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complex indicates that the Fair, now accounting for roughly half of China's exports, will continue to play an important role in China's trade.
The Fair offers the best opportunity for U.S. importers to transact business with China and it affords American exporters some chance to approach the FTCs. It provides a unique opportunity to assess the type, availability, and price of various Chinese products, a difficult task at best owing to Chinese reticence to release meaningful commercial information. By viewing the new products exhibited at each Fair, the businessmen may obtain a convenient overview of the technological progress of the Chinese people, and the direction such progress is taking.
Only businessmen or firms specifically invited by an official PRC agency may attend the Fair. In the past, invitations generally were extended to firms with whom the PRC already had well-established relations or with whom they felt there was a good possibility of business. In recent years, however, both the num ber of invitations issued to and the attendance of American businessmen have had marked increases.
Businessmen who wish to attend should request an invitation from the appropriate foreign trade corporation or one of its agents, such as the China Resources Company (CRC). The commercial office of the PRC Liaison Office in Washington is also able to offer assistance or advice in securing an invitation to the Fair. Invitations are sometimes obtained by writing to the Chinese Export Commodities Fair, Kwangchow, People's Republic of China.
Invitations are usually extended to firms rather than to individuals. It is advisable to request places for as many buyers as necessary to properly conduct discussions on the range of commodities you may wish to purchase. Individuals representing a firm must show some evidence, usually in the form of a letter from the company, that he is the one designated by the firm to attend the fair.
Reaching the Fair.-Travel from Hong Kong to Kwangchow is a matter of about 6 hours by train. Changing trains at the border takes several hours during which time a meal is served and customs clearance is carried out. On arrival in Kwangchow foreign businessmen are met by a representative of China Travel Service and taken to their hotel, which in most cases is the Tung Fang Hotel.
Conducting Business.-To be able to enter the Fair exhibition hall and view products or discuss business it is necessary first to register at one of the liaison offices set up by Fair authorities in the three main hotels accomodating foreign visitors. Most U.S. businessmen would register at the Tung Fang Hotel liaison office. Upon presentation of the letter of invitation and identification, the liaison office issues the visitor a numbered badge which constitutes a door pass and can be used as a convenient form of identification anywhere in Kwangchow. After registration the visiting businessman may request the liaison office to make an appointment for him with the appropriate FTC officials. They can also make arrangements for businessmen to attend various cultural events and visit local factories and communes during their free time. In general, the liaison office acts as the Fair authorities' representative in providing for all the needs of the foreign businessmen.
If the businessman wishes, he can make his own appointment by directly approaching FTC officials on the floor of the exhibition hall. Each of the seven major exporting FTCs has permanently assigned quarters in the exhibition hall where its products are exhibited. Representatives of FTCs can be found sitting at tables set up near product exhibits in their designated areas. They can be approached during business hours, which are from 8 a.m. to noon and 2 to 5 p.m. daily except Sunday. Discussion may take place at these tables or in special discussion rooms. Importers of Chinese products known to be in short supply may in some cases find it advantageous to approach relevant FTC officials promptly after the opening of the Fair. If an importer already has established relations with certain officials, writing to them prior to the Fair about products and quantities desired may facilitate discussions at the Fair. The FTC supplies the necessary interpreters; of course understanding is improved if the visitor speaks Mandarin Chinese.
Discussions may cover any item of interest to either side, including price, quantity, packaging, delivery schedules, and such things as meeting U.S. labeling laws, U.S. food and drug requirements, tailoring goods to U.S. specifications, and use of U.S. trademarks. At recent Fairs, some FTCs have shown flexibility in meeting the specific needs of U.S. im porters. Shoes, for example, have been made to U.S. importer specifications and, in at least one instance, an FTC consented to placing a U.S. firm's trademark beside its own although
the Chinese still decline to place only U.S: labels or trademarks on their products.
While the Fair is principally concerned with Chinese exports, some sales and contract negotiations do take place in Kwangchow. FTC officials, some highly qualified technically, will form a delegation to hold extended discussions with the American exporter. The China National Technical Import Corporation, which handles pruchases of complete plants and technology, was not represented at the Fairs in 1974 and 1975, but may again attend in the future. U.S. firms are occasionally invited to Peking to continue discussions.
American businessmen attending the Fair can now obtain assistance from officers of the U.S. Government and the National Council. Commercial officers from the U.S. Liaison Office in Peking and staff members of the Council maintain suites at the Tung Fang Hotel. In addition to offering advice on Fair procedures and Chinese business conditions and practices, businessmen are provided access to a number of useful reference works and office machines, including typewriters, a copying machine and a telex tape cutter. These representatives give receptions which have been well attended by FTC officials, providing unique opportunities for U.S. businessmen to become better acquainted with Chinese trade officials.
