It has worked with China since 1954. Siemens, after 140 years in the country, could have bid on projects to put together high-speed rail systems and environmentally friendly buildings, both stated priorities of the Chinese government. Both companies will have to continue working with -- and sharing profits with -- Chinese partners to have access to government contracts.
As civil aviation soars in China, Unisys (UIS) announced in September it had finished a year's work to provide "core airport operational systems" in Chengdu, the busiest terminal in western China with a 12.6% increase in passenger flows from 2010 to 2011. The U.S. contractor did that through a China subsidiary, a sign of what's needed to score procurement deals unless China gets generous with the WTO.
China looks to be in no hurry to join the procurement agreement in the way Europe wants. Its official Xinhua News agency said earlier in the year that joining in 2012 was probably out because of "increased standards set by developed nations." China must also first "rectify some of its domestic regulations before it can join the agreement," Xinhua said, citing the Chinese commerce ministry.
With the European Chamber airing its grievances in public, a rare move these days as almost everyone wants to keep bridges standing with the world's economic powerhouse, China will only get testier. (Hint: What does it have to lose?) Beijing has already hit back at Europe, saying it blocks Chinese contractors from doing massive infrastructure projects such as airports.
"Even though (Europe) is much more open; they are blaming the West," says Gilbert van Kerckhove, Chair of the chamber's Public Procurement Working Group. "Their markets have been very much restricted. They would be 2% open, but they would open 100% in Europe."
But if you're invested in a company that sells cars and photo copiers to government offices, consider buying more shares.
Cars by General Motors (GM) and Volkswagen (VLKAY) have been among the country's historical favorites, especially as both are made in China through local joint ventures.
The government has gotten more squeamish about car purchases to avoid being seen living too large, however, and purely local firms are expected to do especially well as the government seeks to boost domestic brands.
But last year GM claimed China's best-selling passenger vehicle, the compact Excelle. Excelle sales hit 254,000, and you've got to figure some of those are parked behind the ministry of you-name-it.
The odds might be even better if the car is a Jetta or Passat, as VW's China sales grew faster than GM's in the third quarter this year. One possible cause: Massive city-regulated taxi fleets in much of China prefer to buy VW models.
Back at the office, I'd copy off a few ballots for Fuji Xerox. The joint venture between FUJIFILM (FUJI) and the venerable electronics maker Xerox was the second largest seller of office printing equipment provider in China last year, Chinese media say. Its leaders have been quoted saying they expect to keep growing in China.
The lack of a WTO procurement deal best serves the local guys, of course. I'm talking again, as I did in July, about government-run giants such as China State Construction Engineering(601668.SS) and railway contractor China Railway Construction (1186.HKG). If their share prices drop, it's not for lack of work./.

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