China: the country of prospects and challenges

China: the country of prospects and challenges

16.11.2019 Analytics

The territory of the People’s Republic of China occupies the third place by area (after Russia and Canada, then the USA follows the PRC). However, it is in the first place in terms of population of more than 1.404 billion, leaving behind India (more than 1.377 billion) and the USA (more than 331 million). There are over 146 people per one square kilometer (in Ukraine, it is slightly over 73).

The GDP per capita of the People’s Republic of China (according to the UN forecast data for 2019) is $19,581 (for comparison: the USA – $64,805, the United Kingdom – $47,479, Japan – $45,956, Russia – $29,504, Ukraine – $9,741, India – $8,348).

Also, the geographical location of the country assumes leadership positions in the East Asian region: the Celestial Empire shares land borders with 15 countries and sea borders with 6 countries.

Chinese migrants and diaspora contribute to the development of the country. Its diaspora is the largest in the world (about 50 million people) and lives in almost all countries. The capital of the Chinese diaspora is estimated at $1,500 billion. Every year, labor migrants send around $80 billion to their homeland. In Ukraine, according to the Chinese embassy, there are about 20 thousand immigrants from the Celestial Empire, although in 2001 there were only 2213. At the end of the twentieth century, 20 thousand Ukrainians lived in China, but they were fully integrated into the social life of the country.

A culturally developed country (literacy of the population is 96.4%) with a huge economic and technological potential, an excellent logistic structure in the region naturally seeks to have equal relations with the same giants (not in terms of territory or population) from the positions of the financial, industrial, technological and trade potential.

Who rules the world market?

Of course, such a large consumer market is a great piece for many countries in the export of their goods and services. Indeed, import of China has crossed the mark of $ 2 trillion since 2013, and have been steadily growing since 2017. To promote trade in 2018, the government reduced customs duties for the importation of a wide range of goods. According to the Department of Foreign Trade of the Ministry of Commerce of the People’s Republic of China, in 2019, Beijing intends to take additional measures to stimulate the import of advanced technologies, agricultural products, consumer goods and services, as well as continue to reduce the overall level of import duties.

However, there is also another side: China is intensifying the exports of its products and services. In 2017, it amounted to over $2.42 trillion (up 10.24% compared to the previous year), while the positive balance of exports amounted to $873 billion. Among the major buyer countries: the USA, then Hong Kong, Japan, Germany, South Korea… However, if we compare the main recipient countries and supplier countries to China, the list is practically the same, but with a “small” exception: among the main exporters to China, the United States moved to the penultimate position, giving way to the first, in addition to the named, also a number of Asian countries. Actually, the policy of the Celestial Empire, which is aimed at the economic restraint of the USA, has contributed to the sharp increase in economic development and, subsequently, the expansion of the global commodity market was aggressive but well-conceived and correct (in the interests of the country. China is going to develop the technology market. It has alerted the main players and leaders in the world market, especially the USA due to the precedent: in 2012, the USA ceded leadership to China in world trade for the first time – $3.82 trillion and $3.87 trillion accordingly. And the trend is still urgent: since 2003, China’s trading volumes have risen sharply – if by the end of 2002, exports amounted to slightly more than $247 billion, and imports – to $210 billion, in 2017, it was more than $2.4 trillion and $2.1 trillion accordingly. Perhaps because of these “trade” reasons, Donald Trump recently announced a “war” to one of China’s largest telecom giants, the manufacturer of electronic devices for wireless networks and consumer devices Huawei Technologies Co. Ltd. (issued an order introducing a state of emergency in the country for the protection of communication networks). The official reason for the investigation is the violation of the US sanctions against Iran.

In addition, according to forecasts, economic expansion of China will continue to expand rapidly, occupying a dominant position in various sectors of the market – services, consumer goods, technologies, transport, etc. In the future, more resistance from other powerful players on the world economic map is expected up to the complete reformatting of political influence on the main regions of the planet.

What is the reason for this dramatic vision?

