Economic impact
One month after first hitting the international headlines,
the economic impact of SARS is spreading well beyond airlines,
hotels and conferences to virtually all businesses within
the region, and beyond. It is now endangering supply chains
and depressing consumer demand. SARS threatens to reduce
product quality, delay new ranges and, if production is
forced to move, raise manufacturing costs. Nestlé
said that the overall impact of SARS should be limited,
but could hurt the company's ice cream and catering business
in Asia. China is one of the company's strongest-growing
areas, with double-digit growth rates. Switzerland-based
Logitech, the world's biggest manufacturer of computer
mice, has not seen any negative impact from the epidemic
on their production. About half of Logitech's production
is in China. Nike, the world's biggest sports-goods
group, is ready to shift production out of Asia, probably
to Latin America, if the disease is not brought under
control in the next six to 12 months. Adidas-Solomon
is considering moving some of its production from Guangzhou
to Vietnam or Indonesia. Nissan Motor Co. said
the public health crisis could hold up the launch of its
Sunny model in China in June, because it may delay the
arrival of support staff and engineers needed to begin
production in Guangzhou. Toyota plans to evacuate
virtually all its Japanese employees and their dependents
from Beijing due to fear of a spread of SARS. Airbus may
not meet its goal of delivering 300 planes this year because
the onset of SARS is causing Asian carriers to push back
orders.
Perhaps the most concrete impact of SARS so far is the
cancellation or postponement of major trade shows. The
Canton Trade Fair, once the single most important
event in China's economy, "is effectively dead,"
say observers. According to official information, the
first phase of its 93rd edition ended with total transactions
worth USD3.31 billion, down roughly 60% from last year.
The China International Machine Tool Show (16 -
22 Apr) in Beijing started successfully but saw a sharp
decline in visitors and closed a half day early, after
the Chinese Government admitted the actual level of the
SARS crisis in Beijing. The Auto Shanghai Fair
- planned from 21 to 27 April - was shut down before it
opened for the public. The prestigious car show in Shanghai
was expected to get about 400'000 visitors and was initially
pushed ahead by the local government, despite doubts of
foreign participants. Shanghaitex 03 - originally
scheduled for early June - has just been postponed to
December.
An immediate impact on the Chinese economy will also
be felt due to a sharp decrease of travelling and consumer
spending. A week ago, Central Government ordered that
Labour Day holidays be limited to 5 days and discouraged
students and workers to travel at all. This week-end,
Beijing's government closed the city's theaters, cinemas,
Internet cafes and other public entertainment venues in
an attempt to stop the spread of SARS. Credit Suisse First
Boston said May retail sales could show negative growth
versus 9.2% growth in the first quarter. Citigroup estimated
Labour Day holiday receipts would fall as much as 60%
compared to last year's, which amounted to nearly CNY40
billion. Some analysts predict that more than 40% of China's
annual USD67 billion in tourism-related income may be
lost this year. Although revenue from foreign tourists
are tiny compared to domestic travelers, it is significant
that the number of tourists visiting China fell 6.5% in
March on the year, the first monthly decline in two years,
and well before the crisis really broke.
Recent surveys of companies with manufacturing operations
in Guangdong found the disease had so far had minimal
effect on their production. However, the current crisis
threatens to make itself felt in months to come. Usually
between February and May buyers come to place orders for
the goods that will be under the Christmas trees eight
months from now. Toy retailers bring over new molds. Watch
sellers arrive to see which strap goes with which model.
Clothes retailers are checking quality control for the
fall season lineup. Small companies hooking up with small
traders do the bulk of this business. That's all been
put on hold, and come fall the repercussions for the Pearl
River and Yangtze River manufacturing areas will be huge.
If the virus - or the panic - can not be contained within
weeks, investor confidence will be a SARS victim,
and that would have far greater consequences for China's
economy. Foreign direct investment, along with trade-related
industrial production and state spending, is one of the
key drivers of Chinese economic growth. Analysts keep
downgrading their forecasts for growth of the Chinese
economy. Citigroup revised downwards its 2003 growth
forecast for the mainland for the second time in less
than a month, from 7.3% to 6.7%. Just a month ago, they
estimated the mainland economy would grow 7.6%. JP Morgan
Chase cut mainland growth forecasts from 8% to 7.4%, while
Credit Suisse First Boston cut the growth forecast from
7.9% to 7.3%. Morgan Stanley Dean Witter revised its forecast
from 7% to 6.5%. In their latest reports - which had been
drafted before the full extent of SARS was revealed by
China's health authorities - the World Bank and the OECD
seem more concerned about the public debt, the increasing
wealth gap and the lack of support to a nascent private
sector than about SARS. The World Bank predicts China's
growth will slow to 7.2% this year from 8% in 2002. The
OECD forecasts growth of 7.7% this year, slowing to 7.1%
in 2004.
