For most American businesses, China represents a potentially huge market someday.


It takes a scorecard to keep track of where the openings are, and where China is still plugged shut to foreign investors and competition.


Even then, the opportunities aren't always what they seem.


On paper, the Chinese government has opened a variety of consumer sectors to domestic and foreign competition, including papermaking and electronics manufacturing. Meanwhile, it has kept closed heavy industries such as steel, defense and aerospace, and maintained an iron grip over the politically sensitive media.


But the reality is more complicated. Domestic regulations within many supposedly open industries, as well as the continuing presence of government-owned firms, make it hard for foreigners to compete on a level playing field.


"The Chinese are still very much in a transition from a socialist style planned economy to a market economy," said Robert Kapp, president of the U.S.-China Business Council. "The hand of the state still rests unevenly on the various sectors."


Since 2001, the pace of China's decades-long transformation to a market economy has been dictated by pledges the government made to gain entrance to the World Trade Organization.


The WTO agreement includes a timetable that spells out in exacting detail for hundreds of sectors and sub-sectors such issues as the permitted level of foreign investment, the allowable government subsidies and when new regulations and laws must be promulgated to encourage competition.


The Chinese government has generally met the schedule and in some cases even exceeded it. But it remains difficult to compete, despite an ostensibly open market.


"Most sectors are getting free, but some sectors are still highly controlled," said Baizhu Chen, a professor at USC's Marshall School of Business and an expert on China's economy.


Mixed economy


Mao Zedong, the communist leader who defeated Chiang Kai-shek's Nationalist forces, is credited with opening the People's Republic of China to Western influences by meeting with President Richard Nixon in 1972. At that time, China was emerging from decades of widespread economic chaos and starvation the result of a series of failed policies.


China's current economy grew out of a gradualist path set out by then-leader Deng Xiaoping in 1978 to liberalize what was arguably the world's most tightly controlled economy. The small number of collectively run businesses at the time was still dominated by the Communist Party.


The first set of reforms allowed managers at state-run businesses more autonomy and the right to sell goods (albeit at government-set prices) once they met production quotas.


In the mid-1980s, Beijing spun off minor state-owned enterprises into individual and local government owners, while collectivist farms were broken up in the countryside and became privately owned. In addition, the domestic private sector was legalized.


A decade later, the government spun off larger enterprises, converting them into joint stock companies that gave managers and employees ownership, although in many cases the state still retained majority control.


Finally, in recent years, the government has been exiting some sectors altogether, while encouraging foreign investment in businesses, joint ventures and the establishment of stand-alone foreign businesses.


Even so, what's left is hardly what American businesses are used to.


"In the states your company would be competing with two or three or a half-dozen competitors, all of whom would be trying to be profit-making," said Donald Straszheim, who runs a Los Angeles business consulting firm focused on China. "In China in many cases there are still state-owned entrants."


In addition, many Chinese manufacturing businesses are partly or majority owned by the townships where they are located. In some cases, foreigners are investing in these companies as part of joint ventures.


In others, they may find themselves in direct competition with a company whose owners regulate local affairs. This means foreign investors must walk a tightrope, necessitating a lot of dinners and socializing with government officials.


There are so many strings by which the government exerts influence on the economy, you would be a fool to ignore them," said Barry Naughton, a University of California San Diego economics professor specializing in China.


Bureaucrat entrepreneur


In another twist, American businesses may find themselves competing with Chinese business owners who not long ago were Communist Party bureaucrats.


Across the country, state-controlled enterprises are still being spun off in complicated management-led buyouts, with an eye toward an eventual listing on either a domestic or foreign stock exchange.


The rules require the government to reap the net asset value of the business, plus at least one cent on a per share basis. In some cases, this grants huge windfalls to managers and employees and also allows managers buy far more of the discounted stock than employees.


"It's a way of recognizing the contribution of managers in the past," said USC's Chen. "Basically the policy is that the Chinese government wants to get out of sectors that the government thinks there is no natural monopoly in."


Under the WTO agreement, China's stated policy is to encourage foreign investment by specifically allowing competition and gradually increasing levels of investment.


Large sectors that are affected include forestry, oil exploration, manufacturing, electronics and even railway construction and home building. But there are individual restrictions; a whole host of chemicals, for example, cannot be manufactured by foreign companies.


More confusing is when the WTO agreement calls for a specific sector to be opened but local or state Chinese rulemaking lags behind. That has been the case with the international advertising companies that wanted to enter the Chinese market in 2001 when the WTO agreement was completed.


But as it turned out, the new regulations allowing advertising firms with foreign majority ownership were not published until March of this year.


While the delay could be attributed to the Chinese government's notoriously slow bureaucracy, it might signal other factors at play. The new obstructionists are independent businesses that have developed over the past two decades and do not want to see foreign competition.


"There are still vested interests in the economy that are very uneasy about the foreign competition entering China," Kapp said.

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