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1 June, 2000 Monthly China Review |
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| On the back of recovering domestic consumption and robust external demand for China goods, the industrial sales ratio has edged up to 96.3% in the first four months of this year, up from 94.9% in the same period of 1999. Along with the increase in sales ratio which reflects a depletion of China’s excess inventory, value-added industrial output growth has also strengthened in the first four months, increasing to 10.9%, compared to 8.7% in 1999. Continued export growth and strengthening of domestic demand is expected to lift this year’s value-added industrial output growth to 10.5%. | |
| Due to higher global oil prices and stronger retail sales, China’s deflation has narrowed with the decline in CPI easing from 1.4% in 1999 to 0.3% in April. For this year, China’s CPI is expected to pose positive 1.6% growth on the back of the government’s continued efforts to encourage consumption and initiatives to raise fees on housing, medical and educational services. | |
| On a few occasions over the past two months, the PBOC had allowed the Renminbi to deviate marginally from the tight trading band of RMB8.2770-8.2800 per US dollar that has been practiced since early 1998. The lack of intervention by the central bank appears to be a test of market reaction to a wider Renminbi fluctuating band, which the PBOC has conceded to be under study. As the aftermath of the Asian financial crisis wears off and China opens up its markets wider after WTO accession, it would be necessary for China to eventually adapt a more flexible exchange rate regime. | |
| On May 19, China finalized an accord with the EU on its accession to the WTO. Compared to the agreement signed with the US last November, the accord reached with the EU included even more concessions particularly in sectors of interest to major European businesses such as automobiles, telecommunications and insurance. After the EU accord, China needs to reach bilateral WTO agreements with only five remaining nations. Formal entry to the WTO can hopefully be completed before the year-end. | |
| The US House of Representatives finally passed the trade bill that grants China the PNTR status and the bill is now awaiting the Senate’s approval, where the hurdle is believed to be much lower. With the PNTR, the access of Chinese goods to the US market would be more secure and China’s exports would grow more steadily given that the US is the country’s largest export market. | |
| Following global interest rate trends, domestic banks in China raised on-shore deposit and lending rates of major foreign currencies on May 29. The hike would allow mainland banks to avoid an outflow of hard currency seeking better deposit returns overseas. | |
| The China Association of Banks (CAB) was established on May 10, with 22 local bank members, including the four state commercial banks and the three state policy banks. The CAB’s main functions would be to facilitate self-regulation among banks, ensure that members are abiding by the industry’s laws, and provide value-added services such as training and seminars to members. In the long run, the PBOC expects the association to play an increasingly important role in the reform of China’s financial system. | |
| Local non-financial institutions will be allowed to buy bonds issued by the MOF, PBOC and state policy banks from the interbank bond market, which used to be restricted to accredited financial institutions only. Extending interbank bond market trading activities to more institutional investors would boost trading activity and increase the liquidity of the interbank bond market. A more liquid and efficient bond market is particularly crucial for the government as it increases its reliance on bond issues to finance fiscal spending. | |
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| Major Economic Trend |
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| Industrial sector posed stronger growth | |
| As a result of recovering domestic consumption and stronger external demand for China goods, the industrial sales ratio edged up to 96.3% in the first four months of this year from 94.9% in the same period of 1999. The higher sales ratio reflects the gradual clearing of excess inventories which led to an increase in the demand for industrial goods. As manufacturers expand production to meet the increased demand, industrial output has also grown more rapidly. | |
