January 15, 2000	atimes.com

China Cars in collision on China's free-market highway By Antoaneta Bezlova BEIJING - As China's entry into the World Trade Organization looms, the country's economic pundits have been busy devising ways to counter the shake-out of highly-protected industries that the inward rush of competitive foreign products and services is expected to cause. Yet many of those economists remain oblivious to the fact that local trade barriers and local favouritism, not foreign imports, are the greatest foes of China's pillar industries. Twenty years after the launching of free-market reforms, China's market remains fragmented and rules in different parts of the country are laid down by local economic warlords. This situation has been highlighted in the two months since breakthrough US-China talks signaled the imminent entry of Beijing into the world trade body. China's car industry, one of the country's most protected and least efficient, best reflects the reign of local protectionism. In the past few months, two of the leading car-making bases - Hubei province and Shanghai municipality - have been virtually at war over their locally-produced cars. The first shot was fired by Shanghai. In mid-1998, it came up with local regulations to protect its much favored Santana sedans, produced by the flagship auto enterprise of the city, Shanghai Volkswagen, a joint venture of Volkswagen of Germany and Shanghai Automotive Industrial Corp. To do this, the municipal government slapped extra licensing fees and sales taxes on consumers who bought cars made outside Shanghai, adding some 80,000 yuan ($9,600) to the already high prices of domestic cars. Because of over-staffing and small-scale production, the prices of Chinese-made cars are two to three times higher than world averages. However, import tariffs of 80 to 100 percent allow big domestic manufacturers to remain profitable. One car badly affected by the Shanghai regulations was the Fukang passenger car, made by a joint venture between Citroen of France and Dong Feng Motor in Wuhan, the capital of Hubei province. Last year, the local government released figures showing that in the first half of 1999 Citroen Fukang sold only 24 cars in Shanghai. In the same period, Shanghai Volkswagen sold 6,400 Santanas in its home town. Swift and severe retaliation followed from Hubei. In a bid to kill Shanghai's auto business in the province, Hubei began levying taxes on consumers who went for Santanas instead of the locally-made Fukang. Taxes included irrigation construction fees (abolished long ago by the central government) and a 70,000 yuan ($8,400) levy for a dubious pool of funds for ''helping the loss-making state-owned enterprises overcome their difficulties''. As a result, the Shanghai-made Santanas sell for 326,000 yuan ($39,000) in Wuhan - nearly double their usual price of 172,000 yuan ($20,700). Both Shanghai and Hubei's regulations on car purchases have come into being despite a 1990 directive from the State Council, China's cabinet, that bans restrictions on inter-provincial trade. Also prohibited are any ''indigenous policies'' regarding industries. A spokesman contacted at the Machinery Industry Department of Hubei province says Hubei had been forced to issue the restrictions against its will, because ''everyone else does the same''. To play by the market rules when everyone else cheats would mean losing out to the competition, threatening the livelihoods of workers and endangering already shaky social stability - something China's modern rulers fear most. Hubei and Shanghai are hardly the only places in China that favor local auto companies over outside manufacturers. With more than 120 car makers nationwide, nearly every locality that boasts of a car-making plant applies restrictions to outside manufacturers in order to keep its own champions afloat. Closed markets and the sway of local protectionism translates into high costs, low quality and falling sales, analysts say. According to figures released by the state press this week, Beijing car sales suffered their first major decline in three years as individual purchases, a key sales indicator, dropped to their lowest level since 1997. Officials of the State Administration of Machinery Industry say auto markets in other cities and provinces have also reported sales slumps. This is despite the central government's vigorous support for private car ownership as it tries to rekindle consumption and boost the economy. This slackening of demand is one consequence of the failure to establish an integrated market, which in turn keeps alive the deflation that has been plaguing the economy for more than two years. Unable to enforce regulations among fighting localities, the state has decided to take under its protection China's three leading car makers and support the creation of mainland-style auto ''chaebol''. The chosen three include the two companies at the center of the Shanghai-Hubei car war - Shanghai Automotive Industrial Corporation and Dong Feng Motor - as well as First Automotive Works, based in Jilin province. Although Shanghai announced this week that it is scrapping its protective licensing fees and, from January 19 will throw its market open to outside manufacturers, experts doubt the change will last for long. As one observer of the domestic market put it: ''China is a land torn apart by rival warlords. If it is not Hubei against Shanghai, then it is the center against the localities.'' (Inter Press Service)

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