After having fallen for four consecutive quarters, the growth of China's economy increased to 8.1% in real terms in the first quarter of 2000, up from 7.1% in 1999. The turnaround was mainly due to a strong rebound in exports and the gradually improving domestic economy.

Externally, a faster growth of the global economy has continued to boost the overseas demand for Chinese goods. Meanwhile, the price competitiveness of China's products also improved with the increase in export value-added tax rebate in the second half of last year and the strengthening of the Asian currencies since mid-1999. China's exports thus surged by 39.1% year-on-year in the first quarter of this year, compared to <.2% during the same period of 1999.

Aided by continued recovery in domestic demand and rapid expansion of exports, China's real GDP growth is forecast to rise from 7.1% in 1999 to 7.5% in 2000. As demand picks up and excess supply runs down, consumer prices are expected to reverse their falling trend which began in February 1998 and increase by 1.6% in 2000, compared to a decline of 1.4% in 1999.

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China's retail sales volume rose further by 12.5% year-on-year in the first quarter of this year, after having expanded by 10.1% in 1999. The recovery in private consumption was mainly due to the various government measures introduced in the second half of 1999 to boost consumption.

To discourage people from putting money in the banks, the government announced a cut in deposit rates by an average of one percentage point in June 1999, followed by a levy of a 20% interest tax on bank deposits beginning November 1999. These together with the easing of deflation since mid-1999 reduced the effective real return on one-year bank deposits significantly from 6.1% in May 1999 to 1.1% in February 2000. Meanwhile, to encourage people to spend more, the government announced a 30% increase in the monthly allowance of laid off workers, the pensions of retired state employees and the salaries of middle- and lower-income urban residents in September 1999. The plunge in the return on bank deposits and the boost in income have lent support to the recovery of consumption.

For this year, consumer spending would further be supported by the doubling of government social welfare payments to the unemployed and retired state sector workers, which should help to mitigate the dampening impact of rising unemployment due to the restructuring of state-owned enterprises. Moreover, consumers are expected to be more willing to spend as real interest rates are likely to decline further with the easing of deflation. The continued recovery of consumption would provide a strong boost to the growth of the economy.

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Having declined by 20.9% in 1999, China's contracted foreign direct investment (FDI) grew by 27.1% year-on-year to US$ 11.1 billion during the first quarter of this year. The decline in utilized FDI also narrowed to 2.7% in the first quarter, down from the 11.4% decline in 1999. The improvement in contracted FDI was attributed to the recovering of Asian economies which has helped revive the confidence of Asian investors to resume their business expansion plans in China. Meantime, with market demand in Asia recovering more strongly since the second half of last year, foreign manufacturers have stepped up production in their China facilities, leading to a narrower decline in utilized FDI during the first quarter of this year.

Looking ahead, China's FDI is expected to increase further in the run up to China's accession to the World Trade Organization (WTO), which is widely expected to materialize within this year. Although a real improvement in market access would probably not be seen until 2002, foreign companies are already stepping up their investment in China in preparation for the expanded business opportunities. In anticipation of increased distribution capability in China, foreign investors who already have a presence on the mainland would also expand their operations to gain a firmer foothold before other competitors get the chance to enter the market to compete with them. Utilized FDI is expected to increase by 4% to US$ 42 billion in 2000 and a further 9.5% to US$ 46 billion in 2001.

Last year, US trade deficit with China reached US$ 68.7 billion, up 20.6% from US$ 56.9 billion in 1998. As a source of trade deficit for the US, China is trailing a close second behind Japan with which the US had a trade deficit of US$ 73.9 billion in 1999. According to the US Department of Commerce, robust economic performance in the past year has increased the country's demand for various consumer products manufactured mainly by foreign-invested enterprises on the mainland. Imports from China thus grew by 15% in 1999 to US$ 81.8 billion. On the other hand, the slower economic growth in China has dampened US exports to the mainland by 8% to US$ 13.1 billion, leading to the widening of trade imbalance between the two countries last year.