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| China’s industrial output resumed stronger growth this year. In the first four months of 2000, value-added industrial output grew by 10.9%, compared to 8.7% in the full year of 1999. The pick up in industrial output was attributed to stronger external demand for China manufactured products since the second half of last year and the faster pick up in domestic consumption this year. In the first four months of 2000, exports grew by 39% year-on-year, up significantly from 6% in 1999 while retail sales posed a 12% year-on-year growth, up from last year’s 10%. In the state sector, although ongoing reform is still pressuring state industrial firms to be more prudent in expanding production, state sector value-added industrial output growth picked up in April, growing by 10.8% year-on-year, compared to 8.6% in the first quarter. | |
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| As China’s export growth is expected to remain strong on the back of sustained global demand, and the government continues to introduce measures such as increasing social welfare benefits to encourage domestic spending, value-added industrial output growth is expected to average 10.5% this year, up from 8.7% in 1999. | |
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| Consumer prices fell but decline has narrowed | |
| Although China’s consumer prices failed to follow through the positive growth recorded in February, the deflationary trend has eased substantially with the decline in consumer price index (CPI) narrowing from 1.4% in 1999 to 0.3% in April. The retail price index (RPI), meantime, fell by 2.4% in April, compared to 3.0% decline in 1999. According to the State Statistical Bureau, the decline of prices in March and April was due to lower prices of food products thanks to ample harvests in spring. | |
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| The recent narrowing of price decline was partly brought about by higher global oil prices which contributed to higher imported inflation. It was also due to an improvement in retail sales growth which increased from 10.1% in 1999 to 12.3% in the first four months of this year, allowing retailers to be less aggressive in their price-cutting strategies. Looking ahead, the government’s decision to double social welfare payments to the retired and unemployed and the plan to implement a minimum wage system for the rural residents will continue to encourage consumption and lend support to consumer prices. Moreover, the government’s initiative to raise charges for housing, medical and educational services will also help lift consumer prices. On average, the CPI is expected to increase 1.6% in 2000, up from the decline of 1.4% in 1999. | |
| Excluding the increase in housing and services costs, China’s RPI, however, would likely continue to decline this year, albeit less sharply by 0.5%, compared to the decline of 3% in 1999. In certain goods sectors, such as household appliances and automobiles, persistent oversupply would continue to put downward pressure on prices. | |
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| Renminbi deviaged marginally from the tight bandwidth | |
| To ease the region’s fears of Renminbi devaluation, the People’s Bank of China (PBOC) has maintained a tight trading band of RMB8.2770-8.2800 per US dollar on its currency since early 1998. Since then, any pressure on the Renminbi to deviate from the band had triggered the PBOC’s intervention in the Shanghai-based foreign currency market, so that an informal peg was maintained in the past two years. The stronghold was, however, relaxed on six occurrences between April 12 and June 1, 2000. On April 12, Renminbi exchange rate slid to a 28-month intra-day low of RMB8.2830/US$ and on the five trading days between May 24 and June 1, the Renminbi was allowed to close at RMB8.2768-8.2769/US$ which were the highest levels since China unified its official and swap exchange rate systems in 1994. | |
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| As the deviations from the informal benchmark were only marginal, the lack of intervention by the PBOC appears to be merely a test of market reaction to a wider Renminbi fluctuating band. So far, the PBOC has not issued any notice officially announcing the widening of the currency’s trading range and only contended that the currency issue is still under study. Given that China’s economic recovery is still being spearheaded by the export sector, the central bank appears to be reluctant to see the Renminbi strengthen too much for now. It is, therefore, likely that the PBOC would intervene again if the Renminbi becomes too strong. However, as the aftermath of the Asian financial crisis wears off and China’s foreign trade grows more rapidly after the country opens up its markets wider after accession to the World Trade Organization (WTO), it would be necessary for China to move to a more flexible exchange rate regime in the longer run. | |
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| Other Business News
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| International trade and investment
