Foreign firms' love-hate bond with China

Foreign companies have mixed feelings on China. The world's second-largest economy offers them an enticing market, yet there remain tricky barriers to entry, bosses of global heavyweights said at an international forum on Thursday.

China has become very attractive for international firms seeking to tap the growing consumer market, but its complicated business and investment approval procedures have bothered many foreign entrants, said attendants at the ongoing Boao Forum for Asia (BFA) 2014 Annual Conference.[Special coverage]

GROWING CONSUMPTION CAKE

A Chinese consumer market barely existed a decade ago, but now the country seems ready to be the next consumption superpower, with Chinese getting richer and increasingly luxury-minded and online.

China has already become the world's largest market for automobiles, smartphones and luxury goods. It has also outperformed the United States to be the world's largest e-commerce market.

Currently, private consumption accounts for less than 40 percent of China's total GDP, while over half of economic growth is driven by consumer spending in developed countries, according to a report released by a think tank with the BFA last month.

But the potential for future consumption growth is enormous. The Chinese consumer market is expected to grow 10 to 15 percent in the coming six years, with a total market growth of 1.4 trillion U.S. dollars, said Mitch Barns, CEO of Nielsen.

Meanwhile, Chinese consumers' consumption patterns are expanding to service industries, as they splurge on travel and entertainment. The service sector accounted for 46.1 percent of the total GDP last year, as it overtook the manufacturing sector for the first time.

The Chinese government is also taking steps to shift its economy by reducing reliance on foreign investment and exports and encouraging consumption for renewed growth momentum.

A massive urbanization push is under way, which will produce tens of millions of more affluent citizens seeking better goods and services at home and abroad.

"China is the most important market in Asia for us and it's getting bigger. The attraction in the past was cheap labor, now it's the rising consumers," said Sanjeev Chadha, PepsiCo CEO for Asia.

BARRIERS TO ENTRY

While Chadha's comment encapsulates the enthusiasm of foreign companies for China, they also complain that the government stands in the way, hampering their movements towards and within the market.

Over half of U.S. companies established in China have been running businesses here for over 20 years, but now they are finding a palpable growth slowdown accompanied by rising costs and challenges, said Barbara Franklin, former U.S. commerce minister, citing research by the U.S.- China Business Council.

Many sectors are not fully open to foreign players and China does not allow total ownership of a company through investment. Foreign enterprises also face a loose intellectual property rights protection regime and talent shortages in some sectors and regions due to the country's uneven urbanization.

According to former EU trade commissioner Peter Mandelson, there has been some lowering of market entry barriers over the years, particularly in terms of tariffs, but new ones are often erected in their place.

However, there are signs of the government more seriously loosening its grip on the market as China's reform continues to progress.

American businesses were closely watching China's reform moves, said Franklin, who believes that the gradual implementation of the reform agenda set by November's key CPC meeting will offer foreign firms promising prospects in investment.

Mandelson also recommended that those eyeing China peruse the decision document issued at the meeting as it indicates "really amazing" changes to come.

He predicted that quite a different economy will be seen as the reform gradually rolls out, with structural changes and more specialized sectors, advanced technologies and management and professional workers.

Fang Xinghai, senior official with the office of the central economic and financial leading group, said that the document's highlighting of the decisive role of the market and the importance of the private sector is unprecedented.

Echoing Mandelson's forecast, Fang said that the Chinese market will look very different in seven years' time. "Be prepared for the change to start happening right now," the official added.