Most analysts who followed China's painstaking efforts to enter the World Trade Organization (WTO) expected China's entry in 2000. Unfortunately, the inability of the WTO and China to see eye-to-eye on the reduction of price supports for agriculture is stalling progress today.
Analysts, however, still expect China's entry to happen this year.
What will China's entry into the WTO mean for the Chinese refining and petrochemical industries?
Entry into the WTO will make China's downstream petroleum businesses more susceptible to competition from foreign and private sector participants. Certainly, existing inefficient companies should expect their market shares to decrease and their plants to close.
China's membership in the WTO also will yield positive economic developments. Its entry will boost exports and encourage foreign direct investments. Eventually, it will restructure Chinese businesses into more efficient ones, able to compete effectively in international markets.
Preparations
Exposing itself to free market whims requires some cautiousness, however, and China has made several major changes to prepare its downstream petroleum industry for inclusion in the WTO.
Since the mid-1990s, the country's refineries have been readying themselves to handle more sour crudes. As crude demand increases, China expects to import more Middle East crudes, whose characteristics are generally more sour than its present feed (see related article, p. 66).
In 1998, it reorganized its oil and gas assets into two vertically integrated companies, China National Petroleum Corp. (CNPC) and China Petrochemical Corp. (Sinopec). Prior to this restructuring, CNPC was the exploration and production firm, and Sinopec was the refining and marketing firm.
CNPC, however, still has more than two-thirds of China's crude oil production, and Sinopec has more than half of China's refining capacity.
The assets of the two companies are now geographically oriented. CNPC's assets are in the north, and Sinopec's assets are in the south.
During a presentation at Chem Systems's recent chemical conference in Houston, Andrew B. Swanson, director of the petrochemical practice in the firm, pointed out several market-oriented practices in which this reorganization has engaged. It has upgraded management authority to manage the business, made refinery-gate pricing decisions, and practiced wholesale and retail market pricing policy based on international pricing.
In 2000, China closed small refineries that failed to meet government product quality standards. As well as a business decision, this move helped the government close down small refineries that were suspected of smuggling crude oil imports.
Product tariffs
Petroleum product tariffs today, said Swanson, are already low and are not driving the local prices that Chinese consumers see.
Entry in the WTO, however, will require some further lowering of tariffs.
Today, China's import duties on crude oil and condensate are 16 yuan/ton. Duties for naphtha, diesel, and fuel oil are 6%; duties for gasoline are 9%. Chem Systems, White Plains, NY, does not expect the WTO to change these rates through 2005. By 2010, naphtha tariffs may ease to 3%.
Average petrochemical and polymer tariffs, on the other hand, as a result of WTO requirements, will drop from 15% in 2000-01 to 10% in 2005.
Although China largely supplies its own gasoline and ethylene needs, it is a net importer of LPG, middle distillates, fuel oil, and polymers. By 2005, said the consulting firm, China will import even more of these products than it does now.
Issues to manage
Although lower tariffs and entry into the WTO will improve China's international business image, they come with potential issues. Chem Systems warned of several issues that China will still have to manage:
- Control of growth and macro variables to prevent overheating of the economy.
- The widening gap between urban-rural and rich-poor sectors.
- Major changes in financial and company law and intellectual properties at the same times as new foreign investments.
- Bad loans in the banking sector and underfunding of pension funds.
- Conformity of China's policies and practices to international standards for such items as technology and management.
Opportunists
Should China overcome these challenges, its WTO accession will bring Chinese consumers lower prices, better quality products and services, and more supplier choices.
For business entrepreneurs, the reduction of tariff and non-tariff barriers means easier entrance to the Chinese market.
Lower entry barriers encourage more competition and lower prices. These market factors will bring about either an extinction of inefficient companies or an upgrade of plants. Opportunities exist for foreign investment in new projects or technical and operating alliances with international firms.
The survivors will be companies who accurately size up the more than 1-billion consumer market in China. Opportunists are salivating at the prospect of supplying such a large market having growing consumption power.
For the plastics industry, said Chem Systems, 1 billion people means at least 1 billion bags; for shoes, that's 2 billion.