Even if the virus can be prevented from spreading around
the world, events in China alone will have considerable
fallout on the world economy, i.e. on global trade,
foreign multinationals with large exposure to Asia and
global investment flows. Last year, China's trade expansion
alone accounted for more than one fifth of the increase
in world merchandise exports and imports. More than half
of the world's silicon chips and 85% of its personal computers
are assembled in Asia. Foreign fund houses hit the panic
button over the SARS outbreak and cut their exposure to
Asia. Asset allocators in London and New York were deciding
to sell first and ask questions later about the impact
of the outbreak on regional economies and corporate earnings.
Fund managers worldwide are concerned that Asia's new
growth locomotive, China, was being derailed as it came
clean about the extent of the SARS outbreak.
One analyst said the SARS emergency highlights the struggle
of China's leaders to reconcile their secretive, authoritarian
politics with the needs of an increasingly international,
market-driven economy. Moreover, the current crisis also
draws the light on the price China inevitably has to pay
for its one-sided focus on economic growth. For years,
the government has paid little attention to its rural
health-care system, which has been run down even as the
country grew wealthier. Last October, Vice-Premier Li
Lanqing told a national rural health conference: "The
possible spread of contagious diseases and endemic diseases
would cause consequences that are too dreadful to think
of; and such diseases not only mean a catastrophe for
the families of sick peasants but will also cause great
harm and heavy losses to the state and society."
Timeframes for Normality
SARS has a bit of a head start in being brought under
control in China. It will be a difficult task with localized
naivety, ignorance and sheer scale of logistics all needing
to be overcome. We do not expect much improvement in China
over the next two months, with possibly July & August
being the earliest we can expect to see any improvement
or stabilization of the spread of the illness. This means
September and possibly October this year is going to be
a likely timeframe before things start to get back to
normal. (Dezan Shira, 24 Apr)
Economy
China has cheapest Big Macs
in Economist index
In its latest "Big Mac index", the Economist
found that a Big Mac in China is now cheaper than anywhere
else surveyed. The survey found that the average price
of a Big Mac was USD2.71 in four U.S. cities and just
USD1.20 in China, implying that the yuan was undervalued
by 56% against the dollar. The index is a rough-and-ready
measure of a concept that economists call purchasing-power
parity, valuing currencies according to what they will
buy at home, rather than in international exchange. In
terms of Big Macs, the Swiss franc was the most overvalued
currency, with the burger costing a whopping USD4.52.
(Economist, 24 Apr)
Minister says 2003 a tough year
for job seekers
The country's registered average unemployment rate in
urban areas reached 4% last year and is expected to go
higher this year. There are nearly 14 million laid-off
workers in urban areas so far. And more than 10 million
new graduates are predicted to enter the work force. To
make things worse, the nation's agricultural adjustment
has forced more than 150 million rural workers to quit
farming. Many of them will head to the cities to seek
employment, posing uncertainties for the State. The State
will make efforts to create more than 8 million new jobs
this year, mostly in the service and building industries.
