1. China: Opportunities and Obstacles
National Economy
China’s rapid economic development over
the past twenty or so years has lifted millions out of severe poverty and
propelled many into extraordinary wealth.
China has emerged from virtual isolation to become the seventh largest
trading nation and the sixth largest economy in the world. Following Deng Xiaoping’s reinstatement in
the late 1970s, the central government initiated a set of reforms that
completely revitalized the country’s economy, integrating it into the world
economy. In 1978 China was almost completely autarkic, engaging in trade with
only its closest neighbors and political allies. Today, trade accounts for nearly fifty percent of China’s Gross
Domestic Product (GDP); imports from the United States have grown from nearly
zero to almost $20 billion in value. In
2001, China’s GDP reached close to $1.13 trillion. Although annual economic growth during this period had been
somewhat inconsistent and heavily affected by domestic political policies or
trends, it has generally remained greater than 5% for the past decade. Growth in 2001 remained strong at over 7%.
While
much larger increases have occurred in coastal areas, national per capita GDP
increased from $46 to $860 between 1978 and 2000, and average incomes are
projected to reach US $954 by the end of 2002.
China’s
reforms, targeted initially only at the agricultural sector, were later
extended to industry and are now – as the country evolves into its membership
in the World Trade Organization (WTO) – gaining momentum in the services
sector. China’s leaders have stressed a
gradual and somewhat piecemeal reform process in order to avoid large,
sweeping, and fast-paced restructuring that could potentially result in
economic and social instability, not to mention potential political
upheaval. Although Premier Zhu Rongji’s
style in the late 1990s had been less consensual and stressed more rapid
reforms than that of Premier Zhao Ziyang in the 1980s, China has managed to
avoid extending its reforms to the political system and related governing
institutions. It has been what Barry Naughton calls “institutionally
conservative,” whereby the center has avoided dramatically replacing
institutions and processes, instead slowly restructuring existing ones to
enable the economy to eventually “grow out of the plan.”
The
Chinese expression “groping for stones while crossing the river” has epitomized
the reform era and the government’s experimentation process, attempting
different policies at the local level and eventually officially adopting at the
center those that seem to work best.
Unfortunately, this has also meant that reform has been uneven and some
areas, like the eastern coast, have experienced significantly more economic
growth than others, such as the inner western provinces.
China’s
leaders are committed to integrating the country into the global economy and
are well poised to continue down such a path.
2001 was an auspicious year for creating momentum in reforms and opening
the country up to the rest of the world.
China’s capital city, Beijing, won its Olympic bid for the summer 2008
games; the country became a member of the World Trade Organization (WTO); and
Shanghai successfully hosted the APEC summit in the fall. Even in the face of the global slowdown
after September 11, the country was still able to maintain an officially
reported 7.6% economic growth rate during the last quarter of 2001 and a 7.8%
growth rate during the first half of 2002.
As China grows, so do the wants and demands of its consumers;
consumption patterns in China are beginning to look more and more like those of
a developed country
The
next year will signal a new era for China as its leadership changes hands. President Jiang Zemin is to step down at the
16th Party Congress in November of 2002, and will likely be replaced
by his successor, current Vice-President Hu Jintao. In addition, Li Peng,
Chairman of the Standing Committee, and Premier Zhu Rongji are expected to
leave their posts within the next few years.
Zhu is expected to be replaced by his protégé, present Vice-Premier Wen
Jiabao. The new leadership will be
technocrats, bureaucrats who were trained in science and technology, and who
are seemingly more driven by economics than political fervor. Hu was trained as an engineer, Wen as a
geologist. Hu has very often been
described simply as “enigmatic,” in that not much is known about him or his
leadership style and how he will perform after taking the reigns from
Jiang.
Regardless
of Hu’s physical presence, a certain priority for both Hu and Wen will
certainly be the preservation of the Communist Party and Beijing’s ability to
exert control over the provinces and municipalities. They will have to do so in the face of increased massive layoffs
as the government offloads debt-ridden state-owned enterprises (SOEs) and
increased unemployment among peasants. The Chinese Academy of Social Sciences
has estimated that China’s unemployment rate could reach as high as 15% in
coming years.[1] However,
despite some uncertainties in the next generation of the Party’s leadership and
concerns over inflated reported growth rates, the outlook for the Chinese
economy is generally good.
Demographics
Population
Despite
the crisis and famine of the Great Leap Forward during 1959 to 1961, China’s
population has more than doubled from 552 million persons in the early 1950s to
over 1.2 billion in 2000. This is due
in large part to the dramatic increase in crude birth rates coupled with a
simultaneous drop in crude death rates during the 1960s, creating a nearly 3%
population growth. During the 1970s,
however, as a result of stringent government imposed family planning policies,
birth rates began to drop off, and by 2000, the government reported actual
population growth of just one percent.[2]
Since
the introduction of the One Child Per Family Policy, and its predecessor, the “Later-Longer-Fewer,”
a policy that encouraged couples to get married later (for women, until they
reached 23 in rural areas and 25 in cities), leave longer spacing between
children and to have fewer children in total, average household size in China
has been reduced to approximately 3.5 persons. It is likely, however, that in
many areas, families are underreporting the size of their households in order
to avoid fines or punishment for exceeding the one-child quota, a problem that
has significant cumulative consequences for tax collection and
government-provided services.
In
1980, in order to ensure that couples wait to get married, the government
increased the minimum marrying age to twenty for all women. The average marrying age for women in China
has increased from 18.7 in 1950 to 20.8 in 1970 and again in 1998 to 23.6. Unlike many Western countries, almost all
women in China marry, and almost all marry by the time they reach the age 30. Also unlike many Western countries or Japan
most women are still having children, even if only one; most Chinese women have
their children between the ages 20 and 29.
In addition to creating “little
emperors” (children who are doted upon by their parents and grandparents),
there have been a number of more significant unintended side effects of the
government’s family planning policies.
First, because in rural areas boys are generally considered critical to
maintaining a family’s legacy while girls marry into another family, thereby
leaving their own, preferential treatment is generally given to producing
boys. Studies have demonstrated that in
lower income families, first-born surviving children are more likely to be
boys.[3] As the post one-child policy generation
grows up, men are outnumbering women (some estimates put the ratio at 117 or
125 men for every 100 women) and are finding it increasingly difficult to find
women willing to marry them. These
“bare sticks” (those who cannot find wives and are resigned to living alone)
are typically of lower-income and peasant origin.
As the
generation born in the 1940s and 1950s begins aging, there will be fewer
members of a younger generation to care for them and to contribute to the
social security system as it currently exists.
Chinese culture has traditionally stressed a strong sense of filial
piety, and Chinese offspring have typically cared for their parents in their
old age. As a result, there is no
current infrastructure for retirement homes or facilities as found in western
countries. Compounding this problem is
that it is socially taboo to not care for your parents, so that developing an
adequate infrastructure for elderly care facilities will likely take some time
yet to achieve. Although urban workers
have been entitled to pensions, the pension system is virtually bankrupt,
making it unlikely that these pensions will cover the costs of caring for the
elderly as the century progresses.
Urbanization and Migrant Populations
Although
urbanization rates have skyrocketed over the past twenty years, China is still
predominately an agricultural country.
Approximately 64% of its population continues to live in rural areas,
but many rural residents are leaving the countryside to find better employment
opportunities in urban areas. As of
2000, 40 of China’s 663 cities already had populations over one million, making
the urbanization rate around 30%; by 2030, it is expected that urbanization
rates could reach as high as 55%.
Because
of strict policies regarding one’s permanent residency status and the need to
have a household registration card (hukou)
to gain access to resources or facilities available to urban residents, cities
are developing burgeoning “floating populations, ”migrant workers that are
largely unaccounted for, or rather are included in rural population statistics
but not those of the cities they are living and working in for at least six
months a year. Without these residency
cards, the estimated 100 million members of the floating population living and
working in urban areas are not entitled to state subsidized housing.
The
government has realized it must act on the issue of the hukou and their “floating populations”, and has initiated reforms
in certain cities. In 2001,
approximately 600,000 rural migrants received urban residency cards, mostly in
small to medium cities. In March 2001, the State Council mandated that all
urban areas at and below the small city-level (or having a population of less
than 100,000) grant a hukou to
residents with a fixed job and home.
