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7 August, 2000 Monthly China Review |
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Spurred by robust export growth of 38%, China's real GDP expanded further by 8.3% in the second quarter of 2000. For the remainder half of the year, although export growth is likely to ease due to higher comparative bases in the second half of 1999 and slower demand growth from the US and European markets, the impact should be partially offset by the continued strengthening of domestic demand. Real GDP growth is thus expected to slow down only moderately to 7.8% in the second half of 1999 and full-year real GDP growth is expected to reach 8%, up from 7.1% in 1999.
Retail sales grew by 12% in volume terms during the second quarter, supported mainly by May's extended holiday boost. The 30% hike in salaries of urban residents in September 1999 and the doubling of social welfare payment to the retired and unemployed this year had further boosted consumption. Looking ahead, rising consumer prices may prompt consumers to cut short their wait for better bargains and spend more, lending support to a continued recovery of retail sales growth.
For the first half of 2000, consumer prices increased by 0.1%, compared to the 1.8% decline in the first half of 1999. Stronger prices were partly brought about by government-induced housing rental hikes since early this year and the gradual relaxation of domestic oil price controls introduced beginning June. Given continued upward adjustment in the prices of oil products and government services, consumer prices are expected to increase further in the second half. CPI is thus expected to reverse the 1.4% decline in 1999 and grow by 0.5% this year.
Beginning April 2000, Chinese exporters with over US$ 200 million annual exports turnover are allowed to retain up to 30% of their overseas earnings in foreign exchange, double the previous 15% limit. With a larger captive pool of foreign exchange holdings, Chinese exporters would have more flexibility in scheduling payments of their imported raw materials and would be able to manage their inventories more cost effectively. With better cost control, Chinese exporters would become more competitive in the international market.
The PBOC had announced that foreign investors would be allowed to invest in domestic financial leasing companies. The move is aimed at introducing foreign management expertise into the local financial leasing industry. The relaxation also offers an apt opportunity for foreign investors to gain a stronger foothold in China's financial leasing market and indirectly participate in China's A-share markets.
The mainland stock markets were the world's best performers in the first half of this year, with both the Shanghai and Shenzhen A-share indices surging by over 40%, thanks to stronger recovery of the economy and government initiatives to enlarge the investible capital in the local market. Supported by accommodating government policies and better performance of listed companies, China's stock markets are expected to see healthier development ahead.
The CSRC announced that H- and B-share listed companies would be allowed to raise new capital from domestic investors through issuing A-shares. The new regulation would enable H- and B-share companies to tap the flourishing A-share markets for additional funds, as foreign investors' interests in the Chinese stocks had weakened substantially after the Asian financial crisis.
The PBOC had allowed finance management companies of big state-owned enterprises to borrow from the interbank market, issue bonds and invest in securities. Through allowing finance management companies to tap the interbank and bond markets, the new rules would help improve the liquidity of big enterprise groups and provide better funding back up for their reform and expansion needs.
GDP growth reached 8.3% in the second quarter
Following the 8.1% growth in the first quarter of this year, China's real GDP expanded further by 8.3% year-on-year in the second quarter and brought first half economic growth to 8.2%, up from 6.9% in the second half of 1999. Growth had continued to be spurred by robust exports, stronger state sector investment and sustained recovery of domestic consumption.
Exports continued to post robust growth in the second quarter and increased by 37.7% year-on-year, as demand from the US, European Union and neighboring Asian countries remained strong. Meantime, higher export value-added tax rebate, which was introduced since July last year, has continued to enhance the price competitiveness of China products in the international market. On the back of strong exports, China trade surplus reached US$ 12.3 billion in the first half of 2000, up from only US$ 7.8 billion in the same period of 1999. The widening trade surplus had helped boosted the country foreign exchange reserves to US$ 158.6 billion at the end of June from US$ 154.7 billion at end-1999.