It is, however, worth noting that a substantial portion of US imports from China is accounted for by the increasing exports of China via Hong Kong to the US. To take advantage of the lower production costs in China, Hong Kong manufacturers have relocated their plants to the mainland since the 1980s. Raw materials and semi-manufactured goods were then shipped from Hong Kong to the plants in China for processing. The finished goods were in turn shipped back to Hong Kong for re-exports to the overseas markets including the US. As the US records these re-exports as exports from China, the trade imbalance between the two countries have seemingly escalated over the past decade. If China's method of classification were used, US trade deficit against China would appear a lot less daunting. For example, for last year, US trade deficit against China would amount only to US$ 22.5 billion under China's trade record, up only by 7.5% from 1998.

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With the sharp widening of US trade deficit against China as measured by US statistics, US President Bill Clinton's campaign for the US Congress to grant China the permanent normal trade relation (PNTR) status is expected to face mounting challenges. The PNTR status is a pre-condition set by China in the bilateral trade agreement on the country's accession to the World Trade Organization (WTO) reached with the US in November 1999. While failure to gain the PNTR status from the US will not stop China from entering the World Trade Organization (WTO), the US will be deprived of the more liberal market access that China would be granting to other WTO member-countries after its entry to the trade body. As China has reiterated, the concessions offered to the US in the agreement will be revoked if the US fails to accord China the PNTR status.

US President Clinton has been lobbying hard for the Congress to grant China the PNTR status so that US exporters could gain freer access to China's vast markets and help narrow the country's widening trade deficit, which surged by 65% to US$ 271.3 billion in 1999. Opponents to the proposal, however, worried that granting China the PNTR status would lead to a surge in imports from China and further widen US's trade imbalance. Increasing competition from China's products would also hit the local manufacturing sector and lead to higher unemployment. The concerns were despite the inclusion of a provision in the Sino-US trade agreement which gives US the right to take effective action against China in case of increased imports of a particular product from China that causes or threatens to cause market disruption in any US industry.

Although a considerable number of Congress members have remained undecided on the issue, supporters of normalizing trade with China are increasingly optimistic that enough votes will turn out for China to be granted the PNTR status when the Congress votes on the issue during the week of May 22.

On April 12, China's State Council announced a series of new regulations on the issuance of foreign debt by Chinese entities. Effective immediately, with the exception of the Ministry of Finance, all domestic entities issuing medium- and long-term foreign currency-denominated debt securities (including certificates of deposit, bonds and commercial papers) will need to submit their financial statements for evaluation by both the State Development and Planning Commission (SDPC) and the People's Bank of China (PBOC), and obtain the approval of the State Council. The timing as well as the markets where the domestic entities plan to sell their debt issues will also have to be approved by the State Administration of Foreign Exchange (SAFE). Moreover, proceeds raised from the international debt issues can only be used for operating expenses, merchandize trading purposes or on projects approved by the government. Subsequent to the debt issuance, a biennial review will be conducted by the SDPC and PBOC to monitor the uses of the borrowed funds.

The new procedures will replace the previous system wherein certain designated institutions, such as the overseas fund-raising arms of local government units - the so-called "window companies" could freely issue foreign-currency debts to raise funds in the international market. Under the new rules, even local government units themselves are subject to evaluation by the SDPC and PBOC before they can continue to issue foreign debt.

The more stringent procedures for approving foreign debt issues would enable the government to monitor the accumulation of foreign debt in domestic enterprises more closely. Meantime, the biennial review on debt issuing enterprises, which serves to ensure better use of funds obtained from the international market, would help appease the concerns of foreign creditors over the repayment ability of Chinese corporate borrowers. This would hopefully help to ease the tight international credit squeeze on Chinese enterprises that had emerged since the bankruptcy of Guangdong International Trust and Investment Corporation (GITIC) which had led to a default on much of the corporation's outstanding debt.