Migrant workers typically live in shared housing, but there is a subset
that has accumulated enough wealth to purchase or lease their own homes and
could contribute to the further development of the middle and upper
classes. Even without registration
cards, and because they are not entitled to subsidized housing, a growing
number of migrant workers paying full market rent are purchasing real estate,
mostly in the smaller cities in the South, near Hong Kong, where they are
actually driving the industry.[4]
In
Shanghai the government recently issued a new form of residency cards, which
are being touted as “green cards”, and are available to both migrants from
other parts of China and to foreigners living in Shanghai.[5] These new cards entitle recipients to the
same social security benefits, to enroll their children in local schools, and
access to provident funds as permanent residents, but have a limited time that
they are active.
Household Formation
All
of the above factors influence housing formation patterns in China, which also
depend largely on income and location.
It is generally presumed that even as the population increases,
household size will continue to decrease as a result of family planning
policies. While rural families will
continue to have larger household sizes, urban families, which are generally
better educated and have access to better healthcare, have household sizes
smaller than the national average. As
mentioned above, the national average is 3.5 persons; Shanghai’s average
household size is approximately 2.9 persons, while Beijing’s is 2.8.[6] The number of dependent children is not the
only factor involved in Chinese household sizes, the number of dependent
elderly parents also contributes to household size and determination.[7] While the nuclear family in the U.S.
includes two parents and two children, the nuclear family in China will look
more like two parents, one child and one grandparent.
Every
year approximately one and half million new urban households are created. Newly married couples have tended to continue
to live with one set of parents: in the planned era, until the government
assigned housing, and in the reform era until they can afford the cost of
purchasing their own homes.
Income Levels
As
mentioned previously, per capita income has increased dramatically over the
past twenty-five years since reforms were initiated. In 1978, per capita GDP was just $46 (in current dollar value);
today the per capita GDP is about $954.
However, income distribution is greatly uneven. The government has emphasized developing
certain areas first, and as a result urban workers have seen their incomes rise
dramatically higher than have rural agricultural workers and residents of
eastern coastal cities have seen their income rise higher than their
counterparts in inland cities. Recent estimates put China’s Gini Coefficient,
an indicator of income distribution that ranges from 0 to 1 with 0 being
perfectly equal distribution and 1 at the other end of the spectrum, at around
.45; for comparison, most OECD countries have a Gini Coefficient around .26.
There
is now a middle class of more than 100 million people, earning at least US
$3000 per year and growing by 20%.[8] Most urban areas are striving to maintain
between 9-11% per annum growth rate in per capita incomes. If they are able to achieve such a goal, by
2010 there could be a population larger than that of the United States earning
at least $6,000 per year.
Housing Reforms and Investment
Prior
to the housing reforms initiated in the 1980s, all urban housing was provided
by the state, via State-Owned Enterprises (SOEs) and work units (danwei). Since reforming SOEs and reducing the size of their debts has
become one of the government’s top priorities, relieving these institutions of
the burden of providing their employees with what were previously considered
non-market benefits, has become a vehicle of change. One of the major reforms
to propel this change has been in the housing sector. In the 1980s, the
government began experimenting with different types of incentives to offload
the housing burden, but it was not until the late 80s and early 90s that
housing reform really gained any momentum.
During
the Mao years, because private consumption was eschewed, investment in housing
was considered unproductive. All investment in new housing construction during
those years was appropriated by the state, but the enterprise was responsible
for maintenance and upkeep costs.
However, because rents were less than one percent of household income
they were not even adequate to cover maintenance costs and as a result housing
conditions deteriorated significantly.
On the eve of the Cultural Revolution in the 1960s, Mao urged urban
developers and residents to reduce their living standards and wants; the
Ministry of Building Industry actually called for per capita living space to
not exceed four square meters (43 square feet) and household living area to not
exceed eighteen square meters (194 square feet).[9]
Between
1949 and 1978 annual investment in housing was generally less than 1% of total
GDP. As a result, by the late 1970s, per capita living for urban residents was
only 3.6 square meters and total national investment in fixed assets in 1980
was US $10 billion. By the mid 1980s, a
nationwide survey determined that almost 30% of all urban residents were either
without formal residence (“homeless”) or living in overcrowded and otherwise
inconvenient conditions; for those living in public housing, only a quarter
lived in what were considered “good” conditions.[10]
The
late reform era, however, has witnessed the development of policies aimed at
eliminating such problems and increasing investment in housing. By 2000, per capita living space had
increased to 10.3 square meters and total investment in fixed assets had
increased to more than US $387 billion.
During this period construction of residential floor space has increased
by more than 250%. The Chinese government estimates that approximately 700
million square meters of residential floor space was constructed from 1997
through 2000.[11]
Today,
the government would like to see housing and real estate be established as a
force fueling growth in the economy, instead of a public good and burden to the
state. This transformation of the housing industry is evidenced in a number of
cities across China. Beijing alone is
calling for the development of the housing industry in order to increase its
current 6% share of GDP in 2001 to 10% in 2010.[12]
The
government hopes to increase urban per capita living space to 25 m2,
or approximately 72 m2 per household, by 2005. In order to achieve
its plan, the government expects to construct 1.5 billion square meters of
residential building space during the five-year plan 2001 – 2005.[13] Domestic housing starts, which reportedly
reached 22 million last year, are projected to grow to 24 million in 2002 and
26 million in 2003.[14]
This could result in approximately four to ten million urban annual housing
starts, depending on the rate at which increases in per capita and household
living space are achieved.
In
addition to building new structures or renovating existing ones, the government
introduced a series of policies in 1998 to provide better incentives for people
to purchase their own homes. While rents are still subsidized in many cities,
an emerging middle and upper classes able to afford their own homes will
contribute to the growing number of urban dwellers renovating and furnishing
existing residences.
China’s
Building Materials and Secondary Wood Products Industrial Sector
Domestic Supply and Constraints
Forests
and their potential resources have long been a matter of concern to the Chinese
government. When the Communists
established power in 1949 an early goal was to improve forest coverage from a
meager 8.6% of total land area.[15] Over the years total forest coverage
increased, but Mao’s manic drive for industrialization and inappropriate
management of resources in the 1950s and 1960s resulted in the over extraction
of forest resources, predominately from virgin or natural forest areas, often used
as fuel wood to support industry and manufacturing.
Today
forests are owned either by the central government, province, or collective,
and still generally tend to be inefficiently managed. Private ownership of forested areas was permitted until the early
1950s, but land reform campaigns quickly led to collectivization. The contributions of economies of scale by
the communes lent well to efficient and rapid logging of naturally forested
areas; local officials encouraged unsustainably heavy logging in exchange for
immediate economic benefits. Prices were determined by the state; timber
producers did not receive true market value for their products and were
rewarded instead for their ability to fill production quotas.[16] Even through the reform era the state has
maintained ownership and management of industries related to the natural
resource extraction. It is unlikely
that forests will be privatized in the foreseeable future.
Immediately
after a series of devastating floods killed several thousand people along the
upper reaches of the Yangtze River in 1998, the government imposed a logging
ban, froze construction on officially designated forested lands for at least
one year, and required that any new projects obtain cabinet level approval. In
1999 Beijing developed the Natural Forest Conservation Plan (NFCP), which
ensured the protection of natural forests along the Yangtze and Yellow Rivers
and in state-owned forests located in Inner Mongolia and the northeastern
provinces. There were also provisions for
additional protection of collectively owned natural forests under provincial
jurisdiction. The government also
launched the “Green for Grain” programs in 1999 to compensate farmers for
growing trees instead of planting high-yield crops.
The
NFCP alone is expected to protect more than 56 million hectares of forestland
and result in the increase of forestland by almost 23 million hectares.[17] For the Five-Year Plan (2001-2005), the
State Council approved an annual logging quota of 223.1 million m3,
a decrease of almost 25% from the previous Five-Year Plan. This will mean that domestic supply will
fall short of the estimated 250 million m3 China’s consumers will
demand in 2002 alone.[18] The main goal of increasing forest coverage
is to increase long-term resources for domestic demand. In fact, the government has the ambitious
goal of meeting demand with domestic supply by 2010. To execute associated programs like the “Green for Grain,” which
cover an area of approximately 3.6 million hectares along the Yangtze and
Yellow Rivers, the government has received loans from international groups such
as the World Bank and the European Commission to help finance reforestation and
afforestation programs in the Sichuan, Hunan, and Hainan provinces, which are
expected to cost a total of US $93.9 million for the 2001 to 2007
implementation period.[19]
It
is evident that even before China imposed the 1998 ban its timber supply was
severely constrained by a lack of domestic resources. According the fifth national survey of forestland conducted from
1994 to 1998, China had about 160 million hectares of forested areas, and more
than 11 billion m3 in forest stock.
