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Asia-Pacific Economic Cooperation

Introduction

The Asia-Pacific Economic Cooperation (APEC) is a forum for a group of 21 countries that was formed with the main aim of promoting business in that region in terms of cooperation, trade and investment. Incidentally, this region contributes to a total of 60% of the worlds’ economic production. China is not a full fledged member of this organization, and it only sends ministers to APEC meetings which are addressed by heads of government of member states.

Indeed Chinese economic reforms have come a long way. Being a communist country, it represents a major huddle for its democratic neighbors in terms of business opportunities. Ideally, the Chinese economy has been undergoing a lot of reforms to convert it into a destination of choice for multinational countries. These reforms have enabled China to divide its economic environment to follow two main paths; one path goes along the lines of state owned, and the other takes on private firms including MNCs. These paths have clearly been designed to appease foreign critics of its workplace practices. This move seems to have paid dividends since many foreign manufacturers have shifted the final assembly of their products from other Asian countries to China, together with this is the fact that an increasing value of Chinese exports consists of parts made elsewhere in Asia and channeled through Chinese manufacturing [Bain et Al.]

Of significant mention is that the largest economy in the world, the US economy, has a current account balance deficit of some $666 billion in 2004 alone, and this figure grew in 2005 on account of trade with China. Trade in goods with China for that period accounted for about $176 billion making China the United States’ single largest contributor to its bilateral deficit, which has generally remained between 20 and 25 percent of the total (U.S. Congressional Budget Office 2005).

The recent Chinese economic reforms that have supported such a blossoming in trade ties between the two world powers comes from a history of major restrictions and bottlenecks in trade. China has had to reform from the era when the famous “three old irons” held sway, to current situations. The three old irons of the 1950’s to the 70’s illustrated the communist government’s efforts to guarantee lifetime employment, wages [centrally administrated], and control, through state-controlled appointments and promotion of managerial staff (Ding and Warner 2001). The resultant effects were an extremely low productivity level coupled with workforce redundancy.

Such predicaments are now history as China’s system of supporting both private sector development and the state owned enterprises takes shape. This has created two economic situations; the private sector, subject to market forces, is very diverse. It ranges from small Chinese-owned businesses to large, entirely foreign-owned MNCs. In this sector connections are still important, as is the competition among localities to attract and keep FDIs. This competition has encouraged local governments to relax their enforcement of labor standards. Among MNCs there is a distinction in the enforcement of labor standards between ethnic Chinese investors from Taiwan and Hong Kong, the Sino-MNCs, and other, often Western, firms. Sino-MNCs are given greater freedom to minimize labor law enforcement at their facilities, while Western MNCs must comply more strictly with national and international standards. This results in the inconsistent application of labor and employment regulations between the national and local levels, the type of organization, and the firms’ location. Different forms of FDIs require different forms of approval from district governments. For example, recruiting techniques could differ among MNCs based on local approval. The government has also been more responsive to the demands of management than to workers with a lot of local interpretation. In Guangdong Province, firms were able to extend working hours beyond the sixty-hour maximum, including overtime, by getting permission from the local government labor authority [Bain et al.].

On the other hand, the state owned enterprises of China still hold on to the “three old irons” mentality. However, even they have to adjust to the recent market trends and changes, for example they have had to put up with the competitive environments created by the local authority management boards. This competitive environment consisted of:

·         Laying up responsibility to the enterprises to make sure that they are profitable.

·         Laying up higher standards of productivity than was earlier the norm.

·         Putting up quality standards to increase the level of competitiveness.

·         Requiring more accountability in the case of loss making state owned enterprises [SOEs].

The effect of such economic reforms have been a marked increase in unemployment since many of the SOEs have had to restructure and reduce their employment levels to streamline there business approach to current global expectations [Bain et al.].

            Hong Kong has therefore emerged as the private sector launching pad for international businesses seeking a footing into mainland China. Being democratic in governance, it offers international firms a system of doing business that they are familiar with as opposed to the communist system. Secondly Hong Kong’s open and internationally-focused economy has a range and quality of business and legal services unmatched in the region. To this end, Hong Kong’s financial sector now includes offices of nearly three quarters of the world’s top 100 banks, transforming it into Asia’s financial centre assisting multinationals and SMEs alike with setting up deals throughout China and the Asia-Pacific. Indeed, Hong Kong-based firms have been instrumental in supporting Asia’s major growth areas with capital, procurement, logistical services, and management expertise and quality assurance over time.