China reaches WTO accord with the EU | |
| On May 19, China finalized an accord with the European Union (EU) on its accession to the World Trade Organization (WTO). Under the accord, China has agreed to reduce import tariffs on over 150 leading European export items ranging from building materials to spirits, from current levels of 20-65% to a range of 8-10% gradually after China’s accession to the WTO. Compared to the agreement signed between China and the US in November 1999, the accord with the EU included even more concessions particularly in sectors of interest to major European businesses such as automobiles, telecommunications, and insurance. In particular, the concessions include a faster pace of liberalization of foreign ownership in China’s telecommunications and insurance industries, and an end to the restriction on foreign ownership in automobile engine manufacturing and large retail stores. In accordance with WTO rules, these concessions will be enjoyed by all WTO members after China’s entry to the trade body. | |
| Having overcome another major hurdle, China needs to reach bilateral WTO agreements with only five remaining nations; namely, Costa Rica, Ecuador, Guatemala, Mexico and Switzerland before the final application or the "draft protocol of accession" can be submitted. The protocol would then be presented to the WTO General Council and would be voted upon by the current WTO members. For China to successfully gain WTO membership, the draft protocol needs to be passed by two-thirds of the 136 members, after which China’s National People’s Congress (NPC) would have to ratify the agreement. China will formally become a member of the WTO thirty days after the ratification of the agreement. | |
| General trade | |
| - | China will reduce import tariffs on over 150 products varying from building materials to spirits to 8-10%. Currently, tariffs on these products range from 20-65%. |
| - | China will gradually liberalize import quota set on Europe’s fertilizer exports to China immediately upon entry to the WTO. |
| - | China will open the crude and processed oil sectors to private traders through a process of gradual liberalization. Firms no longer need to go exclusively through China’s state importers when shipping oil and fertilizer to China. Oil import quotas will also be increased by 15% annually. |
| - | China will allow foreign firms to buy raw silk directly from Chinese producers, instead of going through state export channels. |
| Agriculture | |
| - | China will reduce import tariffs for the following products: rape oil from 85% to 9%; pasta from 25% to 15%; butter from 30% to 10%; milk powder from 25% to 10%; olives from 25% to 10%; wine from 65% to 14% and wheat gluten from 30% to 18%. |
| - | China has agreed to comply with the WTO’s Sanitary and Phytosanitary Agreement which sets out the basic rules for food safety and animal and plant health standards. |
| Automobiles | |
| - | China will lift all restrictions regarding the class and models of vehicles produced by foreign funded manufacturers within 2 years after China’s entry to the WTO. |
| - | Investments in the sector involving sum of not more than US$ 150 million (instead of US$ 30 million) would require approval from provincial authorities only. |
| - | China will allow the establishment of wholly foreign-owned engine manufacturers. |
| - | As with the Sino-US agreement, import tariffs on automobiles will be reduced by an average of 10% per year from the current 80-100% to 25% by 2006. Import tariffs on auto components which currently stand at 10-80% will be reduced to an average of 10% over the same period. |
| - | China will allow distributors and other non-financial institutions to extend credit facilities for the purchase of all motor vehicles rather than just passenger cars. |
| Financial Services | |
| - | Foreign banks in Zhuhai, where several EU banks have presence, will be allowed to conduct Renminbi business. |
| - | Seven new licenses, five for life and two for non-life business, will be granted immediately to EU companies, and two more companies will be able to open sub-branches in a second city. |
| - | Foreign insurance companies could own up to 50% stake in joint ventures upon China’s accession to the WTO. Foreign majority will be allowed within three years and equity restrictions will be lifted in five years. Under the agreement reached with the US, 50% stake would be allowed in five years after China’s WTO accession while foreign majority would only be allowed after five years. |
| Telecommunications | |
| - | China will allow 25% foreign ownership in mobile telecommunications companies upon entering the WTO. Foreign ownership could be raised to 35% one year later and further to 49% after three years. Under the Sino-US accord, China had agreed to 25% foreign ownership one year after accession, 35% two years later and 49% after five years. |