Although total land supposedly designated as forestland is almost 27%,
forest coverage is actually only about 16.6% of total land area, far less than
the global average of approximately 26%.
Per capita forest coverage is equal to about 0.13 hectares, compared to
the world average of approximately 0.6 hectares per capita.
China’s
main timber producing forests are located in three key areas: the north
(Heilongjiang, Jilin, and Inner Mongolia), the west (Yunnan, Sichuan, and
Tibet), and the south (Fujian, Hunan, Hubei, Jiangxi, Zhejiang, Hainan,
Guizhou, Guangxi, and Guangdong). These
three areas comprise nearly 90% of China’s total growing stock. Even with the restrictions that have been
imposed in recent years the wood products industry continues to play an
important role in the country’s economy as forest products account for
approximately 8% of China’s total GDP.[20] Industrial roundwood production in 2001 was
51 million m3. China’s main
species include Chinese Fir, Southern Pines, Masson Pine, Larch, Eucalyptus,
Poplar, Natural Hardwoods, and Natural Softwoods. China has approximately 113 million hectares of naturally
forested areas and 46 million hectares of plantation forests.
In
2000, total domestic demand for wood products in China was almost 80 million m3,
and the value of timber as a building material was worth approximately US $4.2
billion. Predictions for the wood and forest products market expect demand to
increase to 250 million m3 by the end of 2002, but do not foresee
major fluctuations in coming years.[21] Chinese consumers generally tend to show a
preference for American imports, but the general public is still unable to
purchase expensive imports and most Chinese are price sensitive.
Building
Materials
Because
steel and concrete are the primary building materials in China, the greatest
potential for immediate growth in wood consumption is likely to be in
non-structural building materials, interior decoration, and furniture. Building and decorations material
consumption are expected to continue development at a rate of 15-30% annually
over the next five years, and the total annual volume of interior decoration
and refurbishing work will also likely grow from $24 billion to $71 billion
between 2001 through 2005.[22]
Until last year, the average homebuyer
purchased not a finished home but an empty shell home (maopei), and was responsible for finishing the home him or
herself. This, in addition to the
increased number of hotels and firms building new office space, has created a
large market for imports of non-structural and secondary wood products such as
flooring, cabinets, and furniture, as well as for the Do-It-Yourself
distributors.
The
domestic furniture industry is able to supply the majority of China’s furniture
demand. These firms are on the whole
privately owned and are increasing output by as much as 20% per year.[23] Although manufacturers are seeking
alternatives to wood for materials in their furniture, wood currently comprises
approximately 70% of the materials used in furniture.[24]
Industry Sectors
Plywood Mills
According
to World Trade Atlas data, China’s production of plywood and veneers in 2001
increased by nearly 160% over 2000, bringing the value of production up from
$99,000 to $256,000. China has become a
net exporter of plywood, a dramatic turnaround from even just four years ago. Imports of plywood went from around 1.7
million m3 in 1998 to a mere 650,000 m3 in 2001. Exports of plywood, by
contrast, rose dramatically from less than 200,000 m3 in 1998 to almost 1
million m3 in 2001. Korea, Hong Kong, Japan, US, Taiwan were all destinations
for Chinese plywood. 2002 data shows that plywood exports are rising ever
faster.
China's export and import of plywood, 1993–2001
Source: ITTO Tropical Forest Update,
Volume 12, No 3, November 2002
The tropical timber plywood industry in China gained a
competitive advantage over the low-cost Indonesian and Malaysia plywood when
the Chinese government removed log import tariffs and took a hard line stance
on plywood smuggling. This reversed the creeping decline in log imports. By
2001 the volume of tropical log imports had more than doubled and the Chinese
industry began to export substantial volumes of plywood. In addition, joint
ventures created with foreign enterprises and new technology investments drove
many of the old SOE and smaller mills out of business, creating consolidation
which much strengthened the industry. As always, reliable statistics on the
China’s plywood production are difficult to ascertain, but according to State
Forestry Administration data it amounted to almost 10 million m3 in
2000. The heart of the industry is in Zhejiang Province which has more than 200
mills and an annual capacity of about a third of the nation’s total plywood
production capacity.
Volume of Chinese tropical log and
tropical plywood imports, 1997–2001
Source: ITTO
Describing the rapid growth in the plywood industry, the ITTO writes:
“According
to recent statistics, China produced 21.1 million cubic metres of various
wood-based panels in 2001, a level second only to the US production. Wood-based
panel imports came to 1.9 million cubic metres while exports were 1.1 million
cubic metres. The negative balance of trade was 802,300 cubic metres. However, there is a big difference in the
trade depending on the various wood-based panels. Plywood exports amounted to
965,400 cubic metres or 89.4% of China's total wood-based panel exports in
2001. Exports of other wood-based panels were only 114,100 cubic metres,
including: 62,300 cubic metres of veneer, 26,800 cubic metres of fiberboard and
25,000 cubic metres of particleboard. This illustrates the substantial increase
in plywood exports.
China
imported 1.9 million cubic metres of various wood-based panels in 2001, of
which plywood, was 650,900 cubic metres veneer 335 700 cubic metres and
particleboard 447 600 cubic metres. The statistics show that the increasing
proportion of fiberboard and particleboard imports was the main reason for
unfavorable balance trade of wood-based panel.
According
to local analysts, one of the main reasons for the continued increase in
particleboard imports was the rapidly growing demand for composite flooring
material in the domestic markets in recent years.” (ITTO Tropical Timber Market
Report November 16 – 30, 2002)
Chinese Plywood now being
exported to Japan and Europe
Japan's has
been one of the surprising recipients of Chinese plywood exports. According to
trade statistics, Japan’s imports from China more than doubled over the same
period last year. Japanese importers cite improved technology and greater
production capacity in meeting their quality demands. More importantly, Chinese
plywood has a price advantage over Indonesian plywood and Japan’s domestic
plywood. Most of this plywood is presently being used in packaging, however,
and not as structural panels. Also noteworthy are the inroads China has been making
as a significant exporter of tropical plywood to Europe (UN Economic commission for Europe, October 1, 2002 Press Release).
Hardboard, MDF, and Particleboard Mills
China
is a major manufacturer of medium-density fiberboard (MDF). According to a recent report by the ITTO,
China had more than 230 MDF manufacturing plants and a production capacity of
almost eight million m3 by June 2001.[25] Most of China’s panel-producing firms are
small, with less than 30,000 m3 annual capacity. It is likely that as China begins to shift
domestic production to plantation sourced material resources there will be
increased production of panels made from lower-quality, younger trees.
Furniture Industry
China’s
domestic furniture industry is quite well developed, with almost 30,000
manufacturers across the country. China
is not only an importer of furniture, it is also an exporter, and in 1999
exported $1.9 billion worth of furniture to the US alone.[26] In 2001, industry revenues totaled $16.87
billion and are expected to grow by 10-12% over the next year.[27]
Many of these firms are quite small, operating in township or village
enterprise (TVE) form, with annual sales of less than $120,000.[28]
Many of the smaller firms are located in the southern provinces, while the
larger firms tend to be located in the northern regions.
Tariffs
are not as high for wood when it comes in commodity form for export. Exports of furniture have grown from $48.5
million in 1990 to $3.6 billion in 2000.[29]
Flooring, Moldings, and Millwork
According
to FAS, there are currently 5,000 solid wood flooring manufacturers with an
annual capacity of 40 million m3 and 100 composite flooring
manufacturers. China also has a strong
laminated flooring industry, which exports most of its annual 12 million m3
production. Projected growth for both solid wood and laminated
manufacturers is expected to reach between 50 and 100% over the next several
years. Domestic sales of Chinese produced flooring, siding, and mouldings
reached $37,000, increasing from almost nothing during the previous year.
