China Outlook

by Teresa Acklin
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Chinese businessman David T. C. Lie offers his perspectives on Hong Kong's July 1 reversion to Chinese rule and China's current and future grain situation.

   Editor's note: This article is adapted from remarks by David T.C. Lie, chief executive of China Concept Investments, a strategic consulting company specializing in agribusiness in China. Mr. Lie is an executive member of the All China Federation of Industry and Commerce and is a member of the selection committee responsible for electing the first chief executive of the Hong Kong Special Administrative Region of the People's Republic of China. Mr. Lie spoke at the April 24 annual dinner of the Grain and Feed Trade Association in London.

   I have just come in from Hong Kong, and I can tell you I did not feel part of a mass migration in the run up to July 1. I assure you I shall be heading back home.

   Some gray pictures have been painted of the territory once British rule comes to an end — the front cover of Fortune magazine in June 1995 announced “The Death of Hong Kong” — unless Beijing changes its ways. Conversely, optimists include Michael Enright from Harvard Business School and others, who recently launched a book titled “The Hong Kong Advantage,” suggesting there is life in the “Barren Rock” yet.

   The contrasting predictions — and the lack of crystal balls — reflect a degree of uncertainty over our future, but this is true of many countries. It is up to the businessman and individual to draw his own conclusions from the wide range of informed and not so informed sources available.

   I do share some of the views of Fortune magazine, especially over Hong Kong's ability to compete in the region. Yet I also adhere to some of the more upbeat views that we can continue to create value for our business partners and for China.

   I am definitely not one of those who is predicting the death of Hong Kong after June 30. But Hong Kong will not prosper if the future government in the Special Administrative Region is not allowed to maintain the current level of autonomy.

   The handover of Hong Kong to China is without doubt the event of the year. Already, 1997 has seen the passing of Deng Xiaoping, China's paramount leader. This too created doubt, hinging on China's leadership and whether the president, Jiang Zemin, would remain in power.

   My personal view is that significant change in the top brass is unlikely. The Chinese leaders are well aware that maintaining a stable environment will both ensure a stable society and strengthen relationships and trust with its trading partners and so aid the country's growth and development. So at the important 15th Chinese Communist Party Central Committee meeting later this year there will be changes, but power will continue to be spread among those already in high office.

   But more interesting is what direction the central government's policy will take with regard to agribusiness in China and foreign trade. With some authority, I would like to say that the government is fully backing measures to make the country self-sufficient — or at least setting self-sufficiency as a nominal target.

   It appears that the government could be willing to accept a level of around 95% self-sufficiency in grain.

   Whether China should seek self-sufficiency in agriculture, either to achieve a positive trade balance or purely in terms of grain, is often debated. The political and nationalist standpoint of being able to feed one's people is contrasted with the economic view of using China's low cost advantage to export value added, processed food, while importing commodities.

   But what is clear is that feeding a population of 1.2 billion people is no simple task, especially when a population the size of Beijing's is being added each year, thus increasing domestic demand by around 5.2 million tonnes per annum. To counter this and encourage domestic production, the government has created many incentive programs for farmers and for agribusiness company investments to further develop the sector.

   Of course, talk of self-sufficiency is a long term view. China currently is a net importer of grain, and many would suggest that with a growing population and changing eating habits, this is not going to change over the next 20 years. While imports will continue to play a key role in supply, I believe they are unlikely to reach the levels predicted by Lester Brown in his controversial book “Who Will Feed China?”, in which he talked of nearly 300 million tonnes of imports by the year 2030. Most observers have predicted China's imports at 40 million to 80 million tonnes by 2030.

   This year has seen more positive research for China in this field. First, a report by the International Food Policy Research Institute has predicted grain imports will reach only 25 million tonnes by the year 2020. But more remarkable is the Chinese Academy of Science report that claims China will become one of the big exporters of agricultural products by the middle of the 21st century. The report cites increased investment and the use of technology, especially genetic engineering, as the main drivers, but this picture may be a little too optimistic.

   The widely varying reports bring us to one issue, information. Without timely and reliable information, business decisions cannot be made. This issue perhaps is best illustrated in the commodity markets. Often in China the level of transparency needed to reduce risk to manageable levels is not yet in place. While risk does create opportunity, it is difficult for businesses to shoulder sudden and material changes to tax, trade, or other regulations within which they operate.

   Information is the key, but it is a rare commodity. Of course, this is something that will have to change if China is to be accepted into the World Trade Organization.

   W.T.O. members have recently agreed that China will not have to join the W.T.O. as a developed country. Still, China will be required to work within a defined framework, although the measures are likely to be phased in three to 12 years down the road from entry.

   Despite the delay, this means that China's domestic market shall open up. China has already agreed that foreign invested enterprises will be allowed to handle import and export trade in China within three years of joining the W.T.O.

   Such agreements show that China is serious about joining, although I am sure they will seek various exemptions from the many entry requirements. Will compliance then be an issue? I think China should be given the benefit of the doubt. From a government point of view, I am sure they will try their best to honor this agreement, as they do not want to be marginalized.

   Internal and external pressure already exists to reform the current State grain buying and distribution system. Raising the procurement price index by 44% last year did create an added incentive for farmers to produce, putting more money in their pockets.

   But this leaves the State with a huge bill and is not a sustainable way of keeping producers contented. This situation presents the government with an opportunity in the near future to choose a halfway point between the highly managed domestic market and an internationally acceptable model.

   From 1995 to 1996, grain production increased by 5%, according to Ministry of Agriculture figures. This level of growth cannot be sustained indefinitely. But I see the future, in general trends, as quite obvious. China will give the world's grain suppliers a great opportunity for business, but how suppliers can capitalize on this opportunity depends on many factors.

   These factors include the cost of foreign exchange to fund the deals; the protection of domestic price levels, which are often higher than the market price; trade sanctions; legal redress; and transportation, in terms of both China's international capacity and its internal distribution. Internally, the necessary infrastructure is currently not in place. This situation is improving, but only gradually.

   Driving the changes is China's continued economic development, which is delivering improvements in living standards and a change in the national diet. Rice consumption in the urban areas is predicted to fall by a further 10% from now until 2020, and demand for meat has pushed production from 28 million tonnes in 1990 to 58 million tonnes in 1996.

   This growing demand for meat will continue to drive consumption of grains. However, I suggest that China should be able to meet its domestic demand for grain to the year 2000 and be looking to import in the region of 20 million tonnes by the year 2010. The government predicts importing 30 million tons by 2010.

   The government genuinely is putting great emphasis on food production and incentives for producers. This is how back-to-back record harvests have been possible.

   But this is not to say that the government is not concerned about future harvests. They realize that an unstable food supply has the potential to destabilize a country. Imports are and will remain a vital part of supply and will continue to be undertaken for a range of reasons, whether to satisfy demand, for balance of trade purposes or even for political motivations.

   As a footnote, I would like, if I may, to offer you a few words of advice in dealing with China. Before you commit yourself to this market, ask the question: how well do you know your industry in China? And before drawing up your business plan and strategy, make sure you understand the position of the government and of your business partners. Without this knowledge, in my opinion, medium and long term success will be achieved by luck rather than design.