Published 10 November 2014

China

– Opportunities for Sweden where Trade meets Innovation

China is one of the world´s largest economies and an important trading partner for both the European Union, as well as for Sweden. After entering the World Trade Organization (WTO) in December 2001, China has increased its integration with the rest of the world, resulting in increased global trade volumes and investment flows. China is also trying to find a role in international politics, which so far has been surrounded by some uncertainty. Extensive problems still remain for China, largely caused by challenges faced domestically. Problems relating to the growth model began to appear 10–15 years ago.

These problems take the form of over-investments, overcapacity, inefficient resource allocation, low productivity, soaring public debt, environmental degradation and corruption. China handled the financial crisis by launching a financial stimulus, which hampered the necessary reform progress. This strategy worsened many structural problems and the situation is today severe in many areas.

These challenges have been recognized by the central government and a comprehensive economic reform plan has been presented. The government is now steering development away from the quantitative objectives that dominated the period 1979 to 2013. From 2014, qualitative objectives are in focus. China aims for more efficient use of resources and quality in production of goods and services. The individual is to be set at the center of development. Upgrading China´s industry goes hand-in-hand with these objectives, and knowledge intense sectors should contribute with 60 percent of GDP growth in 2020. China has set the target to be the world leader in knowledge intense production by 2045.

China aims to take a greater role in global value chains. Labor intense manufacturing is to be replaced by processes with higher value content. This will position China as a leader/coordinator of global value chains, a position many Swedish companies hold today. The core of the economy will be constituted by so called “National Champions”, companies mainly controlled by the government. These companies are backed by the central government through various forms of direct and indirect support. This objective has been clarified since the leadership change and was stressed at both the Third Plenum in November 2013, as well as at the National People's Congress in March 2014.

The strategy is far from unproblematic. A strong governmental interference in the market together with a nationalistic industry policy might well create an uneven playing field, where it is difficult for foreign companies to act on their own. This will affect the work of Swedish governmental agencies in China. Thus, it is important for Swedish actors to consider a number of framework conditions that influence the business environment in China;

The division between the private and public economy is unclear. In spite of comprehensive reforms, the public sector’s influence over the economy remains significant. This is partly performed through SOEs, as well as a result of a strong connection between authorities and private enterprises. One problematic effect of this is the absence of the principle of subsidiarity. It is far from always left to the market to decide which companies will be successful. This in conflict with the high-tech, innovative economy China aims for, which requires that more influence is given to market forces.

Quality vs short-term financial priorities. Foreign companies in China often complain about short-term perspective in local investment decisions. Advanced, more expensive, technology and smart services with long life and high productivity are often rejected in favor for investments with lower initial costs. This applies both to SOEs and private enterprises as well as for public procurement.

China is a decentralized economy. A large part of China’s challenges are managed at local level where many investment decisions are taken. This brings significant variation in policies and implementation across the country. For research and development (R&D), 80 percent of the State’s expenditure is directed to institutions at regional or local level. New solutions to attract R&D and knowledge-intense industries are created at local level by pressure from politicians at central level.

Foreign companies are increasingly worried. Politicians and interest groups note the emergence of a new kind of industry policy which put higher pressure on foreign firms. Foreign firms are forced to take difficult decisions of strict requirements on technology transfer and adaptation to national standards etc., which is often required for market access. Pressure is also exerted by preferential rules and regulations. Several of these benefits are directly linked to science -and industrial parks and to pre-defined clusters. China’s economic policies limits market access for foreign companies to several sectors. These sectors are in Europe open to Chinese investments. This collides with requests of enhanced transparency, equal treatment and fewer export barriers.

Studies recently published by the European Chamber of Commerce in China and the U.S. Chamber of Commerce show that China’s policy discriminates foreign companies. Among the difficulties mentioned are requirements for domestication of operations, constraints to equally participate in public procurement, complicated processes and weaknesses in transparency and monitoring. Requirements to adjust to Chinese product standards, almost impenetrable competition law, deficiencies in patent law, the law on competition and national economic security are other barriers.

There is a good reason for Sweden to follow the Chinese reform. If China succeeds to establish itself as an upper middle income country, the market will become the world’s largest. However, large potential for increased trade exchange is present already today. Swedish actors possess knowledge of interest within a range of prioritized reform areas and, innovative and high quality products are essential for China’s interest in Sweden. Nonetheless, China´s uneven playing field demands a more active role by Swedish governmental agencies and ministries. This is needed in order to create an environment which allows existing exchange to develop and to create new and more extensive industrial collaborations that build on research, development and innovation.

Important to remember is that Swedish actors do not only compete with Chinese actors in a complex Chinese market, but also with a number of other countries about trade with China. A successful Swedish innovation, investment, and export strategy is dependent on an approach that can manage the challenges discussed above and in the main document.

Title
China – Opportunities for Sweden where Trade meets Innovation

Serial number
Direct response 2014:18

Reference number
2014/248

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