Imports
of Forest Products and Building Materials
With
a per capita demand for wood products of .12 m3, China has just a
fifth of the global average, yet the sheer size of the country’s population
made it the largest importer of wood products last year. From 1990 to 2001
solid wood imports increased in value from $800 million to $3.5 billion. In 1995 China imported approximately 2.4
million cubic meters of wood; if China adheres to its logging quota,
it will have to import nearly 27 million cubic meters in 2002 alone. In 2001 the greatest increases in imports
came in the form of softwood logs, lumber, poles and veneer, hardwood chips,
medium-density fiberboard, and pulpwood.
The greatest decreases in imports came in railway ties, hardwood veneer,
and tropical hardwood plywood.
Source: FAS
Russia has been the
greatest beneficiary of the increased imports of softwood logs and lumber by
China. The value of Russia’s wood
exports to China in 2001 increased by 53% over 2000, followed by the US, which
experienced an overall increase of 18.6%.
Many of China’s other leading partners for trade in wood products
actually experienced decreases in the value of their exports, with Germany
experiencing a 35% decrease and Malaysia experiencing an almost 38%
decrease. Indonesia’s exports fell by a
little less than 3%.
The United
States is among China’s top five trading partners in wood products, and it is
expected that US exports will gain a slight lead this year over Germany’s. US
exports to China of wood products increased by just 2% in 2001 over 2000, but
are expected to grow by more than 60% in 2002, bringing the value to close to
$79 million. Major US exports to China are hardwood lumber, logs and veneer,
softwood lumber and logs. According to
FAS data, the largest increase in exports over the past five years was in
softwood lumber. The value of SW lumber
exports grew from $2.3 to $12.6 million from 2000 to 2001.
Softwood
Logs and Lumber
The
majority of China’s imports of softwood logs and lumber come from its close
neighbor, Russia. In 2001, imports from
Russia totaled almost $600 million and 8.2 million m3 in softwood
logs, an increase of nearly 50% over the previous year and accounting for
nearly 90% of China’s total softwood log imports. In 2001 the US exported only 48,530 m3 in softwood
logs, and although far less than the Russians it was an increase over the
previous year of nearly 50%.
Similar
to its softwood logs, most of China’s softwood lumber imports come from Russia,
followed by New Zealand. Russia experienced a significant increase in the
amount of lumber exported to China last year (85% over the year 2000). Canada also increased its lumber exports by
40% last year. Conversely, the US
decreased its lumber exports by almost 9% over the previous year.
Russian
exporters clearly have several advantages. First is the lower price for
softwood logs; the average price of Russian softwood logs in 2001 was $59 per
cubic meter, while U.S. softwood logs were close to $106 and those from New
Zealand were $63.[30] Second, the Russians benefit from “small
trade deals” tariff and tax benefits.
It is more difficult to keep track of imports over land ports than at
larger seaports. Customs statistics
show that log imports for 2002 may very well double.
Hardwood Logs and Lumber
According to
the American Hardwoods Export Council, total United States exports of hardwood
products to China reached $138 million in 2001, an increase of 89% over the
previous year. Temperate hardwood products are the US’s major exporting wood
products, valued at US $67 million. US hardwood species that were popular in
the Chinese market included ash, beech, birch, cherry, hickory, maple, red oak,
yellow poplar, walnut, red alder, and white oak. Other popular products are logs and veneer.
According
to the ITTO, China continues to be the largest importer of tropical logs,
lumber, and veneer. Between 1998 and 2001, tropical log imports more than
doubled due in large part to the removal of tariffs on log imports.[31]
Structural Panels
There is potential for a very sizable panel market in China;
the Chinese have already developed a high demand for reconstituted panels. Of
the total demand for structural wood materials, panels has grown from
approximately 15% in 1990 to more than 40% in 2000, sharing the other 60% with
lumber. Total imports of plywood for
2001 were valued at US $60 million, a 46% decrease over the previous year,
indicating further development of domestic production. Nearly 74% of imports in 2001 came from
Indonesia, valued at US $44 million; Malaysia was China’s second largest
supplier, with a 14% market share and exports valued at US $8.5 million. While China’s Southeast Asian suppliers
maintained the largest market share, they experienced a net decrease in their
exports to the mainland. Countries like
Denmark, Canada, the U.S. and Switzerland all experienced significant increases
in their exports of structural panels.
Plywood and Veneer exports from the US in 2001 increased by 81% over
2000. Exports during this period decreased initially from $62,000 in 2000 to
$55,000 in 2001and will likely increase dramatically to $99,000 in 2002.[32]
Furniture
China
has a well-developed furniture industry, and most trade in this sector is in
exports. Much of the import volume in
hardwood logs are converted into furniture for export. Most imports were
high-end, luxury items. While normal
tariffs are being reduced on imports of furniture, they are still currently around
22%, giving Chinese low-cost producers a comparative advantage.
Doors and Windows
Imports
of wood window sashes (441810) have increased overall during the past three
years. In 2000 total imports of wood windows were valued at just US $1.095
million. In 2001 they increased to
$1.96 million, but are expected to continue to rise in 2002.[33]
Source:
World Trade Atlas
While
imports of wood window frames have increased overall, imports of wood doors and
their frames (441820) have declined overall.
Imports in 2000 were US $1.52 million, decreased to $1.41 mill in 2001.[34]
Moldings and Flooring
In
general, Chinese demand is higher for hardwood flooring and molding than for
softwood flooring and molding. The
total value of imports of continuously shaped hardwoods has decreased from
approximately $1.7 million in 2000 to $1.4 million in 2001, but is expected to
increase to nearly $2 million in 2002. China’s continuously shaped wood
products come predominately from European countries like Sweden and Finland,
followed by Italy, the Netherlands, and Canada.
Legacy of the State Owned Enterprise System and Its Impact on Housing
After the Communists established power
in 1949, urban land was seized and incorporated into national ownership. Urban workers employed by the state were
entitled to a number of benefits provided by the state via the enterprise. These benefits, which were generally not
extended to rural peasants and urban employees working in collectives, included
health care, education for family members, access to lower prices for food, lifelong
job security (“the iron rice bowl”), retirement benefits, and housing. Oftentimes, the quality of housing or health
facilities depended on the magnitude of the enterprise. Larger and more profitable enterprises
benefiting from an economy-of-scale effect were able to provide their employees
with access to better
resources.
Although
different enterprises were able to provide state workers with different levels
of quality housing and because personal consumption was eschewed during the Mao
years, most urban residents lived in poor quality housing. Well-known problems of the welfare system
included housing shortages, unequal distribution, stagnant investment, and
inadequate rents that led to government deficits. Entitlement did not necessarily mean workers were always provided
with adequate housing or that the system functioned effectively. Urbanization rates also increased rapidly
during the years following the initiation of reforms, compounding the shortage
and quality problems.
From
1950-1978, urban per capita living space remained stagnant and even declined in
some areas, falling from an average of 4.5 m2 per capita to
approximately 3.6 m2 per capita.[35]
Annual investment in capital construction between 1957 and 1977 grew threefold,
increasing from approximately US $1.5 billion to US $4.5 billion. As a
percentage of GDP, investment actually increased from 12% in 1957 to nearly 27%
in 1960, but this was likely due to the intensive industrial development
policies of the Great Leap Forward, because by 1962 it had dropped to a mere 6%
of total GDP. During this period,
investment for new housing construction was allocated directly by the state to
the enterprise; one obvious consequence of this was that the government had
complete control over increasing or restricting housing investment.[36] Mao’s suggestions that urban residents ought
to reconsider how much living space they actually needed then became official
policy, and the government simply reduced the amount of funding appropriated to
enterprises. Individuals could not own
their homes and the average cost of rent was equal to a mere 1% of household
income.[37]
In
the late 1970s, the government acknowledged the severity of the housing
situation and began seriously considering reforms in the manner of which
housing was provided to the public. In
1980, after a speech made by Deng Xiaoping, individuals (and households) in
some cities were permitted, and even encouraged, to purchase their own homes. For several reasons the early experiments
and incentives carried out over the next decade aimed at promoting individual
home buying were not entirely successful.[38] First, the purchase cost was subsidized by
as much as 30% by the enterprise for which the buyer worked, making it still
very costly to the enterprise. Second, rents continued to remain so low that it
was not worth the high purchase prices. Third, buyers were required to put as
much as 40% down, with the rest to be paid out over a span of only five
years. Fourth, while homes could be
inherited, they could not be resold into a secondary housing market, making the
purchase of a home not very attractive in terms of investment possibilities.
