SARS

Economic Impact: Summary of latest developments

• The State Information Center predicted that GDP numbers will demonstrate that the country powered straight through the SARS and Iraq shocks during the second quarter with an 8.3% year-on-year pace, even faster than the 8.0% expansion in all of 2002.
• Restrictions on domestic and outbound travel are being relaxed; inbound travel remains weak.
• Lost consumption and exports in the second quarter will force manufacturers to limit their inventories, which will curb overall economic growth in the third quarter.
• Retail sales will slow down, urban unemployment will go up, contractual FDI will decrease, deflation may be back, deficit will increase.

Improved SARS situation raises retail sales in late May
Retail sales in China for the last two weeks of May grew by 3.98% year-on-year, the first increase since the outbreak of SARS in the country. Health care goods and seasonal commodities topped the list. (Xinhua, 8 Jun)

SARS affects farmers' income
Experts warned that China may fail to meet this year's goal to increase farmers' income by 5% due to the SARS outbreak. Fearing they may be infected by the virus, large numbers of farmers who work in cities have returned to rural areas since April and will not return to cities until the end of August, when harvesting and planting is finished. During the past years, income earned by farmers from working in cities accounted for about 70% of the total annual increase in income. SARS has also had some impact on farmers' sales of farm products, as they were unable to sell their products abroad, because foreign countries set up technical barriers for China-produced farm products. (China Daily, 7 Jun)

Economy

China, Mongolia agree to expand trade, economic ties
A joint declaration issued at the end of Chinese President Hu Jintao's state visit to Mongolia said that both sides agreed to make great efforts to expand mutually beneficial and reciprocal economic and trade ties by seeking more channels and wider scope for diversified cooperation. As part of the efforts to expand cooperation in tourism, China decided to include Mongolia on the list of destination countries for Chinese tourists. (People's Daily, 6 Jun)

China's policies on chips meet vocal foreign opposition
China's policies to encourage the growth of its domestic semiconductor industry are meeting with increasingly vocal opposition from foreign industry groups and politicians, particularly in the U.S. The policies in question were launched in 2000, with the explicit goal of boosting the size of the domestic industry in order to reduce dependence on imported chips, which are estimated to satisfy more than 90% of local demand. The centerpiece is a break on the China's 17% VAT. Currently China has only a handful of chipmaking facilities using mainstream technology of producing chips on 8-inch wafers. But there is about USD10 billion of new investment in semiconductor fabrication plants in the pipeline. (Dow Jones, 5 Jun)

Japanese unfair trade measures condemned
Chinese exporters angrily condemned a series of unfair trade measures by Japan to block Chinese farm produce. Japan announced it would stop importing Chinese fowl and eggs after finding two cases of a flu virus in a Shandong-based firm's exports of duck meat. It issued an import warning on Chinese frozen spinach on May 20 using the pretext of higher-than-required amounts of pesticide residue. (China Daily, 3 June) "required" pesticide residue?

Mainland cities wrestle to win Taiwanese investments
Shanghai and Guangdong are fighting to attract the island's investors by offering tax breaks and other benefits. Shanghai has attracted 300'000 people, 5'000 companies and nearly USD9 billion in committed investment from Taiwan. The investment figure might be higher, since companies in Taiwan typically route funds through a third region. The whole of Guangdong has drawn 200'000 people, 16'000 companies and USD29 billion in contracted investment. (SCMP, 2 Jun)

Thailand, China agree to sign FTA on 200 products
Thailand and China agreed to sign a free trade agreement for 200 products consisting mainly of fruits and vegetables. Thailand's top export fruit product to China is durian and its top import from China is apples. (Dow Jones, 1 Jun)

Government

New car-industry policy drafted
The Chinese Government is putting the finishing touches to a long-awaited new policy for the fast-growing car industry and is expected to relax some of its control. The requirement regarding the equity structure of Sino-foreign automobile and motorcycle joint ventures - one of the most sensitive issues for the industry - is expected to remain basically unchanged. However, this requirement will not apply if Chinese and foreign motor manufacturers set up JVs in China's export-processing zones and if their products are exclusively for export. (China Daily, 6 Jun)

China to publish policy on global auto goals
Beijing is poised to publish an auto policy that foreign firms may balk at, as it supports Chinese models and local companies at the expense of foreign rivals. The ultimate goal of the proposed policy is to turn China into "a major global automobile-manufacturing country" to meet local demand and "enter the international market on a grand scale," a 16-page draft policy said. The new policy would force international auto makers to foster research and development within China and increase technology transfers to their joint-venture facilities. That isn't the case now, as most existing and planned Sino-foreign joint ventures are focused on making established models for the China market. (Dow Jones, 2 June)