Advantages and disadvantages of Chinese philosophy

This is not about the Chinese philosophy itself, which is one of the most ancient cultures in the East and marked the beginning of numerous philosophical trends. It is about the modern economic ideology of the state and the developing of people’s outlook. Since ancient times, China has promoted the idea of returning (and capturing) the territories lost in different periods of the historical past. Such ideas are still supported in society. That is what we read in the Chinese history textbook for the 8th grade: “After the Second Opium War, the Russian Empire, when China was seized by the army of Great Britain and France, occupied Chinese territories with the help of force captured the lands of the north-east and north-west of China with an area of more than 1.5 million square kilometers in an insidious way.”

This story is a thing of the past. Naturally, primitive invading intentions are seen utopian in modern world realities. However, the idea itself remained latent, turning into a trait of a national character, becoming an integral part of national mentality. It has been transformed into an economic expansion under the motto “We are for peace in the world and business.” This motto can be slightly paraphrased “We are for business in a peaceful world.” It’s about Chinese business…

The state adheres to a policy of maximally promoting the entry of local enterprises into world markets. Special attention is paid to high technologies (in particular, artificial intelligence), the industrial and transport sector, software: China’s experts (and not only they) are seeing the future of development on Earth in general. Besides the interest in the cooperation of their own enterprises with advanced technology companies in Europe and America, the government promotes quality education for its citizens abroad mainly in the USA and Europe. Hundreds of thousands of young Chinese are studying in European universities, not only in the technical field but also in humanitarian. Ukraine is one of the countries chosen by students from the PRC.

The state has developed a program that supports farmers who buy agricultural land abroad. Russia, as the geographically most convenient region, ranks first in these plans.

So, in African countries, where local laws are loyal to buying land, China has invested more than $ 10 billion, and in Latin America – more than $25 billion.

Ukraine is among the priority regions in this context. In 2017, during the Chinese-Ukrainian business forum, Liu Jun, economic and trade adviser to the Chinese Embassy in Ukraine said that China has invested more than $7 billion in the development of the agricultural, energy and infrastructure sectors of our country.

However, virtually everywhere, Chinese farmers and entrepreneurs enter another country, they turn it into their raw material appendage.

UKRAINE AND CHINA: Excursus in the new history

For Ukraine, such a large market for potential exports, as well as the possibility of importing competitive goods and services (if compared with imports from Europe, as well as taking into account the sharp decline of imports from the Russian Federation in recent years), is of strategic interest. To understand this, it is worth turning to the closest history of the formation of relationships…

The relations in this vein have actually been adjusted since Ukraine declared independence, which China recognized on December 27, 1991, that is, a few days after the All-Ukrainian referendum. By the way, this happened even earlier than in some recognizable EU countries — France, Italy, Great Britain, Greece, Denmark…

Even before the official visits of the state heads, a number of documents aimed at the normalization of relations were signed (Joint Communiqué on the Establishment of Diplomatic Relations, January 1992; Joint Ukrainian-Chinese Communiqué, October 1992 and June 1995). The first meetings at the intergovernmental level (in the format of the exchange of state visits) took place in 1994-1995 between the then President of Ukraine Leonid Kuchma and the head of the People’s Republic of China Jiang Zemin. Two documents were signed: “Joint Declaration between Ukraine and the People’s Republic of China” (6.09.1994, the so-called ‘Kyiv’ one), and next year “Joint Declaration on the Development and Deepening of Friendship and Cooperation Between Ukraine and the People’s Republic of China” (04.12.1995, the so-called ‘Beijing’ one). The documents are rather declarative with the aim of recognizing each other as subjects of international relations (mutual confirmation of the territorial integrity and legitimacy of governments, the guarantee of peaceful coexistence, close cooperation at the ministerial level). This was the first major step in intensifying relations between countries at all levels. In 2001, the head of the People’s Republic of China, Jiang Zemin, visited Ukraine for the second time, which resulted in the signing of the “Joint Declaration on the Strengthening of Friendship and Comprehensive Cooperation in the 21st Century” (so-called ‘Kyiv’ one). In November 2002, Leonid Kuchma first personally visited China, where the counterpart “Joint Declaration” (so-called ‘Beijing’ one) was signed. In addition, already literally in six months, in April 2003, he makes the second visit. In September 2010, Viktor Yanukovych visited China (signing a number of important documents, in particular, “Joint Statement of Ukraine and the PRC on the comprehensive enhancement of friendship and cooperation relations” and “Main directions for the development of relations between Ukraine and the PRC for 2010-2012”). Next summer, the President of the PRC, Hu Jintao, visited Ukraine, which resulted in the signing of the “Joint Declaration on the Establishment and Development of Strategic Partnership Relations between Ukraine and the People’s Republic of China”. In 2013, in spite of the extremely unstable situation in Ukraine, the President headed to the People’s Republic of China again and signed the “Treaty on Friendship and Cooperation” between the countries and the “Joint Declaration on the Further Deepening of the Relations of the Strategic Partnership” (both documents dated December 5, 2013) as well as “The Program for the development of relations for 2014-2018”. Of course, many experts question the functionality of these documents of 2013, but whatever people may say, it shows serious intentions to develop relations further.