Having
experimented with a series of improved incentives in the second half of the
1980s, the government was confident it had developed several successful
initiatives and in 1988, Beijing put forth the so-called Ten Year Reform
Strategy, or the National Housing Reform Plan.
The plan was based on experiments carried out in Yantai in the Shandong
province, and called for increasing rents for publicly provided housing,
subsidizing the purchase of housing by individuals, and vigorous promotion of
selling public housing.[39] The national plan was implemented initially
only in the 80 largest cities and later extended to include all cities and
towns. Three years later, the
government formalized a set of plans to establish sources of savings for
households to draw from upon purchasing their own homes. Administrative control
over housing allocation and management was devolved to the work unit level,
with the eventual goal of shifting responsibility to private or
non-governmental firms. In general, however, the central government still
retained ultimate legislative authority over property rights in urban areas.
Throughout
this era of new housing policy, urban residents experienced improvements in
their overall living conditions. During the 1980s, per capita living space in
urban areas rose to 6 m2. By
2000, urban per capita living space had increased to 10.3 m2; by
2005, the government aims to increase that average to 23 m2, and
doing so has been declared the main task of housing departments for the
2001-2005 period.[40]
Since 1978, investment in capital construction has averaged about 12% of GDP
annually, growing from US $6.6 billion to more than $158 billion.
In 1998, ten years after the first formal
housing reform plan, Premier Zhu Rongji announced that urban state-owned
enterprises were to completely discontinue providing housing to new employees,
but would continue to provide cash allowances to help cover the cost of the
higher priced housing now available on the open market. For those who have
continued to live in state-provided housing, monthly rents have risen from 1%
of the household income to close to 15%.
By 2000,the government reported that nearly 70% of all formerly
State-owned housing had been sold to individuals at “market” prices.[41] One of the most important aspects of housing
reform isn’t in the number of houses or apartments sold to date, but in the
overall change in perception, particularly among young people, of housing
provision. Because the government has
legitimized the concept of private home ownership, most people now view home
ownership as a goal and a long-term necessity.[42] This, in turn, will undoubtedly result in
exponential growth of home sales in future years.
The Mortgage
System and Trends in Financing
As
mentioned earlier, prior to reforms all funds for the construction of new
buildings had to be earmarked and provided by the state, but beginning in the
late 70s the government allowed private individuals and other ownership regimes
to partner in the investment of construction projects. Although private investment in construction
grew fourfold from 1980 to 1984, it never accounted for more than 7% of total
investment. More recently, state appropriation for capital construction has
dwindled from 78% of total funds in 1978 to just 12% in 2000.[43]
State investment in real estate development has also become largely
insignificant; by 2000, it had been reduced to a mere .1% of total investment,
with the greatest investment coming from domestic loans, foreign investment,
and fundraising.
In
the two decades since housing reforms began, and since it realized it could no
longer afford to entirely finance urban residential housing development, the
government has reintroduced market mechanisms to stimulate both investment in
new construction and the purchase of individual homes. In 1994, the government formally recognized
the importance of private investment in housing construction and home buying.
With respect to the latter, policymakers have used a combination of initiatives
to make the purchase of a home more accessible to urban residents.
First,
the government called upon Chinese banks to expand their portfolios to include
consumption loans. Many Chinese banks,
created largely to fund industrial and agricultural development, are now
redefining their portfolios to include home loans. The Bank of China, the country’s central bank, and others, such
as China Construction Bank and the Industrial and Commercial Bank, are now
issuing 20 to 30-year mortgages without fixed rates. Interest rates on home loans are generally around 5.6%. During
the 1990s, the Industrial and Commercial Bank tripled their home savings
deposits, reaching over 70 billion RMB.[44]
In June 1998, in an effort to make loans more accessible to more people, the
government issued the Personal Housing Loan Management Regulation, which
regulated various aspects of housing loans including target, condition,
process, validity limit, interest rates, mortgage, property pledge and
assurance, housing insurance, mortgaged property, and property disposal.[45] In 1999 banks had doubled the value of loans
issued for home buying over the previous year.
Second
is the creation of mandatory public reserve funds, also known as provident
funds or the compulsory savings, which were developed through experimentation
in cities like Yantai and Shanghai in the late 80s and formalized across the
country in the early 90s. Where
implemented, state employees are required to deposit a portion of their monthly
salary into their funds (approximately 5-7% of monthly salary); the employer
then deposits a comparable or matching amount into the account. Within two years of participation, the
employee can borrow up to fifteen times what has been deposited with an
interest rate typically 1-2% below market levels.[46] The employer’s approval is required for use
of the funds and they can only be used for the purchase, renovation, or repair
of a home. If the fund is not used, the
employee can collect the monies upon retirement.
Third,
in order to offload many homes, work units offered apartments for sale at less
than market prices. Many people were
able to afford the purchase of their homes through this sort of incentive,
especially when combined with one or two of the above options and their own
personal savings or through other forms of informal borrowing. The Chinese have
unusually high savings rates; it is estimated that urban and rural savings
reserves account for nearly half of China’s bank deposits. This is largely due
to the fact that for so many years, urban workers had most of their needs
provided or subsidized by the state. Some estimate that five or six million
Chinese have savings worth more than US $100,000.[47]
The Future of Financing
One
of the concerns accompanying China’s accession to the WTO is the certain
difficulty the country will encounter in revamping the banking system. At present, China’s banks are predominately state-run
and are the primary source for the insolvent SOEs the government is desperately
trying to reform. SOEs account for a large portion of the banks’ non-performing
loans (NPLs). Although there is little
consensus on the real value of China’s NPLs, it has been estimated that they
now account for anywhere between 30-45% of all loans.
It
is these same banks that the government is instructing to issue increased
number of personal loans for home buying. Prior to the 1998 housing policy,
only a certain number of banks were permitted to issue mortgage loans; the new
policy not only extended mortgaging rights to all banks, it also formalized a
uniform application process and eligibility requirements.[48]
In
1997, there were eight national banks, most of which were tied to industrial or
agricultural development. In 2000,
there were nineteen national banks, most of which were established to assist in
local economic development or international trade. Most of these banks continue to be state-owned and operated, but
WTO entrance will most likely result in a complete restructuring of the banking
system. Previously, foreign banks have
not been allowed to open branches in mainland China or to accept personal
savings accounts in Chinese currency. Within two years of accession foreign
banks will be allowed to conduct business with companies in RMB; within five
they will be allowed to accept deposits of RMB from individuals.
Source:
McKinsey Quarterly 2002, Number 4
The
frenzied pace of construction has left little room for style or grace in many
places; after years of the bland style with which Communist China built
apartment buildings for the masses, trends in home design are beginning to
change. Prior to 1990, most apartments
were constructed with 2-3 bedrooms, a bathroom, small kitchen and no living
room. For most of the 1990s, apartments
were built similarly, but a small living room was added to the home. After 1998, apartments began to be
constructed with 2-3 bedrooms, a bathroom, larger kitchen and living room and a
dining room, as well as with some closet or storage space.[49]
Because of the high population density
of most urban areas, planners have stressed multi-family residences. Close to78% of urban residents live in high
density schemes, which include low-end, “economical” housing to full service
apartments. These homes are typically
built in the form of either a six-floor walk-up or a high-rise building. It is estimated that 48% of urban residents
live in six-story and under buildings, 28% in high-rise apartment buildings,
and 3% live in luxury-style apartments. Less common is low-density housing,
which includes high-end luxury villas geared to high income Chinese and the
expatriate communities living in China.
These villas account for only 1% of urban housing. Most of these villas tend to be designed in
western-style architecture, with few in the traditional Chinese style
courtyard.
ITTO reports that by the end of
2001 the per-capita housing area for China's urban residents had jumped to 21
sq. meters from 13 sq. meters in 1989. Rural housing also improved. Per-capita
housing area in rural China area has reportedly increased to 25 sq. meters up
from 21.8 sq. meters in 1995. Annual
investment in both urban and rural housing has taken up more than 8% of
GDP which accounts for more than 20% of investment of national fixed assets.
