Britain starts bid to join China scramble

As the French make up with Peking, can a £1bn export credit deal help U K companies break the ice? Teresa Poole in Peking investigates

Despite political uncertainties surrounding the Chinese leadership, Western companies are clustering around the world's biggest commercial honeypot. The British, dogged by frictions over Hong Kong, are having to play a careful game.

But last week's announcement that the Government is giving £1bn export credit backing to China looks like an attempt to move a few squares forward. British officials are hopeful that after a chill of more than two years, commercial relations could be on the mend.

Last weekend, Jose Rossi, the French Minister of Industry, oversaw the signing of a $2.8bn (£1.76bn) deal for French companies to supply two nuclear reactors to the southern province of Guangdong. The French company Framatome will supply the "nuclear island" which accounts for the bulk of the work. But the "award intention agreement" also included an order worth up to £350m for GEC Alsthom, the 50:50 UK-French company, which will provide turbine and generators for Daya Bay station.

According to French government officials, British factories will receive two-thirds of this work, worth more than £200m. Mr Rossi also announced that GEC Alsthom had received an order worth about £300m for the Luohuang coal-fired power station in Sichuanprovince.

But GEC Alsthom did not officially announce the Daya Bay deal, nor did it elaborate on the second deal. In China, there can be many a slip betwixt memorandum of understanding and contract. French officials also let it be known, though, that, that there was a consensus at GEC-Alsthom that the French should lead negotiations.

Both France and Britain know first-hand what it is like when political disagreement rears its ugly head in the commercial arena. When France sold Mirage fighters to Taiwan in 1992, Peking put an effective ban on big deals with French companies. France t h en promised there would be no more weapons for Taiwan, and the thaw began. For Mr Rossi, last weekend's signing ceremony was confirmation that the freeze in Sino-French business relations was over.

British companies are not so lucky, with the row over Hong Kong still dominating bilateral relations. Last October, for instance, Richard Needham, the Trade minister, did not visit China as planned, because it proved impossible to "agree dates" with the

Chinese government. So the disclosure that Britain is making available £1bn of new export credit guarantees to China over five years looked a vote of confidence in UK companies' ability to secure business in China.

The package is aimed at telecommunications business in Wuhan, a central Chinese city on the Yangtze. Those hopeful of contracts in Wuhan include GEC Marconi, GPT, Northern Telecom Europe and Pirelli Cables.

So far, the agreement appears to be mostly about creating an atmosphere in which Wuhan might look favourably on British companies. Since October, no company has actually done a deal, and British officials say no contracts are imminent. "It is most unlikely they will do anything like this amount of business," a UK official admitted.

At the moment, the proposed Wuhan trade guarantees look ambitious. Given the political situation, Britain's performance is holding up, but other countries show stronger growth. According to figures released last week by China's General Administration of Customs, Germany remains the largest trading partner within the European Union. Chinese statistics show that last year, German exports to China reached $7.1bn, up 18 per cent on the previous year; Italy exported $3.1bn, up 12 per cent; France $1.9bn, up 18 per cent; and Britain managed $1.8bn, up 6.3 per cent.

The most recent British trade statistics, on the other hand, claimed an 18 per cent increase in exports to China in the first 11 months of last year, to reach £781m or $1.2bn). (Such a statistical discrepancy is not unusual with China.)

Direct investment tells a similar story. Figures from the Ministry of Foreign Trade and Economic Co-operation (Moftec) said that in the first six months, German actual (as opposed to pledged) direct investment was $85m; Italy invested $100m, France $42m , and Britain $28m.

Overall, the pattern of investment in China is changing, which could benefit British strengths in telecommunications, transportation, and food processing. Moftec said last week that it wanted to see an increase in technology-intensive and infrastructure

projects.

However, the climate for investment is also becoming more circumspect, with inflation stubbornly high, political uncertainties ever-present, and a number of high-profile cases of contracts not being honoured - as when McDonald's was recently told to movefrom its flagship Peking site. Total pledged foreign investment fell from more than $100bn in 1993 to $69bn last year, and the number of new projects fell from more than 80,000 to 47,000. Actual foreign investment rose from $26bn in 1993 to $33.8bn.

In areas where world demand is slack, such as power stations, China continues to drive a hard bargain, demanding easy financing terms for big contracts. The Framatome representative said that under the new deal, China was buying the world's "least expensive" nuclear reactors. Right up until the last minute, Chinese officials were pressing for an improvement in financial terms.

And when competition is fierce, British companies can be hindered not only by political shadows but by the lengths other countries are going to to secure business in China. At virtually the same time as news of the Wuhan export credit came through, Japanwas signing a $1.4bn soft loan agreement for China, part of a package worth $8.1bn.

"It's a mutually beneficial practice for the Japanese government to provide loans to China," the Moftec minister, Wu Yi, said.