In addition, three other important agreements were signed at different times: on scientific and technical (April 1992), trade and economic cooperation (August 1992), as well as on the promotion and mutual protection of investments (May 1993).

In general, the current legal basis of the Ukrainian-Chinese relations includes about 250 documents, in addition, a number of contracts have been signed between state institutions and enterprises of both countries.

Another important fact is that China has received the largest number of visits by Ukrainian presidents among all the countries of the eastern region. Moreover, even if the EU members are taken into account, the PRC is probably one of the leaders among the countries that are well-liked by the leaders of Ukraine.

All the legislative levers exist, the state also seems to be conducive, the prospects for cooperation are enormous – we only have to work and work! However…

CHINA IS TESTING UKRAINE

Today, cooperation between our countries is a slow-moving process. There is a group of Chinese companies operating in Ukraine, but their actions more closely resemble a testing situation than a full-fledged business. By investing relatively small amounts in the agrarian sector, raw materials, and the IT market, they estimate the prospects and hypothetical degree of economic return. Maybe for China, Ukraine is a very convenient platform for a breakthrough to Europe? At one time, the Executive Director of the Chinese Trade Association, Ruslan Osipenko, wrote in his blog: “Ukraine is also beneficial for them geographically, as a springboard for entering the European markets.”

It is a paradox, but the fact: it’s very difficult to determine the exact amount of China’s investment in Ukraine. Domestic officials claim some figures, while the Chinese investors talk about others. An indicative case since 2017: after returning from Beijing, the Ukrainian delegation was puzzled, as they have been working with the Celestial Empire for a long time, and according to the Chinese Embassy, Chinese investments in Ukraine amount to $7 billion, but they didn’t know where this money was sent… Some experts suggest that Chinese “investments” exist only on paper in numerous agreements and memorandums signed over a period of nearly 30 years of relations. However, this is not quite true: Chinese investors tend to work quietly in Ukraine, so as not to attract too much attention, especially from the many corrupt and dishonest officials.

Even this $7 billion against the hundreds of billions that China invests annually abroad, looks rather scanty.

Contrary to expectations and convictions of domestic politicians, there are no noticeable shifts in the intensification of Ukrainian-Chinese relations. At the end of 2018, an Action Plan on Economic Cooperation was signed, and at the beginning of 2019, First Deputy Prime Minister of Ukraine – Minister of Economic Development and Trade of Ukraine Stepan Kubov met with the Deputy Prime Minister of the State Council of the People’s Republic of China, Liu He, on this and other issues. By the way, no project initiated between the countries has been completed before: the introduction of a free trade strategy between our countries; project “China – Motor Sich” on the release of “Dreams”; modernization of Ukrzaliznytsia locomotives; construction (according to Chinese technologies) of coal gasification plants…

So, contrary to the expectations and assurances of politicians, at the end of the whole China-Ukraine investment activity was realized in that on April 16, 2019, Stepan Kubov signed an agreement, under which Ukraine will receive technical and economic assistance in the amount of $29.7 million… Not a lot. And not an investment.