Trade and Products.-The Fair has grown in recent years with an estimated 24,000 foreign businessmen, representing the major industrial and commercial firms of over 100 countries, attending the 1976 Spring Fair. Total trade has been steadily increasing since 1969 with close to $1 billion total in the Fall of 1975. The past several fairs have witnessed an increase in the amount of finished and semifinished goods sold by the Chinese.
Chinese products purchased at the Fair consist mainly of foodstuffs, textiles, animal by-products, metals and minerals, basic inorganic chemicals, pharmaceuticals, hospital and other medical equipment, and arts and crafts. The latter have been selling extremely well. Chinese prices are generally competitive with world market levels, but can fluctuate sharply.
Chinese purchases at the Fair in recent years have generally been characterized by slow buying with emphasis on metals, chemicals, plasticizers, dyestuffs, synthetic fibers, wood pulp and other non-agricultural commodities.
American firms were invited to attend the Fair for the first time in the Spring of 1972. About 325 American firms were represented at the 1976 Spring Fair. American sales and purchases have totalled $55 million and $30 million in the Fall 1975 and Spring 1976 Fairs, respectively.
A film on the Kwangchow Fair made by the Chinese is available for showing. Write or call the Division of PRC Affairs of the Bureau of East-West Trade for details (202 377-4681).
Other Fairs and Exhibitions
Each year the PRC participates in trade fairs and exhibitions in a number of foreign countries. It also hosts foreign exhibitions in China, usually in Peking, but occasionally in Shanghai. In addition, various FTCs have been holding mini-fairs in Shanghai, Tientsin, and other centers located near producing facilities. Such fairs, covering forest products, carpets, straw products, wines and spirits, pharmaceuticals and medical instruments, feather and down, and furs are held irregularly although some of them are expected to become regular events. They are designed to complement, not replace, the semi-annual Kwangchow Fair.
To date there have been no U.S. trade fairs in China and it is unlikely any will take place before the linked issues of Chinese blocked assets and U.S. private claims are resolved. U.S. subsidiaries abroad, however, have participated on occasion in the fairs of other countries exhibiting in Peking.
Business propositions which elicit Chinese interest usually result in invitations to go to the Kwangchow Fair if the Chinese are exporting and to Peking if China is considering importing. For special reasons, businessmen may be invited to other Chinese cities for discussions, for plant visits or to attend a specialized product fair. Chinese Foreign Trade Corporations have also begun to send buying and selling missions to the United States. As emphasized above, contacts with Chinese FTCs should be opened directly. Normally, however, the businessman's ability to begin serious negotiations depends on obtaining an invitation from the Chinese Foreign Trade
Corporation to come to Peking or to visit the Fair.
Business negotiations with the Chinese are marked by efforts to obtain as much technical and commercial information about a company's product as possible. When companies have been unwilling to discuss proprietary technical information, they have found that the Chinese understand and accept a simple statement to that effect. They are usually well informed not only about the company with whom they are negotiating but about the company's competitors and market conditions as well. Competition among Western businessmen may be used by the Chinese as a lever to get a company to improve its offer.
Negotiations with the Chinese emphasize technical aspects and are extremely detailed. It is very important to include highly qualified, tactful personnel on the negotiating team both to resolve difficult technical problems and to demonstrate the company's technical competence and serious intentions. Commercial negotiations with the Chinese often include extensive discussions on relatively minor aspects of the transactions. Careful preparation is a must. Businessmen should have all previous correspondence and expect to confront very astute bargainers.
A frustrating aspect of such negotiations for many businessmen is its nature. Negotiations are often recessed while the Chinese consider the company's presentation. This provides a marvelous opportunity to enjoy Chinese hospitality and tourist sites, but it can involve excessive time of valuable staff. Decisions are usually group decisions, made in coordination with a number of Chinese entities including the Foreign Trade Corporation, the relevant ministry and the end-users. It is characteristic of Chinese negotiating style to emphasize mutual understanding and the development of good long term relationships, both corporate and personal.
The Chinese provide interpreters, and talks are conducted in English so it is not necessary to have an interpreter present. If a member of the company's delegation speaks Chinese in addition to his other abilities, however, this can speed the discussion and resolve possible difficulties in transmitting technical and commercial information. Knowledge of Chinese business practices as well as a sensitivity to Chinese customs can also be quite useful, but contracts have been successfully negotiated by American companies without relying on such expertise.