The housing industry has contributed about 4% annually to GDP since 1999. This
exceeds the contribution of other important industries such steel industry and
energy. [50]
Housing Starts by
Construction Method
Concrete,
steel and brick, have been the dominant building materials in the modern
era. Wood frame construction, popular
in traditional Chinese architecture, has not seen much penetration since
housing reforms began, and will likely only be attractive or affordable to
upper class Chinese and the expatriate community for the foreseeable
future. The Foreign Agricultural
Service has estimated wood frame construction housing starts to be
significantly less than one percent of total housing starts for the next
several years, while steel, masonry, and others forms will make up the large
majority of construction methods.
Housing Categories by Ownership and Financing
Private Housing
By
2000 the number of homes purchased by individuals was fifteen times greater
than the number of homes purchased in 1991.
In 1998 a State Statistical Bureau survey indicated that almost 33% of
urban residents owned their own homes, although many think that the estimate is
too high. Owners can sell their homes,
but it is unclear what will happen at the end of a 70-year lease for the land
on which homes are built as this land is owned by the state.
Public Housing
Those
purchasing housing remain largely tied to the public sector; work units
continue to contribute a large portion of buyers of new housing. Ownership of
the land itself remains in the hands of the government, but an easement is
provided to the leaseholder, who is entitled to use of the property for a set
amount of time depending on use.
Residential users can be granted a 70-year lease, industrial users are
entitled to 50-year leases, and sports, recreational, or educational groups can
also be granted 50-year leases.[51] At the end of these leases, the user can
renew their contracts.
Although
publicly provided housing is being phased out, the government still subsidizes
housing for the vast majority of urban residents. For those who continue to rent from their work units, gradual
increases in their monthly payments have risen from approximately 1% to 15% of
total household incomes.
Constraints
Consumer Preferences
and Building or Construction Quality
There
are consumer concerns about several aspects of wood frame construction
homes. These concerns include
durability, wind load resistance, fire, moisture/decay, insects/termites, and
seismic strength. Developers have also
expressed these concerns.
Pricing
One
concern for potential homebuyers is that the price to income ratio is quite
high, much higher than many other countries, and the average urban resident
would have to save for many years before he or she would be able to afford
their own home. However, because the
Chinese have relatively high savings rates, former state employees have access
to provident funds, and because the government is encouraging banks to expand
home loans to include “zero down payment”, there are many ways to fund the
purchase of a home other than through individuals’ direct incomes.
|
Actual Price (including
estimate finishing costs) in $ per m2 |
|||
|
2000 |
Residential
Buildings |
Villas &
Upscale |
Economical |
|
Beijing |
773 |
1411 |
449 |
|
Shanghai |
564 |
1037 |
NA |
|
Guangdong |
505 |
682 |
236 |
|
Sichuan |
193 |
651 |
143 |
In China all urban land is owned by the state. Users may opt to lease rights to a piece of
land for a given period of time. In 1990 and 1994 the government enacted the
Urban Land Regulations and the Urban Real Estate Law, which gives local land
departments the right to issue long-term leases (i.e., up to 70 years for
residential usage). This concept is
known as “granted land use rights.”[52]
Pricing is determined by a combination of factors, including
current government policies. These
factors include:
·
Cost for land
acquisition, resettlement of peasant owners, site development, construction, taxes,
project management, and profits.
·
Expenses for
auxiliary facilities with housing.
·
Public facilities
including green space, on-site infrastructure, kindergartens, schools,
sub-district offices, and other unspecified items, commonly known as da peitao (large projects of public
infrastructure in new housing development areas).
·
Commercial facilities
such as clinics, grocery stores, bookstores, gas stations, waste treatment
plants, and similar structures.
If the average home
is approximately 80 square meters in cities, or 861 square feet, and 50
nationally, or 538.2 square feet, then the average price of a home is:
$14,531 (nationally):
In
Beijing it would be: $61,840
In
Shanghai: $45,120
Chengdu:
$15,440
Guangzhou:
$40,400
An
example of gradual reform from the early stages is the two-tiered development
scheme; one for residents who could afford to wholly purchase their homes and
one for those who could not afford to purchase. For these individuals, enterprises would purchase apartment
buildings and rent at subsidized prices.
In Shanghai in 1993, 75% of new housing was bought by work units to
provide to their employees.
Opportunities for US Building Materials and Housing
Systems
Opportunities
exist for US building materials and housing system companies to enter and
expand in the Chinese market, but it will require a tremendous amount of work
to conquer the cultural and language barriers.
Firms should be committed to establishing long-term contacts with whom
to develop trading relationships and to make effort to adapt their products to
meet Chinese needs. It is estimated
that a growth rate of anywhere in the range of 15-30% will be sustained in
building materials for several years to come, growing from US $24 billion to
$71 billion between 2001 and 2005. The US has managed to increase its exports
to China in this market, despite an overall decrease in imports of building
materials.
One
of the greatest opportunities to enter the market is in the 2008 Beijing
Olympics. The government estimates that
nearly $22 million will be invested in infrastructure for the Olympics. Furthermore, the government is promoting a
“Green Olympics,” providing good opportunity for green building and use of wood
products in building materials and finishing.
Furthermore,
the Ministry of Construction has recently approved “green building” guidelines,
and is promoting energy saving, recycled or renewable and pollution-free
building materials. This initiative
could prove to be a useful marketing tool for imports of wood-based building
materials. As of June 2000, clay
bricks, a traditional building material in China, have been banned in the
construction of all new buildings in medium to large cities by the Ministry of
Construction, the State Economic and Trade Commission, and the State
Administration of the Building Materials Industry. Coal is China’s primary energy source, and in an effort to reduce
air pollution the government is targeting brick production, which reportedly
consumes a quarter of China’s coal.[53]
As of June 2003, clay bricks will be banned entirely.
In
2000, the government banned the use of clay brick in home building. Prior to this ban, brick was one of the most
preferred building materials and was a major competitor to wood frame housing,
composing nearly 70% of Chinese construction materials. The Ministry of Construction is largely
promoting the use of lightweight concrete blocks as a substitute to the clay
bricks and is hoping that the housing boom will carry over to China’s steel
industry. However, because there are no codes for steel framed houses and they
serve a different market than wood frame housing, and because homebuyers in
China (like those in the US) do not want to live in a home constructed entirely
of steel, experts do not expect steel and concrete to pose much of a threat to
the development of wood frame housing in China.[54]
Other materials that have recently been banned or are being phased out are cast
iron piping and steel windows and doors.
Most
of the new housing will likely be built in the form of six-story walkups or
high-rise buildings, but there also exists a potential for single, wood-frame
construction (WFC) homes. Weyerhaeuser’s Kent Wheiler has said that China
represents the only opportunity in the world to create a large wood frame
housing market where one does not currently exist; this is largely because of
China’s aggressive housing reform policies, low amounts of housing currently
available, high savings rates, increasing purchasing power, and a strong
consumer desire for better housing.[55] To penetrate the market, however, will
require a significant amount of effort and marketing, as there is no current
infrastructure to introduce potential Chinese homebuyers to wood frame
construction. Despite this tremendous
long-term potential, the Foreign Agricultural Service (FAS) estimates that for
at least the next several years, WFC will occupy less than half a percent of
all housing starts.
It
should be noted that China has nearly four times the population of the United
States living on almost half the arable the land. Population densities in most cities are quite high, especially in
the eastern coastal cities. In the four
cities discussed above, the average density of residents is about 1832 persons
per square kilometer, with Shanghai having the highest population density at
2,626 persons per square kilometer, followed then by Chengdu, Guangzhou and
Beijing. The American suburban model of the single-family home with a large
surrounding lot is not likely a feasible model for a high percentage of Chinese
real estate development. Not only is it
not affordable for the majority of the population, but also there simply is not
enough land for such expansion. WFC and
single-family homes, in general, will be limited to a small subset of the population
and most construction efforts will be focused on multi-family and multi-story
buildings.
Competitor Analysis:
Products
Imports from Other Regions –
South East Asia, Europe, New Zealand
China’s
other top trading partners, in addition to those described above, include
Gabon, New Zealand, Thailand, Papua New Guinea, and Myanmar (Burma). Gabon’s
exports increased in 2001 by 25%, but are projected to decrease by 27% in
2002. New Zealand’s exports increased
by 17% in 2001 over 2000, and are projected to increase by 84% in 2002 over
2001. Thailand also increased in 2001 over 2000 by 32% and will increase an
additional 51% in 2002. Papua New Guinea’s exports increased in 2001 by 30%,
but will decrease moderately this year by 8%.