In general, the implementation of joint projects has shown that China is interested not so much in investing in Ukraine, but in lending to joint projects. However, under one condition that Chinese equipment will be used, Chinese technology will be used, Chinese workers and contractors will be involved. Of course, such economic relationships are not always economically not mutually beneficial.

The situation in trade turnover is not better. Though according to the export strategy of Ukraine, the Celestial Empire is second in the list of priority countries for export, the trade turnover between them in 2018 reached only $8 billion. At the same time, Ukraine sold goods to China worth almost $1 billion but imported five times more from China.

In retrospect, the amount of trade turnover is relatively insignificant, there were no significant leaps during the last 10 years and for Ukraine, it always had a negative balance (Fig. 1).

For comparison: the trade turnover between the PRC and the Russian Federation exceeds $ 80 billion, with the EU – more than $ 500 billion, the USA – more than $ 600 billion. However, almost all countries have a negative trade balance, but in China, it is a positive one.

If we analyze the trade between Ukraine and China in a commodity segment, then our country mainly supplies mineral products (about 42%), vegetable products (within 23%), animal fats, vegetable oils, and products of their processing (more than 23%).

China imports cars, mechanical appliances, electrical equipment to Ukraine. This article in the total mass of goods is more than 35%. Textiles and textile products account for an average of 11%, metals and products from non-ferrous metals – 10%, plastics and products from them – about 8%, chemical products – 7%.

In this section of trade, the real picture of economic relations is: for China, Ukraine is still the sales market for its products (high added value), and at the same time – the market for the purchase of raw materials and semi-finished products (low added value).

PROBLEMS, SOLUTIONS, PROSPECTS

The revision of the agreements reached the state level is now urgently needed.

This presupposes, first of all, clearing the relations from the corruption. Cleaning of all structures involved in the establishment of economic cooperation between countries. Alternatively, removing them. Corruption is the main, if not the key, obstacle to effective economic cooperation. This is precise because of the corrupt harassment and abuse that many treaties and memorandums, contrary to their really good intentions, remained only on paper, and a few implemented projects still raise questions. To confirm this, you can quote the words of Ambassador of China to Ukraine Du Wei, that he said two years ago in an interview to the KyivPost: “Chinese investors are interested in the Ukrainian market, but this remains only an intention.” Then the ambassador diplomatically softened the hard truth, encouraging that to improve the relations “it is necessary to solve a number of issues and carry out a lot of work.”

Despite the significant prospects of the Chinese consumer market, Ukrainian entrepreneurs are not actually aware of the possibilities of developing their business in the PRC. Therefore, many of them, not possessing sufficient information, are afraid to enter the Chinese market. However, there are a number of very promising areas.

1. The agricultural industry itself from the processing of products to the manufacture of the finished products is the most promising in enhancing business relations with the Celestial Empire. China is a huge country with a billion people to feed. Ukraine is a country with the most productive lands, a temperate climate and developed traditions of agricultural activity. These two factors already indicate the prospects of developing this area of cooperation.

2. The current economic policy of China is aimed primarily at the development of high technologies and industries based on these technologies. At the same time, there is (and to a certain extent is maintained) a very high level of technological development, concentrated mainly in scientific institutes and laboratories in Ukraine. Previous attempts to somehow realize this potential met the government misunderstood or corruption and frank extortion from the scientific structures interested in financing their projects. The prospects of China’s investment in research and development in artificial intelligence (the PRC approved the strategy of AI development as a priority), as well as high-tech industries on equal terms, is also a very promising trend in the business between the countries.

3. In Ukraine, the machine-building industry, aircraft engineering, dual-purpose and military production are well-developed, and the development of appropriate technologies are at a rather high level. Economic sanctions against Russia, the traditional consumer of this commodity nomenclature from Ukraine, encourage us to look for new markets for finished products, as well as components and technologies. However, Ukraine and China have considerable experience in military-technical cooperation, which has been developing for many years. Its activation, still, in a new format already, can become an effective component of trade and economic relations between the countries.

Please read: Risk management and asset protection is a top priority for any business in Ukraine

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