For small value transactions or for standardized products, the contracts used by FTCs are basically standardized although they dif fer somewhat from corporation to corporation and from commodity to commodity. All standardized contracts are short, usually two pages, and, in some clauses quite vague. While FTCs will make amendment or additions to these standard contracts, they prefer to make oral understandings outside the written contract. In general, they are more willing to amend their import (purchase) contract than their export (sales) contracts. It is im portant for businessmen to press for inclusion of all terms notwithstanding the oral assurances of the FTCs that their apprehensions are unfounded.
Chinese sales contracts generally afford the FTCs more protection against non-performance than do their standardized purchase contracts. Both sales and purchase contracts contain force majeure clauses but for Chinese exports the coverage clearly specifies various natural disasters and a catch-all phrase to cover "any other causes beyond their control." Exporters to China should be aware that the standard force majeure clause would not be interpreted to include "acts of God", strikes, or government intervention.
According to the standard contracts, inspection of both Chinese sales and purchases is done in the PRC by the China Commodities Inspection Bureau (CCIB). Such inspections are characterized by their thoroughness -even counting small items which are packed in bulk. Finally, China's purchase contracts normally include penalty clauses for late shipment while their sales contracts are silent on the subject. In some cases, the FTCs have waived payment when they recognized that the cause of the delay was beyond the control of the exporter: however, in other cases penalties for late deliveries and for late payment have been assessed.
On large, complex transactions standard contracts are not utilized. The FTCs strive for contract provisions similar to those on the standard contracts, but depending on their desire for the product and the degree of competition for the transaction, tend to be more flexible.
Chinese practice, domestic as well as foreign, is to avoid formal arbitration proceedings as a way to resolve contract disputes
Even when the contract contains an arbitration clause and when a dispute has been unresolved for some time, FTCs generally strive to settle the dispute through "friendly discussion." Indeed, in many contracts, "friendly discussions" or "friendly negotiations" is cited as the primary vehicle for dispute resolutions.
The FTCs will likely suggest that if arbitration is necessary, it should be submitted to the Arbitration Committee of the China Council for the Promotion of International Trade in Peking under the Arbitration Committee's rules. However, in recent years, FTCs have increasingly accepted Sweden, Switzerland or other third countries as sites for arbitration.
The most important fact, however, is the degree to which FTCs go to avoid any arbitration even in Peking under Chinese rules. The very few cases that have been arbitrated were reportedly conducted very fairly. In 1974, only one dispute was known to have been settled through arbitration and award. In the Chinese view, such disputes should be resolved by the two parties if they have a good long term relationship. Often the Chinese methods of contract resolution are indirect and take the form of better terms on future contracts. It is preferable to explore all avenues for resolving disputes before seeking recourse in arbitration.
Notes are issued in denominations of Y10, Y5, Y2, and Y1; and 50, 20, and 10 fen. Coins are issued in denominations of 5, 2 and 1 fen. The RMB is an inconvertible currency. Bank deposits can be maintained at the Bank of China but usually RMB is bought and sold as it is needed for commercial and travel purposes.
The exchange value of the RMB is determined by the Bank of China and changes periodically generally in response to international monetary conditions. For example, between July 1, 1975 and June 30, 1976, the value of the RMB changed more than 30 times; changes were less frequent in 1976. The Bank of China posts bid and offer rates for the RMB against major western currencies. The offering price of the RMB has fallen recently from 56.09 U.S. cents on July 2, 1975
to 51.14 cents on June 29, 1976. Between August 1975 and June 1976, it has fluctuated in a narrow range between 50.5 and 51.5 cents.
Since August 1975 the Bank of China has permitted businessmen with RMB denominated contracts to purchase RMB forward. However, the relatively high cost of forward RMB (30% for a six month contract) the availability of dollar denominated contracts, and the stability of the RMB-U.S. dollar exchange rate have combined to minimize businessmen's interest in such transactions.
Most transactions in the China trade call for payment by irrevocable letter of credit (L/C) against presentation of sight draft and shipping documents. Letters of credit are negotiated on the Chinese side by the Bank of China (BOC), headquartered in Peking, with domestic branches in most ports of China. Three foreign branches of the BOC are located in Hong Kong, Singapore, and London. In negotiating letter of credit transactions, the BOC utilizes an extensive network of correspondent banks established throughout the world in areas where China trades. The Bank of China has not established full correspondent bank relationships with any U.S. bank although it will accept traveler's checks, traveler's letters of credit and remittance payments drawn on American banks. To facilitate trade finance, the BOC has made arrangements with the branches of a number of foreign correspondent banks for negotiating commercial letters of credit. As the normalization of U.S.-China relations continues, it is expected that the BOC will make similar arrangements with U.S. banks.