Myanmar is experiencing an overall increase, having stepped up its
exports in 2001 by 40% over 2000 and only slightly this year by 8%. The Chinese are reportedly in negotiations
to invest in various plantations in New Zealand; meanwhile the New Zealand
government continues to heavily lobby the Chinese government.
Canada’s exports
increased in 2001 by 52% and will do so again by 24% in 2002. As China’s demand
for tropical wood soars, equatorial countries are seeing their exports rise
dramatically. Brazil’s exports
increased by 99% in 2001 and will go up again by an additional 13% in
2002. Liberia, while its share of
exports remains marginal, significantly increased its exports both in 2001 by
127% and 2002 by 125%. Congo has also experienced a significant increase. In 2001, exports went up by 143% and will
increase in 2002 by 934%. The value
will increase from US $1.5 million to $15 million.
Quality
Concerns
A reappearing concern on both buyers’ and builders’ parts is
that of ensuring quality. The National
Bureau of Statistics reports that only 30% of all construction in 2000 was of
“high” quality.
Many Chinese consumers have already expressed concern over
issues regarding the safety and durability of their homes, malfunctions, and
comfort. As Chinese homebuyers become more selective and acquire more financial
resources, quality is certain to become an important factor in consumers’
decision-making process.
Unfortunately, such construction quality issues also
carry-over for buyers of western style luxury villas and wood frame
construction homes. Training is much
needed to advise builders of how to assemble doors and windows, inappropriate
use of materials, and even wood with forged labels.
China is currently developing a legal framework for recourse
in dispute cases where homebuyers feel cheated by their builders or developers.[56] In a country where quality can be a
significant problem, having a just resolution process is an important step.
Other Housing Policies and
Government Initiatives – Impact on Demand
The Ministry
of Construction is presently revamping construction policies to convert the
market over to turnkey housing.
Previously, Chinese homebuyers bought only the unfinished shell (maopei) of a home or apartment. Because performing improvements and upgrades
then required much supervision time of the buyer, and delayed the move-in date
typically by six months, the government is trying to create policies that
require the builders to pre-install features and to ensure better quality.
There are already almost twelve thousand foreign invested
developers and five thousand construction firms operating in China; within
three years, wholly foreign owned construction firms will be permitted to
operate within China.[57]
Despite the plethora of official circulars and bureaucratic
speeches, the first piece of legislation was passed in 1995 (Urban Housing and
Real Estate Act).[58] Alan Murie and Ya Ping Wang argued that
without legislation, the development of commercial housing was explosive,
created a boom and bust environment, and inflated prices.
WTO –
Impact on Forest Products Trade and Housing of China’s Entry into WTO
Tariffs: Current and Future
Just ten years ago China’s tariff rates were prohibitively
high, but over the past decade the government began gradually lowering tariffs
from an average rate of 57% in 1992 to about 23% in 1996 for most
commodities. Within two years of
accession to the World Trade Organization (early 2004), most tariffs on all
commodities will drop to an average of 15%, with some dropping closer to
zero.
Before China became a formal member of the World Trade
Organization on December 11, 2001 there had been much talk about potential
trade impacts. Aside from the generally favorable market access opportunities
afforded by improved transparency, elimination of industrial and domestic
subsidies, embracement of science rather than politics for its phytosanitary
customs laws and the adoption of impartial dispute settlement of trade-related
issues, very little discussion actually focused on the impact of membership
related specifically to forest products and building products. In sum, China’s
WTO commitment is to tariff-only import control. In principle, all non-tariff
barriers to wood products will be dropped. Below is a quick summary of forest product
impacts.
Tariff
Reduction:. China will reduce its tariffs on wood and wood products
from an average tariff of 10.6 percent to 3.8 percent. Reductions will be
fully implemented by January 1, 2004. Tariffs on value added products will drop
even more significantly. It is expected
that tariffs on furniture will drop sharply, possibly to between 2 and 15% over
the next several years. Tariffs on
logs, lumber, and engineered wood products will be completely eliminated, and
tariffs on products such as kitchen cabinets and other small products will drop
from 21% to zero. Construction materials will drop from 18-21% to 4-7.5%.
Packaging and pallets will drop from 18 to 7.5%.
Uniform Tariff
Treatment: U.S. exports will
receive the same uniform tariff treatment as all other countries. Any
preferential tariff rates applied under a free-trade area must also be applied
to the US.
Uniform Tax
Treatment: Tax treatment of foreign invested firms will be the same as
Chinese firms. National, provincial, and local taxes will be levied
uniformly.
Phase-out of
Designated Trading Companies: To date China has restricted both the number of companies
and the types of goods that can be traded. Wood products were subject to
further restrictions. After China’s accession, the number of enterprises in
China permitted to import and export wood products will be increased over a
three-year transition period. At the end of this period, all companies in
or outside of China will be able to import and export all wood products.
Open
Distribution: Prohibitions which restricted foreign companies from
distributing products through wholesale and retail systems in China will be
phased out over three years for wood and other products. (See FAS Beijing
Timber Market Report dated December 2001; http://www.fas.usda.gov/)
Import
Procedures and Inspections Standardized: China will unify its certification systems so
that all domestic and foreign products will be inspected according to the same
standards.
Custom
Procedures Will Be Unified: To combat regional protectionism, China agrees to
significantly reduce paperwork (and therefore costs) for exporters and
importers by not only simplifying customs and licensing procedures but by
making them uniform throughout China as well.
Other important issues to watch:
Building
Materials Retail or Big Box Impact? A pre-WTO US/China agreement
clarifies the requirement that foreign investors will only be allowed minority
ownership of chain stores with more than 30 stores.
SEZ Large
Influence on Import/Export Trade May Wane? Under the
WTO, Special Economic Zones such as Shenzhen will no longer receive regional
specific considerations as they have in the past.
Increased
Social and Labor Mobility? To absorb the millions of people unemployed due to WTO
membership and increased agricultural imports, the Chinese government has
announced that the Hukou household registration system will be changed. This
will potentially cause a surge in the eastern urban population and spur an even
larger demand for housing.
“Small Trade”
Deals on Land Border Trade: Despite dramatic drops in the common tariff rates, there
are other forms of taxes, such as the Value-Added Tax (VAT). The VAT rate for
most value-added imports is 17%, and 13% for unprocessed goods. However, the VAT is inconsistently applied
and neighboring countries, like Russia, receive preferential treatment and are
charged only half the tax and VAT when they engage in small deals imported
through land borders. Importers therefore
pay only 6.5% VAT for logs and 8.5% for sawnwood/pulp and other processed
products.[59] Some reports state that the government has
officially rescinded this policy, but there is still some confusion at actual
ports-of-entry on the status of the policy, and the tariff is unevenly
implemented.[60] Raw imports and wood products processed in
China for export are exempt from the VAT.
Other Impacts: Because most of the post-WTO accession
changes will come in the services sector, there will be a tremendous increase
in foreign cooperation in areas such as architecture, design, interior
decoration, and real estate development. One should heed caution however; despite general optimism surrounding
China joining the WTO, there are concerns about Beijing’s capacity to implement
the country’s stated commitment on enforcing organizational rules. There has been skepticism about local
official’s own interpretations of regulations, interpretations that may not be
compatible with the organization.[61]
Distribution
Direct Selling and Trading
Companies
Because
China did not permit direct selling for most of the twentieth century, state
trading companies (STCs) acted as the link between Chinese and foreign
firms. However, membership in the WTO
is forcing a change in this policy. In 1998, government lifted STC control over
dealing in international trade for forest products, allowing any company
engaging in trade to import or export wood products (which is not to say any
company could import or export). The
Ministry of Foreign Trade and Cooperation (MOFTEC) has loosened its
restrictions on import licensing and firms can now be granted approval as long
as they have a certain amount of registered capital. Local agents, the next intermediary after the trading company,
arrange the distribution and marketing of products once they are imported;
these agents have become ubiquitous and, unless a firm has in-country
representation, are necessary for exporting to China.