| - | Domestic leased circuit services will also be liberalized, allowing joint venture foreign telecom operators to create their own network and sell their capacity to clients in China. |
| Distribution | |
| - | China has agreed to lift the 50-50 joint venture restriction applicable to large retail stores (bigger than 20,000 m2 in size) as well as chain stores with over 30 outlets in China. The change would be advantageous for EU automobile distributors. |
| Tourism | |
| - | Capital requirement for travel agencies and tour operators will be gradually reduced to match local agencies. |
| - | The minimum turnover requirement of travel agencies and tour operators would be reduced by 20% to US$ 40 million upon China’s entry to the WTO. |
| - | Aside from leisure tours, foreign travel agents can extend service to corporate travel business. |
| US Congress voted to grant China the PNTR status | |
| Following hours of heated debate, the US House of Representatives on May 24 approved by a larger than expected margin of 237 votes to 197 a trade bill, which would grant permanent normal trade relations (PNTR) to China. The trade bill is now handed over to the Senate, where the hurdle is believed to be much lower. It is all but certain the bill will be passed into legislation by the middle of June. | |
| Since 1979 when China and the US resumed diplomatic relations, the US has granted China normal trading rights, but the status is subject to annual congressional approval. The passage of PNTR will do away with such annual reviews, and enable Chinese goods to permanently enjoy the same low tariff access (5-6% average tariffs) to the US market as products from almost every other nation. Through increasing China's engagement with the international community, the passage of PNTR will also help reinforce the forces of economic reform in China, and speed up the country's transition toward a market-oriented economy. | |
| In return for the granting of PNTR, China would throw open the doors to its vast markets for US businesses under the terms of a bilateral trade agreement signed with the US in November 1999 on the country's bid to gain accession to the World Trade Organization (WTO). According to the agreement, China will open up a wide range of markets, including financial services, agriculture and telecommunications, to US businesses. China will also slash its tariffs on numerous industrial products, and eliminate many non-tariff barriers to US imports. | |
| With more secured access of Chinese goods to the US market, China's exports would grow more steadily given that the US is the country's largest export markets. In 1999, the US accounted for 40% of China's total exports including those channeled to the US via Hong Kong. Meanwhile, freer access to China's vast market would boost US exports to China and help narrow the country's widening trade deficit with China. Including imports from China channeled through Hong Kong, US trade deficit with China surged to a record high of US$ 68.7 billion in 1999. | |
| With or without PNTR, China's bid to join the WTO will not be affected. The US had already lent its support to China by signing the bilateral trade agreement in November 1999. With the successful conclusion of the EU's trade negotiations with China on May 19, the chance of China becoming a member of the WTO before the end of this year has substantially increased. Notwithstanding this, the PNTR status is still an important component of China's WTO accession, without which both China and the US will not benefit fully from the inclusion of one of the world's biggest markets in the multilateral trading body. China had earlier warned that if US Congress failed to accord China the PNTR status, the US would be deprived of the various liberal market access that China would grant to other countries once it becomes a member of the WTO. | |
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| Banking sector
China banks raised foreign currency interest rates |
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| Following the 50 basis points hike in US interest rate on May 16, China’s banks, led by the Bank of China, raised on-shore deposit and lending rates of four major foreign currencies -- US dollar, British pound, Euro and Hong Kong dollar -- as well as the deposit rates for Canadian dollar and Swiss franc in China. The move was approved by the People's Bank of China (PBOC) and took effect on May 29. | |
| One-year deposit and lending rates for the US dollar were raised to 5% and 8.125% respectively while those for the British pound were increased to 5.1875% and 7.8125%. The Euro one-year deposit rate was raised to 3% and lending rate to 5.625%. Hong Kong dollar one-year deposit and lending rates, meantime, were increased to 5.5% and 9.25% respectively. Canadian dollar and Swiss franc deposit rates were also raised to 4% and 1.625% respectively. | |
