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1. From “Fast and Sound” to “Sound and Fast”

2006 was the first year of China's 11th Five-Year-Plan, which targets an annual economic growth of 7.5%. Despite of the government's efforts to slow down the excessive growth, China's economy expanded 10.7% in 2006, posting the strongest gain since 1995. Investment in fixed assets remained one of the main engines of growth while private consumption picked up steadily. Foreign investment continued to flow in and trade surplus hit record high (Table 1).

As the world 4th largest economy after the U.S., Japan, and Germany, China is playing a more and more influential role in the global economy. Although the 20.94 trillion yuan gross domestic product (GDP)(1) accounts for only 5% of the overall world output, its growth represents about one third of the total increase in world GDP. Therefore it's probably worth noting the nation's economic slowdown measures for 2007.

During the National People's Congress that closed on 16th March 2007, the government work report set the economic growth target for 2007 at about 8%. This moderate rate was also targeted for 2005 and 2006, with the results of actual double digital growth for these two years. In his annual press conference, Chinese Premier Wen Jiabao stressed that China's economic development was becoming unsustainable, noting that credit issuance and investment had been excessive. One slight change in the expression of the government's task highlighted its determination to cool down the economy: the government's most important objective is to promote “sound and fast” economic development, instead of “fast and sound” development, an expression has been used since the beginning of 90s. This change of order implies the shift of economic development priority from speed to quality and efficiency. Following that, a series of policies have been promulgated, including tougher land control, unified corporate tax law and tightening monetary measures.

2. Shanghai led Yangtze Delta Region

(1) General Situation: still dynamic

The Yangtze Delta Region - including in this term the city of Shanghai and the two provinces of Jiangsu and Zhejiang - continues to play a locomotive role in the country's economy. The aggregate GDP of the delta region climbed to 4' 749.44 billion RMB (608.9 billion USD), accounting for 22.7% of China' s total GDP, a remarkable result compared to its rather low percentages of population (10.3%) and area (2.2%).

Shanghai reported a GDP of 1'029.7 billion RMB (132 billion USD) in 2006, exceeding 1 trillion yuan milestone with an increase of 12% over the previous year. This was Shanghai's fifteenth year with double-digit growth rate. Jiangsu Province, the second largest provincial economy in China after Guangdong province, recorded a GDP of 2'154.84 billion RMB (276.3 billion USD), up 14.9% and 4.2 percentage points higher than the national average. The GDP of Zhejiang province reached 1'564.90 billion RMB (200.6 billion USD), up 13.6%. Measured by per capita GDP, Zhejiang has the highest provincial income in China.

The Region remains China's top economic powerhouse, thus it's now playing a leading role in the economic restructuring. More focuses have been put on promoting the service sector and elevating the industrial structure. In 2006, the tertiary industry accounted for 41.3% of the region's GDP with 0.4% increase. The GDP contribution ratio of the three industries was 3.7%: 55.5%: 41.3%, while the number for China was 11.8%: 48.7%: 39.5%.

Shanghai is defined as the nucleus of the regional development. Under the panned economy in 1980s, Shanghai's economic growth was about 2% lower than the national level. Since the opening of Pudong in 1990s, its economy has been growing at a speed around 2% higher than the national level, driven by fixed assets investment and FDI, paralleling the nation's growth pattern.

2006 witnessed the turning point of Shanghai's economic growth pattern. The growth rate of fixed assets investment slowed down and for the 1st time since 1990s became lower than the GDP growth. In the meantime, China's fixed assets investment still accounted for over one half of the total GDP with 24% increase. Private consumption picked up quickly in Shanghai with a record high growth rate of 13% since 1998, while service sector played a bigger role. The share of GDP of the three industries became 0.9%: 48.5%: 50.6% in 2006. The city's import and export trade became balanced with an optimized structure(2). The momentum of this growth model remains confirmed this year. The city's GDP grew 12.5% in the 1st quarter of 2007, with service sector jumping 12.7% and retail sales advancing a new record of 13.2%.

(2) New macro-control measures and the impact in YDR

> Tougher land control

Starting 1st January 2007, a new policy was put into effect by The Ministry of Land and Resources setting the minimal prices for industrial land use with different land rates for tier 1, 2 and 3 cities across the country. The new regulation has increased the land-use fee for new constructions in some of the regions by 40% to 60%. The money from the fee, which originally belonged to the local governments, is now be split, 30% to the central government and 70% to the provincial treasury. This move will cool off the local official's fever to sell land at below market price to attract foreign investments and gain their official achievements.

The price increase, however, is not significant in Shanghai and its neighbouring cities, where the land price escalated already. But with shrinking land availability, new investment projects in these cities will face stricter selection criteria and the approval procedure will be more complicated, among which the concept of “ investment density”(3) was applied and more attention was paid to the nature of the investments and factors such as the environmental impact, technological level and brand visibility, etc. As a result, some low cost and low technology foreign investments had to move to the north part of Jiangsu Province and inland 2nd tier cities.

> Unified corporate tax

The long-awaited China Corporate Income Tax Law passed this March in the National People's Congress and will come into effect in 2008. According to this new law, foreign invested companies will need to pay 25% corporate tax, up from the current 15% and domestic companies will be reduced the tax burden at 33%. Development zones will be also deprived of the preferential taxes they have been enjoying.

Foreign companies established before the effect of the law will be given a five-year transitional period, therefore the 1st quarter has witnessed an increase of FDI in the region despite of tightening macro policy and the Chinese New Year's holiday.

