Quickservice chains don't feel China strains

At a Pizza Hut in Shanghai, Cai Baohua and his family sit down to their regular taste of Americana and say they enjoy eating at other fast -food outlets from the West such as KFC and McDonalds.
"We have Western food more and the taste is good," Cai says, tucking into a slice of pizza.  "During Western holidays like Christmas, sometimes we’ll bring our parents to celebrate."

Cai’s family are exactly the kind of middle-income Chinese that U.S.-based restaurant chains hope will drive future growth.Yum! Brands [YUM  71.11    -0.20  (-0.28%)   ], which owns the KFC label, already derives half its revenues from its 5,000 restaurants in China. The New York-listed company hopes to have at least 20,000 outlets in years to come.

While the expansion of U.S. restaurant chains on the mainland highlights the importance of China’s economy to U.S. corporates, trade relations between the world’s two biggest economies have not been on the best terms of late.

And hopes are high that a new leadership in China, expected to be ushered in at the end of the ruling Communist Party’s 18th National Congress on Thursday, will help reset U.S.-China trade ties and kick start stalled economic reforms necessary to sustain the economic growth that Yum! Brands and other retailers hope will help them expand.
“I think we have a very important opening here that must be recognized by both sides,” former U.S. ambassador to China Jon Huntsman told CNBC.

Strong Economic Ties

Strong economic ties between Beijing and Washington have existed for decades now.

China’s economic growth has been driven in part by American investment in factories that has created millions of jobs.  The U.S. benefits from the imports of low-priced Chinese goods for American consumers.
The U.S. is one of China’s top two export markets. China, meanwhile, is the third biggest destination for U.S. exports and the market was valued at almost $104 billion last year, according to US government data.

The trade relationship, however, has been strained in recent months.

Washington complained to the World Trade Organization in September that China doled out at least $1 billion in illegal subsidies to Chinese auto and auto parts exporters during 2009-2011. China retaliated with its own complaint, saying the U.S. had applied anti-dumping and countervailing duties to two dozen Chinese products.
In the kind of world we live in where there is real struggle for growth and demand, that struggle is going to show up in the trade area,” said Michael Pettis, professor at Peking University’s Guanghua School of Management. “My guess is the trade relationship is going to deteriorate not just between China and the U.S. but between everybody and everybody else.”
Rhetoric about China also flared on the U.S. presidential campaign trail with both candidates promising to stand up to China against what they described as unfair trade practices.

“I set up a trade task force, to go after cheaters when it came to international trade.  That’s the reason why we have brought more cases against China for violating trade rules than the previous administration had done in two terms,” President Barack Obama said before winning his second term.

The most recent trade dispute is over Chinese solar panels. Washington intends to impose tariffs on imported Chinese-made solar panels after a U.S. trade panel ruled that American solar panel manufacturers had suffered due to alleged illegal dumping from Chinese rivals.

On the sidelines of the China’s ruling party Congress Saturday, Chen Deming, China’s Commerce Minister, lashed out against the decision, warning the move could backfire for the U.S.

“Someone asked me, ‘Are you entering a trade war with the United States just like this?’ I said, ‘No.’ I hope we can sit down and discuss and try our best not to get involved in a trade war.  But I must say, when others attack our businesses and invade our interests, I have to protect our businesses,” he said.

A Level Playing Field

Many international business leaders have complained about a toughening attitude in China towards outside competition and say the playing field is becoming less fair.

Christian Murck, president of the American Chamber of Commerce, says markets reforms have stalled. He hopes the incoming leadership will be more reform-minded. “If you look at the last five years, there has not been major progress in that area,” he said.

“So, we would like to see resumption in the reform process which would include widening market access for foreign companies,” Murck added.

Despite the current trade tensions, Pettis believes the two largest economies have depended on each other for too long not to tackle contentious issues.

“I think the relationship is going to be further tested, but I also think that both Washington and Beijing understand that that it's going to be a difficult few years,” Peking University’s Pettis said.