The country's employment population reached 737.4 million
last year, absorbing 7.2 million more employees than the
previous year. (People's Daily, 24 Apr) And that was before
SARS
Nation imports more vehicles
China imported more than 45'000 vehicles during the year's
first quarter, up from around 17'200 units during the
same period last year. Passenger cars continued to account
for more than 50% of the vehicle imports. Vehicle imports
this year are expected to reach 180'000 units, up from
127'000 units last year. (Business Weekly, 22 Apr)
Government
France Invites China to G8
Summit in June
France asked Chinese leader Hu Jintao to join the seven
most industrialized economies and Russia at a summit in
France in June. The so-called Group of Seven leading economic
powers - the United States, France, Germany, Britain,
Japan, Italy and Canada - only recently decided to widen
their gatherings to include Russia. (Reuters, 25 Apr)
Finance
China's Central Bank tries to
contain yuan
Bolstering its ability to keep the yuan from appreciating,
the People's Bank of China sold CNY5 billion of six-month
bills in its own name onto the nation's interbank money
market. The issue moderately expands the national debt
load, already estimated by most foreign economists at
more than 100% of the USD1.2 trillion GDP. (Dow Jones,
22 Apr)
Business
Strong Swiss presence at CIMT
2003
58 Swiss companies participated in this year's China International
Machine Tool Show (16 - 22 Apr) in Beijing. They hosted
clients and business partners at the traditional "Swiss
Evening" and they invited 22 engineering students
from Techincal Universities around China to learn about
the latest manufacturing technology in the "Swiss
Program for China's Young People". (Embassy of Switzerland,
22 Apr) See the interview with a representative of Swissmem
in Business Weekly.
China signs contract to purchase
30 Airbus jets
A Chinese aviation materials supply company signed a contract
with the Airbus company on the purchase of 30 Airbus A319,
A320 and A330 planes, in a deal that is expected to be
worth well over EUR1 billion. Other deals set to be concluded
during French Prime Minister Raffarin's visit are likely
to involve French engineering and transport group Alstom,
insurance company Groupama and bank Credit Lyonnais. (People's
Daily, 25 Apr)
VW sold more cars in China than
in Germany in 1Q
Volkswagen sold more cars in China than in Germany during
the first quarter. The roughly 150'000 cars sold in China
- compared with 114'000 in Germany reflect VW's "excellent"
position in a huge, unfolding market, Chief Executive
Bernd Pischetsrieder said. (Dow Jones, 24 Apr) The really
interesting thing to know would of course be, how much
they earned in Germany and China respectively.
Domestic handset makers struggling
Domestic handset manufacturers are struggling to complete
with foreign makers, due to lack of core technology, limited
production scope and oversupply. The main CDMA handset
technologies are still in the hands of foreign makers.
Moreover, the domestic handset sector has a surplus of
total production capacity, but each domestic maker has
a relatively limited scope of production, limiting profits.
Twelve domestic handset makers are predicted to manufacture
150 million mobile phones this year, but market demand
is expected to be only 80 million. Some domestic makers
are trying to spark a price war to grab a slice of the
market, pushing profits down even further. (Shanghai Daily,
24 Apr)
China's real estate heats up
in March
China witnessed a three-year high monthly growth in the
real estate sector in March, featuring surging sales prices,
completed housing and land developments. Real estate investment
amounted to CNY128.5 billion, up 34.9% over the corresponding
period of 2002. House sales soared 45.2% to 31.25 million
square meters and the unsold housing area increased 8.5%.
The developed land area soared 66.6% and the purchased
land area increased 38.8% year-on-year. (People's Daily,
23 Apr)
Beijing
Increased influx of foreign
capital in Beijing
Beijing approved 329 foreign-funded enterprises in the
first quarter of this year, an increase of 27.5% over
the same period last year. The involved contractual foreign
investment totaled USD738 million, up 69.4%. Of the 329
newly approved enterprises, 202 were in the service sector.
(People's Daily, 23 Apr)
Beijing to complete 90 infrastructure
facilities before 2008
Beijing has kicked off 90 major construction projects,
which will all be completed before the year 2008. In the
coming five years priority will be given, besides Olympics
gyms, to projects concerning city environment, transportation,
water supply and city communication. Accordingly, investment
for city infrastructure will be raised to around CNY225
billion in five years to come. By 2010, the city will
basically solve the problems of transportation, water
resources and ecological environment. (People's Daily,
23 Apr)
Various
Text messaging worries authorities
More than six billion text messages were sent by mobile
phone over the Lunar New Year holiday, with the medium
increasingly being seen on the mainland as an easy, affordable
way to keep in touch. But the popularity of the SMS has
also left the authorities worried that it is being used
to spread rumours and reactionary views. Unlike the Internet,
which is controlled by multiple government agencies via
filters and routine Web site checks, mobile text messages
remain unregulated. (SCMP, 19 Apr)
Markets
Shares in Chinese companies took a pounding on the Hong
Kong, Shanghai and Shenzhen exchanges as growing fears
over the SARS outbreak washed away investor perceptions
that the mainland was a haven of stable and robust growth.