Domestically, consumption has continued to post steady growth. Retail sales value expanded by 9.8% in the second quarter, significantly higher than the 5.5% recorded in the same period of 1999, thanks to the series of government income boosting measures since September last year, including a 30% pay hike for urban residents and the doubling of government spending on social welfare. Supported by strong external demand and sustained recovering of domestic consumption, growth in value added industrial output picked up further from 10.7% year-on-year in the first quarter to 11.7% in the second quarter. State sector fixed asset investment, meantime, grew by 12.1% in the first six months, compared to 8.5% in the first quarter, signaling that the government had further stepped up its investment to bolster economic activity.
Looking ahead, export growth would likely ease due to the higher comparative bases in the second half of 1999 and slower demand growth from the US and European markets brought about by higher interest rates. The impact of slower external demand growth, however, should be partially offset by the continued strengthening of domestic consumption. Real GDP growth is thus expected to slow down only moderately to 7.8% in the second half of 2000 and full-year real GDP growth is expected to reach 8%, up from 7.1% in 1999.
TopRetail sales volume expanded by 12% in the second quarter
Retail sales grew by 12% in volume terms during the second quarter of this year and 12.2% in the first half. Apart from May extended holiday boost, retail sales growth was supported by the 30% hike in salaries of urban residents in September 1999 and the doubling of social welfare payment to the retired and unemployed this year. Thanks to these government income boosting measures, per capita disposable income of urban residents increased by 8.7% year-on-year in the first half of 2000, lending strong support to the recovery of household consumption.
Meantime, the lower real return on savings deposit also encouraged consumers to save less and spend more. After the introduction of the 20% tax on bank deposit interest income since November 1999, the effective real return on one-year bank deposits had already plunged from 6.1% in May 1999 to 2.8% in December 1999. With the easing of the decline in consumer prices in the first half of this year, real return on one-year bank deposits fell further to 1.3% by June 2000. This made bank savings even less attractive and prompted consumers to increase spending. Looking ahead, rising prices may prompt consumers to cut short their wait for better bargains and spend more, lending support to a continued recovery of retail sales growth in the remainder half of the year.
Following the 0.7% and 0.1% increases in February and May respectively, China consumer price index (CPI) recorded another month of positive year-on-year change and increased by 0.5% in June. This was the first time that prices had increased despite the absence of a boost from major public holidays such as the Chinese New Year in February and Labor Day in May. The increase of prices was in part due to the gradual relaxation of domestic oil price controls beginning June, and government-induced housing rental hikes since early this year, as well as higher charges on services such as transportation and medical care. Thanks to the increase of prices in three out of the first six months of this year, China CPI edged up by 0.1% in the first half of 2000, compared to the 1.8% decline in the first half of 1999. The retail price index (RPI), however, had continued to decline, albeit narrowing from 3% in 1999 to 1.9% in the first half of this year, as automobile and household appliance manufacturers continued to cut prices to boost sales.
Given continued upward adjustments in the prices of oil products and government services charges, consumer prices are expected to increase further in the second half. Moreover, robust retail sales growth would ease the pressure on retailers to engage in further massive price cuts to boost sales. China CPI is thus expected to increase by 0.5% in 2000, compared to the 1.4% decline in 1999, while the decline in RPI is expected to ease to 1.5%, compared to 3% last year.
TopForeign trade and investment
Chinese exporters allowed to retain more foreign exchange
Representing another move by China to ease the country foreign exchange control, the State Administration of Foreign Exchange (SAFE) had allowed Chinese enterprises to retain a larger portion of their export earnings in foreign exchange. Beginning April 2000, Chinese exporters with over US$ 200 million annual exports turnover are allowed to retain up to 30% of their overseas earnings in foreign exchange, double the previous limit of 15%.
Under a previous foreign exchange rule which was implemented in October 1997, Chinese enterprises were allowed to retain only 15% of their export earnings in foreign exchange. The rest had to be sold to state banks and converted into Renminbi. Chinese exporters in need of foreign exchange more than they kept had to buy from the state banks. With the doubling of the retention limit under the new rule, however, Chinese exporters would have a larger captive pool of foreign exchange holdings. This would make it more flexible for export manufacturers to schedule the payments of their imported raw materials, and enable them to manage their inventories more cost effectively. With better cost control, Chinese exporters would become more competitive in the international market.