| The recent hike in on-shore foreign currency interest rates in reaction to global trend would allow mainland banks to avoid an outflow of hard currency seeking better deposit returns overseas. Higher on-shore foreign currency deposit rates would, in particular, reduce the tendency for local enterprises to keep foreign exchange revenues illegally in overseas bank accounts. Higher lending rates, meanwhile, would raise the cost of foreign currency funds particularly for local companies borrowing from Chinese banks to pay for imports. However, the effect is limited on foreign-invested enterprises borrowing from foreign banks as they are already paying the higher off-shore rates. | |
| China Association of Banks established in May | |
| After over two years of preparation, the China Association of Banks (CAB) was finally established on May 10, 2000. At the onset, the association consists of 22 local bank members, including the four state commercial banks (Agricultural Bank of China, Bank of China, Construction Bank of China, and Industrial Bank of China) and the three state policy banks (Agricultural Development Bank of China, Export-Import Bank of China and State Development Bank of China). Foreign banks will be allowed to join the association later on. According to its constitution, the CAB’s main functions would be to facilitate self-regulation among banks and eliminate malicious competition, ensure that members are abiding by the industry’s laws and regulations, and provide value-added services such as training and seminars for members to participate in. The association would also help resolve disputes among its members, enhance cooperation among Chinese and foreign banks, and foster closer relationship between its members and the central bank, the People’s Bank of China (PBOC). | |
| According to the PBOC, the association is expected to play an invreasingly important role in the reform of China's financial system in the long run. The CAB would provide a venue for more organized interaction among bank members. Through increased cooperation in improving the industry's efficiency and product variety, Chinese banks will be in a better position to face the competition from their foreign counterparts when the market is liberalized after China enters the World Trade Organization (WTO). | |
| The association would also help resolve technical concerns arising from changes that the PBOC would introduce as the country’s financial system is being reformed. For example, the presence of a banking association would enable the PBOC to liberalize interest rates without triggering unhealthy competition in the industry. Currently, deposit rates offered by banks must be kept at levels set by the central bank while lending rates are allowed to move only within a 10% band above or below the benchmark lending rates set by the PBOC. When lending rates are allowed to adjust more flexibly, banks would be able to compete for clients by offering lower rates, and rivalry along this line may lead to cut-throat competition. With the presence of a banking association that lays down self-regulatory rules as well as inter-bank pacts, such hostile competition could be contained, paving a smoother path for China to develop a more market-oriented financial system. | |
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| Capital market
Local institutions allowed to buy bonds in the interbank market |
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| On May 18, the People’s Bank of China (PBOC) announced that local non-bank, non-financial institutions will be allowed to buy bonds issued by the Ministry of Finance (MOF), the PBOC and state policy banks from accredited participants in the interbank bond market. Previously, these bonds were traded exclusively among China’s 400 accredited financial institutions, which included commercial banks, insurance companies, securities brokerages and the limited number of foreign banks which have been granted Renminbi operating licenses. | |
| Extending interbank bond market trading activities to more institutional investors would boost trading activity and increase the liquidity of the interbank bond market. With the new regulation implemented, the accredited interbank bond traders will be able to repackage their large volume bond holdings to suit the investment needs of domestic conglomerates and other enterprises seeking fixed income investment vehicles. | |
| According to officals from the MOF's State Debt and Finance Department, further changes would gradually be introduced as China steps up efforts to reform the domestic bond market. For example, selected foreign financial instiutions would be allowed to underwrite treasury bond issues to increase the efficiency of bond issuance in the primary market. Launching of derivative products on the local stock exchanges is also under study to address investors' demand for more flexible hedging products. Although no concrete timetable has been set, it is clear that China wants to establish a more liquid and efficient bond market as the government increases its reliance on bond issues to finance fiscal spending. | |