New rules for State-owned assets management
New rules governing state-owned assets were issued by the State Council. The provisional regulation sets out guidelines for the ongoing reform of the state assets management system and provides a sound legal basis for the reform. China launched the State-owned Assets Supervision and Administration Commission in April. It acts on behalf of the state to directly supervise the 196 central state-owned enterprises that had CNY6.9 trillion of state assets at the end of 2002. Local state assets management offices are also being established to supervise local enterprises, according to the newspaper. (People's Daily, 5 Jun)

Official website for foreign investment in China opens
A website for foreign investment in China launched by the Ministry of Commerce went into official full operation. Vice-Minister of Commerce Ma Xiuhong said the website will will show the open, fair and transparent principles advocated by the WTO, and improve China's investment environment. (People's Daily, 1 Jun)

WTO

One year's overall evaluation of WTO entry's influence on China economy
People's Daily points out the positive effects of China's enty into WTO. The lengthy article starts: "The whole world has witnessed China's great performance in conducting its commitments and economic and trade development after WTO entry for one year and more. Facts have fully proved China's entry into WTO has not only contributed to China's economic development, but also instilled new energy into neighbor countries". (People's Daily, 6 Jun)

Finance

Quotas set for foreign institutional investors
China's forex authorities set quotas for the first two qualified foreign institutional investors, putting the finishing touches to a long and widely watched approval process. UBS got a USD300 million quota, while the Nomura Securities got the nod for USD50 million. (China Daily, 7 Jun)

Banks dissolve 11-year mainland partnership
The People's Bank of China has given approval to BNP Paribas and Industrial and Commercial Bank of China to dissolve their 11-year partnership in the International Bank of Paris and Shanghai. The parties agreed that ICBC would withdraw from the joint venture, which would become a wholly owned subsidiary of BNP. Sources said the decision to end the partnership was reached amicably and reflected the divergent strategies of both banks. (SCMP, 7 Jun)

China bucks trend, moves to tight money bias
China's SARS scare and the oil market's Iraq war jitters prompted the central bank to maintain extraordinarily easy monetary policy so far this year. Now, the People's Bank of China is seen as getting back to this year's original plan, i.e. squeezing credit growth. (Dow Jones, 6 Jun)

Nation to revise tax refund system
The Ministry of Finance is working with other government bodies to prepare a new tax refund plan for China's export sector. A nationwide poll conducted earlier this year indicated 90% of export-oriented enterprises had to wait for their tax refunds - generated in last year's fourth quarter or even earlier. Statistics indicate about CNY200 billion worth of export tax refunds have been delayed. (Business Weekly, 5 Jun) Foreign experts estimate the outstanding tax refunds at a much higher level.

Goldman, China's ICBC agree to joint venture to clear loans
Goldman Sachs and Industrial & Commercial Bank of China plan to create a joint venture to dispose of up to CNY10 billion of the Chinese bank's problem loans. The venture would be the first of its kind between a foreign investor and a Chinese state bank. Other U.S. investment banks, including Morgan Stanley and Lehman Brothers Holdings, are setting up similar ventures to handle unpaid loans from China's four main state banks. (AP, 5 Jun)

Insurance capital allowed to invest more, widely in bonds
Chinese insurance companies can now invest more and widely in enterprise bonds. The investment scope was extended from enterprises belonging to the central government to those which have over AA credit appraisal. The ratio of the investment by insurance companies rosefrom the current 10% to 20% of the enterprise' total assets. (People's Daily, 3 June)

Central banks launch USD1 billion new fund
An organization of central banks in East Asia and the Pacific region launched a fund to invest in government bonds issued by its members. China is a participant of the fund. The fund has an initial size of USD1 billion and aims to foster a regional bond market to reduce the excessive reliance of local economies on bank loans and overseas borrowing, which was believed to be a major reason for the 1997-1999 Asian financial crisis. The fund will also create an investment vehicle for the sizable foreign exchange reserves of the central banks. (China Daily, 3 June)

Fund poised to enter stock market
China's CNY124.1 billion National Social Security Fund could begin its long-awaited investment in the mainland stock market this month. The national fund, which made a paltry 2.75% investment return on its assets last year, desperately needs to raise its investment earnings. A 2001 Bank of China International report estimated China's unfunded pension debt at USD850 billion, or 80% of its 2000 GDP. (SCMP, 3 Jun)

Business

Merrill Lynch says foreign firms may not profit in China
Merrill Lynch's emerging markets strategy and economics team released a report in which it examined the question of whether foreign multinationals operating in China have indeed been making money. One of the report's findings was that while information on the importance of China to sales is generally widely available, there is very little data on profits and margins. The key theme that emerges in the team's research report is how rising domestic competition has accentuated pricing pressures. Most multinationals are boosting production, admitting prices will fall, and hoping that margins can be supported by cost-cutting and economies of scale. Sectors that are currently profitable include the handset, automobile, household and consumer goods, capital goods and computer hardware sectors. (Taipei Times, 8 Jun)