Within
three years of its accession to the WTO, China will fully permit direct
engagement and open distribution between foreign firms and domestic
customers. WTO accession will require
China to liberalize its retail distribution markets, allowing retail, wholesale
stores, and other forms of direct sales within three years of accession.
HBF
and the Austrian furniture manufacturer Svoboda have already established
production facilities in China. IKEA
has stores in Shanghai and Beijing, and mostly sells products built in China.
Domestic Distribution
Big Boxes vs.
Other Channels
Several
Do-it-Yourself (DIY) stores have been successful in the Chinese market. The British company B&Q has opened eight
stores in mainland China, with four stores in the Shanghai area alone.[62] The chain plans to have 58 stores in China
by 2006. B&Q carries hardwood and
softwood lumber and plywood imported from the US.[63]
OBI, a German DIY chain, has also opened four stores in China. There are two in
Shanghai, and one each in Nanjing and Wuxi, Jiangsu Province. HomeWay, a
domestic company, has opened stores in Tianjin and Beijing. Another company that has recently entered
the big box domain is Orient Home, which has opened seven stores including ones
in Beijing, Shanghai and Dalian. Most
of the products sold at Orient Home are manufactured domestically.
In
China, virtually everything is available through small street-side stores, and
wood products are no exception. Small,
hole-in-the-wall type stores carry everything from doors and windows to
toilets, all of this can be made available on the street.
Distribution
in China is complex; effective and efficient in some areas, and almost
non-existent in others. Some areas of
China are better equipped with the infrastructure to transport goods across the
country. There are 11,000 kilometers of
road networks in China, and road transportation accounts for up to 76% of all
transportation volume.[64]
According
to a State Department report, although China does not yet have any laws
specifically addressing franchising, foreign companies that are establishing retail
outlets arrange management partnerships with Chinese firms or sell to a
domestic franchisee, who then manages and oversees the franchises.[65]
Within three years of WTO accession, all restrictions on equity share, number
of outlets, and location are to be eliminated.
Business Practices
Doing
business in China is not simply doing business as usual. China is heavily influenced, even today, by
the lessons it learned during the 19th century and early part of the
20th century: first, that contact with the West can be harmful and
must be managed with care; and second, that a strong government is essential to
protecting national interests and promoting economic development. These issues still influence Chinese economic
policies and interactions with westerners, as demonstrated by the Chinese
reactions to the accidental bombing of the Chinese embassy in Belgrade in 1999
and the spy plane incident in 2001.
Many foreigners easily become frustrated with the Chinese
style of conducting business. There is
a strong emphasis on personal connections (guanxi)
and relying on “old friends” (lao pengyou),
relatives and acquaintances to fill needs before involving strangers. Chinese firms express disappointment with
American firms too preoccupied with making a quick profit, and believe that
establishing close working relationships is key to conducting business.[66]
Business will often be conducted over banquets or social events, and those
planning to operate in China should expect to build long relationships with
their Chinese counterparts. Foreigners
will often complain of corruption or the bureaucratic nature of conducting
business in China. It is important to
remain flexible and to anticipate delays and to remain calm in the face of
them.
This is hardly the venue for discussing how to bargain or
negotiate with the Chinese, how to avoid making your Chinese counterpart “lose
face,” but anyone conducting business in China should be prepared to learn how
to avoid blunt language and aggressive behavior in their relationships with the
Chinese, sometimes in favor of roundabout and often indirect approaches or
responses. Impeding effective
communication are language barrier difficulties; it is important to find
someone who speaks fluent English and Chinese and understands the subtleties of
both languages. Learning a few words of
spoken Chinese will also take a project manager a long way in impressing his
Chinese counterpart.
Lucien Pye, a noted China sociologist, has commented that
foreign traders are often more influenced by what they want to see in China for
market potential, and can be blind sighted by “dreams of the future.”[67]
It is important to follow up on any deals you may have made in China, and to
perform your “due diligence.” It is
recommended that firm representatives take the time and care to establish and
confirm common goals for the project; once established, they should get
agreements in writing, so as to avoid any unpleasant consequences.[68]
In a CINTRAFOR study published last year, it was found that
foreign companies who successfully entered the wood product market in China
strategically used competitive advantages specific to their firm to overcome
entry barriers.[69] They customized products to Chinese
preferences, adjusted their payment schedules to conform to Chinese banks,
increased their in-country presence, and increased their marketing plans to
take advantage of the government’s green building policies.
Further reading on Chinese culture and China’s relationship
with the west is strongly recommended.
Legal
Framework
China
is only beginning to develop a transparent legal system. Although China has a long history of
developing laws and regulations, the legal system, throughout both the dynastic
period and the modern era, has traditionally been highly politicized and
interpretation of laws has often been subject to either current Imperial or
Party dictates.[70]
Judges
do not necessarily have legal expertise or backgrounds and are appointed by the
local governments. Corruption at all
levels is still a massive problem. The government has exhibited a relatively
high level of commitment to cracking down on corrupt officials, and has
severely punished them, liberally doling out the death penalty to corrupt
members of the bureaucracy. While many
advocates of China point to the successes in reforming China’s legal and
judicial framework, there are also many skeptics who argue that although China
has enacted laws and is becoming a more “rule-based” society, that doesn’t mean
the rules or laws are actually being followed.[71]
Chinese
laws are often written in very vague terms so that officials have flexibility
in interpreting their application.
While common law equity jurisprudence in civil code systems provides for
some level of discretion on the part of judges in the advanced industrial
countries, the level of such discretion in China has been virtually
unlimited. It is often difficult for
individuals to interpret from the Chinese legal canon a discernible set of
“rights”. If a Chinese were to find
himself in court it would usually be in regard to criminal matters in which he
is the accused.
Legal
reforms began nearly 20 years ago, but the country’s recent moves toward an
open-market economy have hastened the process.
From 1949 to 1979, the National People’s Congress (NPC) passed only 23
laws, but from 1979 to 1997 it passed 324[72]. Two years ago, China enacted the Law of
Lawyers. Today, China has more than 100,000 lawyers and 8,300 law firms, with
state-funded firms accounting for 30 percent of the total[73].
In
the spring of 2002, the government replaced rules and regulations regarding
foreign investment with a new “Regulations for Guiding the Direction of Foreign
Investment and the New Catalog
for Guiding Foreign Investment in Industries.” Often, the Chinese government will list
areas of development in which they “encourage” foreign investment. According to a review of the new policies by
the American Chamber of Commerce in Beijing, the government no longer
classifies areas as “Restricted A” and “Restricted B,” but has “encourages,” “prohibited,”
“restricted”; those that are not mentioned at all are considered “permitted.”
Official
approval is often required for projects in which foreign investment or
ownership is involved. The new
guidelines stipulate that State Council (central level) approval is required
for investment projects over $100 million; between 30 and 100 million MOFTEC
approval is required, and then provincial or local authorities have
jurisdiction.
Forestry,
agriculture, husbandry, fishing, and related industries are encouraged
investment areas (as are those that fit generally into environmental protection
or restoration). Log exports of several
species of trees are restricted for joint-ventures, while wholly foreign-owned
firms are prohibited from exporting at all.
The
decentralizing nature of the economic reforms begun twenty years ago have had
unanticipated effects on the central government’s overall ability to coordinate
and communicate with local-level governments.
Local governments were given not only the authority necessary to reform
local industries, but also the power to control financial resources at the
local level. What resulted was the
emergence of a new bargaining power for local governments and a tendency for
them to sidestep or overlook rules handed down from the central government.
The
structure of the national bureaucracy also contributes to the problem. The
redundancy within the bureaucracies of the many central ministries means that
conflicting orders are often issued, making it nearly impossible for those at
the grassroots level to comply, even when they wish to do so[74].
The widely held perception that government officials are corrupt further
undermines the central government’s efforts[75].
Poor
coordination is not endemic to the vertical relationship between the local and
the center. China’s central-level ministries often have conflicting interests,
hence disputes arise.
In
Sichuan there are several key areas where the government is looking for
investment that could be of particular interest to those seeking to conduct
wood product export and/or construction.
These include:
·
Forestation and
introduction of fine varieties
·
Comprehensive
utilization of bamboo resources
·
Construction and
operation of highways, independent bridges and tunnels
·
Development,
construction and operation of scenic spots and supporting facilities