| China Major Economic Indicators
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1999 2000 |
2000 |
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1997 |
1998 |
1999 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Jan |
Feb |
Mar |
Apr |
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Income |
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|
Real GDP growth (%) |
8.8 |
7.8 |
7.1 |
8.3 |
7.1 |
7.0 |
6.8 |
8.1 |
- |
- |
- |
- |
|
GDP per capita (RMB) |
6,079 |
6,418 |
6,546 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Real GDP per capita growth (%) |
7.7 |
6.7 |
5.5 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Inflation (%) |
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National retail price |
0.8 |
-2.6 |
-3.0 |
-2.9 |
-3.5 |
-2.7 |
-2.8 |
-1.9 |
-2.1 |
-1.4 |
-2.1 |
-2.4 |
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National consumer price |
2.8 |
-0.8 |
-1.4 |
-1.4 |
-2.2 |
-1.2 |
-0.8 |
-0.1 |
-0.2 |
-0.7 |
-0.2 |
0.3 |
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Consumer prices in 36 major cities |
3.4 |
-0.3 |
-0.8 |
-1.2 |
-1.7 |
-0.4 |
-0.2 |
- |
1.2 |
1.9 |
- |
- |
|
Industrial Output1 (yoy real growth %) |
13.1 |
10.7 |
9.7 |
12.1 |
11.9 |
9.5 |
8.8 |
- |
8.9 |
12.0 |
- |
- |
|
Retail Sales Volume (yoy real growth %) |
9.3 |
9.6 |
10.1 |
10.6 |
9.3 |
9.1 |
11.2 |
12.5 |
13.7 |
12.1 |
11.6 |
11.8 |
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Investment2 (yoy growth %) |
10.1 |
14.1 |
6.3 |
22.7 |
15.1 |
10.4 |
6.2 |
8.5 |
- |
8.6 |
8.5 |
9.3 |
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Money Supply (yoy growth %) |
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Currency in circulation |
15.6 |
10.1 |
20.1 |
11.2 |
11.9 |
16.4 |
20.1 |
16.7 |
34.0 |
9.4 |
16.7 |
21.8 |
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M1 |
16.5 |
11.9 |
17.7 |
14.9 |
14.9 |
14.8 |
17.7 |
18.7 |
19.4 |
15.3 |
18.7 |
21.7 |
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M2 |
17.3 |
15.3 |
14.7 |
17.0 |
17.7 |
15.3 |
14.7 |
13.0 |
14.9 |
12.8 |
13.0 |
13.7 |
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External Sector (US$ bn) |
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Export growth (yoy growth %) |
21.0 |
0.5 |
6.0 |
-8.1 |
-2.0 |
15.0 |
16.7 |
39.1 |
47.8 |
35.0 |
36.1 |
38.7 |
|
Import growth (yoy growth %) |
2.5 |
-1.5 |
18.0 |
11.5 |
20.9 |
24.3 |
15.6 |
41.0 |
54.4 |
54.0 |
24.0 |
33.1 |
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Trade balance |
40.4 |
43.6 |
29.1 |
4.3 |
3.8 |
11.6 |
9.8 |
5.2 |
1.5 |
1.3 |
2.3 |
2.1 |
|
Current account balance |
29.7 |
29.3 |
15.7 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Foreign direct investment |
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contracted |
51.8 |
52.1 |
41.2 |
8.7 |
10.7 |
10.3 |
11.6 |
11.1 |
3.5 |
3.1 |
4.6 |
- |
|
utilized |
45.3 |
45.6 |
40.4 |
7.3 |
11.0 |
10.7 |
11.2 |
7.1 |
1.8 |
2.1 |
3.2 |
- |
|
Foreign exchange reserves |
139.9 |
145.0 |
154.7 |
146.6 |
147.1 |
151.5 |
154.7 |
156.8 |
- |
156.5 |
156.8 |
- |
|
Import coverage (months) |
11.8 |
12.4 |
11.2 |
12.2 |
11.7 |
11.4 |
11.2 |
11.7 |
- |
11.8 |
11.7 |
- |
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Exchange rate (Rmb/US$ ) |
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|
period end |
8.2796 |
8.2789 |
8.2795 |
8.2800 |
8.2787 |
8.2778 |
8.2795 |
8.2787 |
8.2777 |
8.2786 |
8.2787 |
8.2799 |
|
period average |
8.2898 |
8.2790 |
8.2783 |
8.2787 |
8.2780 |
8.2775 |
8.2784 |
8.2786 |
8.2792 |
8.2788 |
8.2786 |
8.2793 |
|
Stock Market Indexes (period end) |
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|
Shanghai A |
1,258.5 |
1,219.6 |
1,451.9 |
1,232.7 |
1,790.2 |
1,668.9 |
1,451.9 |
1,915.6 |
1,631.5 |
1,825.1 |
1,915.6 |
1,953.7 |
|
Shenzhen A |
406.5 |
370.1 |
431.8 |
375.1 |
542.6 |
499.5 |
431.8 |
604.1 |
505.0 |
565.0 |
604.1 |
610.8 |
|
Shanghai B |
55.9 |
28.7 |
37.9 |
26.6 |
58.6 |
43.3 |
37.9 |
41.9 |
40.7 |
38.2 |
41.9 |
43.1 |
|
Shenzhen B |
99.0 |
53.6 |
84.7 |
50.9 |
118.3 |
87.2 |
84.7 |
94.0 |
88.3 |
86.1 |
94.0 |
90.1 |
| Notes: | 1 - Gross industrial output. Monthly and quarterly figures refer only to industrial production at the level of xiang and above. |
| 2 - Quarterly and monthly figures refer only to investment of state-owned enterprises in fixed assets. Quarterly and monthly figures are year-to-date figures. |
Jason Kwok
North Asia Chief Economist
Joe Lo
Senior Economist
Ellen Cheuk
Economist
Alice Chan
Senior Information Officer
Tel:(852) 2868-8443