Hong Kong also exploits its undefined international status as a quasy independent state cum Chinese province to become the largest single investor in the Chinese mainland. Close to 45 per cent of outside investment in China’s main cities, including Beijing, Shanghai and Guangzhou, comes from Hong Kong companies. In Southern China’s Pearl River Delta region, Hong Kong companies have been key drivers for almost 25 years, with 60,000-plus companies employing over 10 million people. For smaller companies with limited time and resources for lengthy market development and frequent business trips to China, partnering with a Hong Kong company gives instant China expertise and peace of mind. In addition, the recently signed free trade arrangement (‘Cepa’) between Hong Kong and the Chinese mainland, now gives Hong Kong companies and their international partners faster and easier access to mainland markets.

To date, Hong Kong has been the one region to take credit for successfully selling China to the rest of the world. It has an unrivalled position as Asia’s trade fair capital. Each year, more than 60 international events attract hundreds of thousands of exhibitors and buyers from around the world. Hong Kong’s popularity with mainland Chinese exhibitors is a key attraction for international firms that value meeting companies from across China under one roof.
For international companies looking to source products, or explore new markets, Hong Kong is ideally placed within China’s fastest growing economic region, the Pearl River Delta. Hong Kong managed companies have made this region the world’s strongest exporter of many light consumer goods. With its growing middle class, fast modernizing companies and business-friendly environment, this region offers international companies an easy route into China. Expanding transport networks also make this an ideal distribution hub for the wider southern China region.

Multinational firms that have major investment stakes in China like US based Wal-Mart have had various degrees of success. 80 percent of Wal-Mart’s suppliers are in China and $18 billion worth of goods were imported by Wal-Mart into the United States in 2004 (see www.union-network.org). In addition the firm has accessed cheap labor with recent reports from The Institute for Policy Studies (2005) revealing that those workers in Guangdong Province who made toys for Wal-Mart sometimes worked 130 hours per week and averaged 16.5 cents per hour. Wal-Mart’s first store in China opened in the southern city of Shenzhen in 1996. The company has 37 stores in 18 cities with 19,000 employees (China Labor Bulletin 2002). However the firm has faced serious down times with unions and other labor organizations in China. Wal-Mart was reported in October 2004 as resisting union representation in China with municipal unions in three cities having approached Wal-Mart’s store management in several cities but that managers had refused to cooperate in the establishment of unions. The Chinese government has been under pressure from both inside the country and from international agencies and nongovernmental groups to improve its labor standards and show support for worker organizations. The 1994 labor law spelled out in greater detail the character of collective agreements, which could cover such matters as wages, hours of work, breaks, vacations, occupational safety and health, and insurance. The Chinese prefer to use the term collective consultation rather than collective bargaining. Clarke, Lee, and Li (2004) conclude that the process of collective consultation has not introduced a new system for negotiating the terms and conditions of employment, that there is no real negotiation of the collective contract, that the union defers to management with no participation by the union members, and that employers do not add very much to the contract beyond what has been regulated. Hence following from this pressure, Wal-Mart in November 2004 Mart announced that its workers in China could set up trade unions. This was a change in position for the U.S.-based retail giant, which had resisted the organizing of its employees in China. However the case in point here is Wal-Mart’s refusal to move away from China, rather choosing to change its own labor laws than exiting the market. This is a clear indication tat China’s reforms are building a lot of confidence for international MNCs to invest, albeit supported by Hong Kong’s marketing of China.