As part of China's efforts to reform the domestic stock market, the China Securities Regulatory Commission (CSRC) amended the "Notice on Further Improving the Stock Issuance Method" which governs the issuance of shares in the country. When the notice was first issued in July 1999, the CSRC relaxed the stock investment ban imposed on state-owned enterprises in May 1997 by allowing legal persons (state-owned enterprises, collectively-owned enterprises and domestic or joint venture enterprises accorded such status) of all ownership types to invest in initial public offerings (IPOs) of large companies with no less than RMB400 million in capital. Along with the relaxation, the CSRC also required companies issuing shares to legal persons to limit the number of such shares to 25-75% of the total issuance, with the rest going to individuals. In the latest amendment issued on April 4, 2000, the CSRC further relaxed the restriction on investment in IPOs and allowed all legal persons to invest even in companies with share capitalization of less than RMB400 million. From now on, companies issuing shares to legal persons can also independently determine the proportion of subscriptions between legal persons and individuals.

With legal persons allowed to invest in listed companies of all sizes, small- and medium-sized companies seeking public listing will face a larger pool of eligible investors. Meantime, allowing listing companies to freely determine the mix between institutional versus individual investors would provide flexibility to the stock issuance. These changes would make it easier for listing companies of any size and those targeting at different investors to raise the needed funds to finance their investment. With the relaxation, legal persons will also be able to raise their investments in high-technology firms, a government-picked priority sector for investment, which are currently only required to have a minimum registered capital of RMB50 million for public listing.

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Further to the restructuring plan issued by the People's Bank of China (PBOC) in April 1999, which required trust and investment companies (ITICs) to have at least RMB300 million in registered capital if they want to continue their operations, China imposed a deadline by which time the new capital requirement will become effective. It was announced in February 2000 that by the end of this year, ITICs with less than RMB300 million registered capital but in sound financial health will have to be merged to meet the new capital requirement, while those financially-ill ones will be forced to close down. Surviving ITICs will take over the assets and liabilities of the closed ones, and the central government would extend credit to local governments to help settle some of the outstanding debts owed by the trust firms to China's state banks.

Most of the ITICs in China were set up by local government units in the 1980s as "Window companies" to raise funds for investment in the mainland. As the country's financial market developed and local government units began to issue bonds directly to raise funds, the intended role of these ITICs has faded. Meanwhile, the financial health of the ITICs has also deteriorated as their aggressive expansion in the real estate and equity markets during the early 1990s left most of them under financial strain after the outbreak of the 1997/98 Asian financial crisis. The massive losses in the real estate investments have prompted the closure of Guangdong International Trust and Investment Corporation (GITIC) in 1998 which had severely tarnished the reputation of China's trust companies and made it more difficult for the ITICs to obtain financing. With the role of the ITICs as international fund raising vehicles becoming less distinct and given their weakening financial position, many of the trust firms have switched to stock trading which has become an active business segment of the ITICs.

Since the implementation of the Securities Law in July 1999, which prohibited trust companies from stock trading and underwriting activities, an increasing number of ITICs have applied for conversion into securities brokerages. Smaller ITICs which lacked the minimum capital required for conversion into securities brokerages, meanwhile, have continued to operate as trust companies and have formed separate financial subsidiaries to continue their stock trading activities. However, with the imposition of the deadline for the new capital requirement announced in February, the smaller ITICs are left with few choices, but have to merge with other trust companies and apply for conversion into securities brokerages so that their operations in the burgeoning stock trading business may continue. In fact, a month after the deadline was announced in February, five trust companies - including the securities arms of People's Insurance Trust and Investment Corporation of China and the four trust companies owned by the country's big four state banks, unveiled plans to form a big securities brokerage that would have a combined registered capital of RMB1.2 billion and assets of over RMB30 billion. Through forced merger and closure, the restructuring plan will reduce the country's 240 ITICs by as much as three-quarters by the end of this year.

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