The launch of the new corporate tax law will end the tax holidays for general manufacturing and export oriented foreign invested companies, but high value-added manufacturing sectors is still encouraged and the YDR will provide service industries with new tax incentive policy.

(3) Regional integration

While the YDR has been enjoying outstanding economic boom, regional integration has lagged behind, by administrative hurdles and regional competition. The central government and the members in the region are calling for synergy to keep its leading position and sharpen the region's competitiveness. Some efforts have already been made in the fields of infrastructure and regional transportation. The recent railway speed-up on 18th April 2007 underlined the inter-city fast transportation network within the YDR and has shortened the travelling time between Shanghai and the two the capital cities of Zhejiang and Jiangsu Province.

To enhance the regional collaboration was also believed to be one of the reasons for the appointment of the new Party Secretary of Shanghai by the end of March 2007. XI Jinping, the former Party chief of Zhejiang Province, was appointed to head Shanghai and replace Mayor HAN Zheng, who was also acting Party Secretary after the crackdown of the former Party Chief. In Zhejiang, XI stressed regional links with Shanghai and the broader Yangtze River Delta. He built his reputation as pro-market reformer over several postings.

This new appointment cleared the political uncertainty in Shanghai and will stabilize the management of the city rocked by a corruption scandal(4) that marked the end of XI's predecessor's career.

XI pledged to continue to speed the efforts to build Shanghai into an international economic, financial, trade and shipping centre, meanwhile taking the lead in the regional economic collaboration.

3. Switzerland and Yangtze Delta Region

The Yangtze Delta Region plays an important role in the Sino-Swiss bilateral economic relation: over one third of the Sino-Swiss bilateral trade, in terms of both import and export, is conducted through the YDR and over half of the total contracted Swiss investment in China goes to the region. In terms of accumulated capital, more than 60% of the Swiss investment at the end of 2006 was in the region.

Swiss trade relation with the Yangtze Delta region developed rapidly in 2006. As Table 2 shows the region imported goods with a total value of 1'728.96 million USD from Switzerland in 2006, an increase of 16.3% over the previous year, and exported a total value of 894.18 million USD to Switzerland with an increase of 37.9%. Switzerland has been enjoying a trade surplus in its favour with both China and the Yangtze Delta Region, with the region contributing 36% of the total surplus in 2006.

The major exported commodities from the region were garments and accessories, automatic data processing equipment. The major imported commodities were watches and components, machinery and pharmaceuticals. Driven by the rising private consumption power in this region(5), the demands of high quality Swiss made consumer goods, especially watches have noticeably increased. Moreover, with the expansion of the Swiss presence in the region, Swiss-invested companies also contributed a considerable part to the total export volume.

Although the new projects of Swiss direct investment in Yangtze Delta Region still accounted for 40% of the total in China in 2006, the momentum of influx obviously slowed down (Table 3). The main reasons are economic restructuring, shrinking land availability and rising business costs in this region. As mentioned before, different from the before eager and enthusiastic attitude towards FDI, Shanghai and its neighbouring cities became more selective in the approval of new projects. On the other hand, Zhejiang Province had followed a different development pattern in 1990s and beginning of this century, characterised by its dynamic private economy. The government started to give priority to the attraction of foreign investment in recent years, therefore it saw a rapid growth of Swiss direct investment upon its relative low base.

Despite of the new challenges and raised threshold for foreign investment, the Shanghai led region keeps its unparalleled advantages for Swiss investors in terms of its sound infrastructure, large human resource pool, government efficiency and higher investment return ratio. According to a research conducted by World Bank in November 2006, foreign-funded companies' investment-return rate in China averaged 22%, while the rate for Shanghai was 24.7%. Calculating all the indices of the cities, the World Bank pointed out in its report that Jiangsu Province was the most desirable place for investors in China. It was followed by Shanghai, Zhejiang, Fujian and Guangdong. Being the dragonhead of the YDR, with its aspiration to be a major international economic, financial, trade and shipping centre, Shanghai is implementing pilot reforms in financial innovation, venture capital investment and port management, providing preferential policies for financial institutions, headquarters and R & D centres.

Stella Nie
Economic Section

Table 1 - Current Economic Indicators* of the Swiss Consular Area

Source: Chinese Authorities
* All statistics not including Taiwan, Hong Kong and Macao; Figures of the year 2004 refer to the unrevised ones; Growth rates are price-adjusted.

Table 2 - Swiss - Yangtze-Delta Region Trade Relations*

Source: Chinese authorities

Table 3 - Swiss Investment in Delta Region

General remarks:
1. GDP volumes are at prices of the reported years (not adjusted).
2. GDP growth rates are price-adjusted.
3. All figures are based on the unrevised data of China's statistical authorities.

(1) an equivalent to USD 2.7 trillion according to the official Chinese exchange rate: 100 USD = 780 RMB at the year’s end.
(2) diversified market structure (21.7% growth to traditional market and 32% increase to emerging market) and growing added-value in processing trade (added-value rate increased from 67.5% in 2005 to 80% in 2006).
(3) The ratio between registered capital and the total land purchased.
(4) The scandal involved misuse of RMB 3.7 billion (USD 474 million) social security fund. Former Party Secretary of Shanghai, CHEN Liangyu, is the highest level official being cracked down in China’s anti-corruption campaign. Nine senior officials of Shanghai were also implicated in the case and have been removed from their posts.
(5) Per capita GDP: Shanghai: exceeds USD 7,000; Zhejiang: near USD 4,000; Jiangsu: exceeds USD 3,500.

25.4.2007

Consulate General of Switzerland
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