Similarly, other multinationals have followed suit, with the four largest accounting firms in the world deciding to planning to increase their number of staff in China. The four firms include PriceWaterhouseCooper, Deloittee, KPMG, and Ernst & Young. All together, this year these firms plan to boost their staff numbers in China by more than 20 percent. The New York-based Wall Street Journal attributed the high demand for international accounting expertise in China to various reasons. First, is the desire for China’s big state-owned companies to be listed overseas; second, are the new accounting standards that smaller companies are adopting; and finally is the steady growth that the Chinese branches of foreign companies have seen.
Reports say that the largest firm, PwC, has aimed to recruit 1,550 graduates and 500-700 experienced professionals to its Hong Kong and Chinese mainland operations.
Deloitte, which employs 4,960 people across the mainland and Hong Kong, wants to hire 1,500 new staff by the middle of next year. KPMG aims to supplement its current 4,500 staff members with 1,000 graduates and 300 senior people this year.

And Ernst & Young plans to raise its staff of 3,500 in the Chinese mainland to 4,300. However, because China has a limited pool of qualified accounting talents, the big four companies will likely compete for the same group of candidates, which may not be good news for the recruiting firms. Moreover, banking corporations will also be trying to attract similarly qualified personnel; and normally they offer higher salaries than accounting firms.
Experts have pointed out that the lack of qualified personnel in the country hinders the efforts by some Chinese companies to go public overseas. Stephen Taylor, partner at Deloitte in Hong Kong, told the Wall Street Journal that his company has become very selective in their work. They have had to reject working orders for initial public offerings (IPO’s) and mergers & acquisitions (M & A) because they just don’t have enough staff members to take on such projects.

However such successes by the multinationals have increased the caution among local Chinese professionals. With the recent calls by the Shanghai Lawyers Association who issued a “memorandum” calling for a crackdown on foreign law firms and practitioners offering and performing services outside the regulations. Ostensibly this caused consternation among foreign practitioners who feared the government would be forced to overcome its traditional reticence about enforcing the rules to the letter. Chinese Canberra-based lawyer Jun Wang says suggestions by international firms that they would like to see joint ventures with local firms has been met with skepticism from some top-tier Chinese firms. He says they are worried they will see no benefit from formal alliances with international firms, the foreign players instead treating a JV as a formality, and joining with small local firms in order to compete in all areas with the Chinese top-level firms [Drummond].

Jun Wung further adds that, “I know this is a model that has been implemented in Singapore between local and foreign firms, but when it comes to China, I’m really not sure whether the Canberra FTA negotiation team is on the right track.”[Drummond].

One positive aspect that comes out of this argument is that many international firms are now hiring Chinese lawyers in big numbers from their local counterparts, but once they make the move these lawyers have to give up their practicing certificates, something one major US firm says they would obviously like to change, but understands the reasons why local firms wouldn’t want that [Drummond].

Indeed, CNN’s Tara Duffy caps it all with her observation that international companies scramble to tap into China’s booming markets.

Reference:

Bain, T., Chang, C., Tang, Z. MNCs in China: Regulation and Reality
The American Chamber of CommerceChina. 2005. “2004 White Paper.” (available at http://www.amcham-china.org.cn/amcham/show/searchResult.php?word Key=2004+white+paper+&x=11&y=11).

Bronfenbrenner, Kate, and Stephanie Luce. 2004. “The Changing Nature of Corporate Global Restructuring: The Impact of Production Shifts in Jobs in the US, China and around the Globe.” Unpublished paper.

BUSINESS IN CHINA Big Accounting Firms to Boost China Operations [2006-06-06 10:02:47 CRIENGLISH.com]

http://english.china.com/zh_cn/business/investment/11021614/20060606/13379538.html

Chang, Chyi-Herng, and Trevor Bain. 2006. “Employment Relations Across the Taiwan Strait: Globalization and State Corporatism.” British Journal of Industrial Relations, Vol. 48, no. 1.

China Labor Bulletin. 2002, October 27.

Drummond, S. Large Chinese firms suspicious of joint ventures at home
http://www.lawyersweekly.com.au/articles/Large-Chinese-firms-suspicious-of-joint-ventures-at-home_z74241.htm

Duffy, T [Saturday, 07 October 2006]  China firms look abroad to expand

http://menikot.com/news5/index.php?option=com_content&task=view&id=1654&Itemid=3118

Why International Firms choose Hong Kong.

http://uk.tdctrade.com/int_choosehk.asp

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