The Bank of China has an excellent reputation both for its efficiency in handling the technical details of financial transactions and for paying promptly and in full. In general, Chinese financial practices are not greatly different than those in the west but they do stringently implement some contract and L/C provisions to their own advantage. For example, when China is the seller, the standard form contract usually stresses that the buyer is to open the L/C promptly and may say little about the shipping and other documents which China is to present to obtain payment. When the PRC is purchasing, the documentation required by the BOC before it will make payment is spelled out in detail. Moreover, in many PRC purchase contracts, payment is to be made only after the shipping documents
are received by the branch of the BOC which opened the L/C. This will increase the amount of time between the shipping date and the receipt of payment by the number of days it takes the documents to reach China. In addition, there will be a certain period during which the seller is without goods, documents or payment. The PRC also does not follow the accepted international practice of having its letter of credit confirmed with a bank in the seller's country. Against these examples of somewhat unusual financial practices, however, one must set the Bank of China's wellearned reputation for financial integrity.
Since the early 1970's RMB has been used to denominate many foreign trade contractsespecially for Chinese exports. FTCs generally prefer to use RMB to denominate contracts because this minimizes their exposure to the fluctuation of western currency values. However, the question of the denominating currency is open to negotiation between the parties. FTCs appear to readily accept foreign currency denomination when China is importing. Moreover, when the foreign currency appears to be in a strong position, as the U.S. dollar has been in the first half of 1976, FTCs are more amenable to denominating export contracts in that currency. As with other aspects of the contract, practices vary from time to time and from one FTC to another.
China emphasizes a policy of self-reliance and will not incur long term debt to finance commercial transactions. However, short term commercial credit (12-18 months) has been accepted for agricultural and other commodity purchases. Moreover, in the last 5 years a substantial amount of medium term credit, up to 5 years, has been utilized for purchases of complete plants from Japan and Western European countries. In general, such credits are partly subsidized by government export promotion programs and are credits made available to the western firms and not directly to China.
To date there is no program for extending U.S. Export-Import Bank loans or loan guarantees to the PRC. With the exception of agricultural purchases, the Chinese have not, so far as is known, used commercial credit to make purchases from the United States. Some U.S. manufacturers of equipment, however, have been able to obtain commercial financing on the basis of Chinese contracts or L/Cs.
Shipping and Insurance
Generally, FTCs prefer to arrange for shipping and insurance both when China imports and exports. For this reason, most Chinese sales are CIF U.S. port and its purchases, FOB U.S. port. There are, however, many exceptions to this generalization. For small imports China occasionally prefers to have the seller arrange shipping and insurance. For breakable or perishable exports, FTCs often ship C&F, preferring that the foreign firm make the insurance arrangements. The contract usually calls for China National Foreign Trade Transportation Corporation to handle the shipping details and to exchange information about shipping with the foreign firms.
When importing, FTCs usually obtain contract clauses that go into great detail about shipping documentation, marking, and packaging. Contracts generally specify stringent penalties for failure to have the product available on time or for failure to provide information necessary to obtain insurance. Under FOB terms, the exporter loses control over transportation and unloading and this poses potential problems in case inspection by the Chinese Commodities Inspection Board finds the commodity damaged. When buying on C&F or CIF terms, Chinese contracts sometimes specify the carrier and often specifically refuse to allow transhipment and will not permit the use of a carrier that also stops in Taiwan.
When exporting, the FTCs arrange for insurance to cover 110% of the contract value. Standard form export contracts call for less documentation than import contracts and are vague about shipping details. However, such topics are subject to negotiations and amendment. Standard form contracts are also vague on the question of precisely when risk, title and responsibility for loading and unloading pass from the seller to the buyer. Such questions are, however, worked out in great detail for purchases of large, expensive equipment.
China has rapidly increased its oceangoing fleet by nearly 100% in the last 5 years and now has about 400 ships totalling about 4 million deadweight tons. From a negligible shipping capacity two decades ago, China's own ships now carry approximately 33% of total trade. A large part of the remaining trade is carried by ships owned by PRC-controlled companies or by ships under charter. All trade between the United States and China is carried on third country flag ships