USTR Report: Services

Friday, December 22, 2006 14:16

5 coffees down we are finally coming into the homestretch. for the last 80 pages we have been slogging knee deep thorough regulations, trade barriers, issues of transparency, and how all those issues translated into problems for American manufacturers trying to crack the China market.

Now, we look at service sector.

For those who believe there are already too many consultants, lawyers, and bankers in China, the USTR might disagree. While many of the service sectors have opened up, there are still a number that the USTR felt needed to be covered in their report. Namely:

  • Financial Services
  • Legal Service
  • Telecommunications
  • Construction and Related Engineering Services
  • Express Delivery Services
  • Aviation Services
  • Maritime Services

For the sake of time and the safety of our readers, we will be brief as there is a lot to cover (particularly for the financial sector), so we again suggest readers should download the full report to get a complete picture.

Financial Services:

Through the 5 year plan of China’s WTO ascension, China was to gradually increase the market access of foreign banks in terms of product range and geography. Overall, they have maintained steady progress, but as the reports states “it became clear that the PBOC had decided to exercise extreme caution in opening up the banking sector”. given the state of the big four banks at that time, it is not a surprise the PBOC would do this.As seen recently though, the market has opened up significantly with geographic restrictions being lifted, product ranges being allowed to increase, and the ability of foreign banks to invest in local banks.

No doubt the road in 2007 will have a few bumps, but the major goal posts have been passed and as regulations are clarified and deals are passed, the access of foreign banks will only continue to fill in.

Like banking, the insurance sector also saw a major glass ceiling be raised on Dec 11 as full access became theoretically possible. The biggest problems historically have been “capitalization requirements, transparency and branching” as foreign firms have been continually treated differently than domestic ones.

As of October 2006, there were 44 foreign insurers operating in China, and according to the report foreign insurers “continued to capture encouraging market shares in major coastal municipalities and were working to broaden their presence in China.”

Credit Cards
Until December 11, 2006, foreign card companies were only allowed to issue cobranded cards with China Union PAy (CUP), and PBOC owned and operate firm. It remains to be seen if after the 11th foreign card makers will be able to issue cards though Chinese banks without the logo, but the biggest concern following that CUP has been designated the only entity that clear domestic RMB transactions.

Motor Vehicle financing
Was to be fully opened upon ascension to foreign players, but was not until October 2004. Now that is it, banks now have to figure out how they can effectively repossess and resell cars when someone fails to repay the loan

Financial Information Services
This is an area that received a lot of attention lately when Xinhua was designated the only group that could see financial information services to domestic Chinese clients. Beijing has since backed off publicly, but many like Dow Jones and Reuters are understandable concerned

China had committed 5 years ago to permit foreign suppliers to provide a “broad range” of telecommunications services through JV arrangements (49% maximum in most cases).

Problems in the last 5 years have included:

  • An independent regulatory has yet to be set up
  • Reclassifications have occurred since the agreement was made without prior warning
  • Entrance requirements are higher for foreign firms vs domestic firms
  • Licensing procedures are seen as “lengthy”

Construction and Related Engineering Services:
The major issues for this area have surrounded two decrees:

  • Decree 113: Rules on the Administration of Foreign-Invested Construction Enterprises
    • Released April 2003
  • Decree 114: Rules on the Administration of Foreign-Invested Construction Engineering Design Enterprises
    • Released October 2006

It appears that the various issues that the USTR and E.U. Officials have with these decrees will not be settled any time soon as the report mentions that the dialogue to discuss the issues is “tentatively scheduled for May 2007”

Express Delivery Services:
The Express Delivery area is the most profitable of all. Year on year, companies like UPS, Fed Ex, and DHL are adding lanes and planes to meet the demand of customers in this area, and for the last several years all of these companies have been awaiting a postal law revision that would open the domestic China market up to them.

This is an area where the feud has spilled blood where in the summer of 2001 China Post was actually holding bags of contested Fed Ex letter pouches as they were given monopolistic rights to packages under 500g.

Recently, as highlighted in another post, these requirements were dropped to 150g and China Post was split into different entities as prescribed by WTO.

However as the Dec 11 deadline approached, the USTR still had several concerns related to the new Postal Law and the power China Post would continue to have. with UPS, Fed Ex,and DHL all planning big things for the domestic market, the USTR will continue its active involvement in this area during 2007.

Maritime Services:
This area is opened, and no problem have been reported

Wrap Up:
The service sector is one where the USTR will be taking an active involvement as the U.S. is a service economy and there are still a number of bumps in the road for service providers.

For service firms looking at China, this is a good time to make plans as the Chinese market is still in need of a number of service providers, and unlike the many areas where the Chinese are excelling, the service sector is one that foreign firms are far ahead.

Investments in this sector will continue to be very large as banks, insurance companies, logistics companies, and others invest hundreds of millions into establish service platforms.

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