Merger to form medical giant
The China Medicine Material Group, which produces and sells traditional Chinese medicine, is to merge with the China National Pharmaceutical Group Corp (SinoPharm). Experts view the move as a prelude to a larger-scale wave of mergers and acquisitions in the fragmented industry. China's annual medicine market is expected to grow from the current USD21 billion to USD60 billion by 2010 and to USD120 billion by 2020. (China Daily, 6 Jun)

Waterford ware to be made in China
Waterford Wedgwood, the Irish china and crystal maker, joined the exodus from British manufacturing by outsourcing a raft of its production to China. Outsourcing production to China will bring unit cost savings of at least 70%. (Times, 5 Jun)

Lucent to invest USD50 million to expand China R&D facilities
U.S. telecommunications equipment maker Lucent Technologies is investing about USD50 million to expand its R&D organization in China and focus more on next-generation mobile phone technology. Bell Labs, the research arm of Lucent Technologies, has several R&D facilities across China as well as six joint labs with top Chinese schools like Tsinghua University and Peking University. (Dow Jones, 5 Jun)

Foreign mobile phone giants localize in scramble for Chinese market
Foreign firms are localizing their products in China as they strive for a greater share of the world's largest mobile phone market. Foreign mobile phone giants shared 84% of the Chinese market in 1999 but fell to 50.68% in 2002, while domestic companies were rising significantly in market shares, reaching 39.4% last year. (Xinhua, 4 Jun)

SARS worsens cellphone glut in China
A recent production surge and the SARS virus outbreak are threatening to create an even bigger cellphone glut in the world's largest wireless market and dent the growth outlook for both domestic manufacturers and many of the world's top phone makers. UBS Warburg estimates handset sales in China will grow about 10% this year to roughly 75 million units, while overall production, before the onset of SARS, was expected to grow by a heftier 25% to 163 million units. (Reuters, 1 Jun)

China automobiles to tap for overseas market
According to the forecast of experts it is possible for China-made autos to export on a great scale five years from now on. Along with the expansion in auto-production in China, all transnational auto-enterprises in China are bound to release their production capacities to the overseas market. (People's Daily, 3 June) …where there is overcapacity as we speak.

Car industry steps on the accelerator
Car making has become the fifth-largest Chinese manufacturing industry and a leading contributor to the country's economic development. The industry's sales income accounted for 5.2% of all industrial sales last year, up from 2.2% in 1990. Experience from developed countries suggests that demand for private cars speeds up when a country's per capita GDP reaches USD1'000. China's per capita GDP reached that level last year. (Xinhua, 3 June)

Energy

Three Gorges Project to begin power generation in August
The first two power generators at the Three Gorges project on the middle reaches of the Yangtze River will start operation in August. The construction of the mammoth dam project is due to be completed in 2009, when its 26 power-generating units with a combined capacity of 18.2 million kilowatts will be operational. (People's Daily, 8 Jun)

Beijing

Lowest average house-price in Beijing, but still double the average in China
2002 saw the average price for commodity houses to be at CNY4764/sqm, a decrease of CNY298/sqm as against the same period of the previous year, the lowest ever since 1997. Also, the price in Beijing is 15% over that in Shanghai, whereas the average disposable income in Beijing in 2002 was CNY12'500, 6% lower than that of Shanghai. Why the house-price remains at a high level is directly connected with the land price and disorderly operation in the real estate market. (People's Daily, 6 Jun)

Shanghai

Shanghai says inked contract to host Formula One In '04
Shanghai International Circuit Co. said it has secured the right to host an annual leg of the international Formula One racing calendar in Shanghai for the next seven years. The company plans to raise CNY2.2 billion locally to finance the construction of a new racing circuit in China's financial metropolis. (Dow Jones, 4 Jun)

Pearl River

Guangzhou reports dramatic rise in industrial output
In spite of the negative impact of SARS, the city of Guangzhou registered CNY39.1 billion in industrial output value in May, a 25.4% year-on-year rise. For the period from January to May of this year, local industrial added value totaled CNY47.1 billion, a rise of 18.4% year-on-year. This increase led to a year-on-year 13.8% growth rate in local GDP during the five month period. (Xinhua, 8 Jun)

Various

Affairs of China's Communists, mandarins and businessmen under spotlight
Mounting investigations into the financial dealings of Zhou Zhengyi, one of China's richest tycoons, could shed light on some of the more untenable practices of China's ruling Communist party. Zhou's story could implicate party leaders at the highest level, including ex-president Jiang Zemin and Politburo Standing Committee member and Jiang ally Huang Ju. (AFP, 8 Jun)

China executive sentenced to life for tax fraud
A Chinese executive was sentenced to life in prison and his company fined USD58 million in a record-setting tax fraud case. The company created 1'545 fake tax receipts between 1997 and 2000 defrauding the government of CNY193 million in export-tax rebates. (AP, 2 Jun)