As Chinese enterprises retain a larger portion of their export earnings in foreign exchange under the new rule, however, the sales of hard currencies to the state banks will reduce. Accordingly, the supply of US dollar in China foreign exchange market will decline. This would put downward pressure on the Chinese currency. However, the Renminbi exchange rate has so far remained stable on the strong side. Meanwhile, China foreign exchange reserves have continued to increase in proportion to the growth of China trade surplus, indicating that the easing of exchange control since April had not triggered an increased hoarding of foreign exchange by Chinese exporters. The stability in the currency market notwithstanding the easing of foreign exchange controls would strengthen market confidence in the Renminbi and pave a smoother path for China to gradually adopt a more flexible foreign exchange regime.
TopTaiwan plans to relax controls on mainland-bound investments
The People's Bank of China (PBOC) announced on July 26 that foreign investors will be allowed to buy stakes in domestic financial leasing firms. In the same announcement, the PBOC also permitted financial leasing firms with a minimum capital of RMB500 million to borrow hard currencies from overseas, invest in securities and issue bonds, subject to PBOC approval.
Apart from enhancing the liquidity of financial leasing firms, the move is also aimed at introducing foreign management expertise into the local financial leasing industry to help financially troubled companies restructure their assets. In return, foreign investors are offered an apt opportunity to gain a stronger foothold in China financial leasing market. Through investing in financial leasing companies which may now invest in securities, foreign investors could also indirectly participate in China A-share markets, which are in theory opened to domestic investors only.
TopChina's stock indices reached new highs
Supported by a strong recovery of the economy which boosted investors' confidence, the mainland stock markets were the world best performers in the first half of this year and the market rally continued in July. Stock indices at both Shanghai and Shenzhen reached historic highs, with the A-share indices of Shanghai and Shenzhen stock exchanges gaining 47% and 54% respectively between January and July 28 this year. Moreover, total turnover of the two A-share markets amounted to RMB409.7 billion in the first six months of this year, surpassing that recorded for the whole of 1999.
China's stock indices had been edging up since early 2000, thanks to a series of measures introduced by the government during the past year to bolster domestic stock market investment. Beginning September 1999, state owned enterprises are allowed to use their retained earnings to buy stocks in the secondary market. Since last November, insurance companies are also able to invest their premium income in the A-share markets indirectly through mutual funds. Effective February this year, comprehensive securities firms are further allowed to use their stock holdings as collateral to borrow short-term bank loans to finance stock investment. Through enlarging the pool of investible capital, these measures have helped revitalize the stock market and lent support to share prices.
The stock market rally gathered further momentum in May after China closed a bilateral trade agreement with the European Union (EU) on its entry to the World Trade Organization (WTO) and the US House of Representatives voted in favor of granting China the permanent normal trade relations (PNTR) status with the US. Since June, news related to the restructuring of China stock markets including the proposed merger of Shanghai and Shenzhen Stock Exchanges and plans to permit foreigners to invest in China stocks have driven A-share indices to new highs.
For the meantime, local share prices are expected to receive continued support from the further increase in investment funds flow into the market, as the government has recently allowed more institutional investors including financial leasing companies and finance management firms of big enterprise groups to invest in stocks. Increased profitability of listed enterprises would also provide another boost. In 1999, more than 900 of the 1,032 listed companies on the Shanghai and Shenzhen A-share markets had reported better performances than 1998, and the percentage of loss-making listed companies had been reduced to 7.8% from 9%. Supported by accommodating government policies and better performance of listed enterprises, China stock markets are expected to see healthier development ahead.
TopH- and B-share companies allowed to issue A-shares
The China Securities Regulatory Commission (CSRC) announced on July 24 that Chinese enterprises with H-shares listed in Hong Kong or B-shares listed in China would be allowed to also issue A-shares to raise new capital from domestic investors. The new rule reversed the March 1998 regulation which banned Chinese enterprises from issuing more than one class of shares in order to avoid complicated ownership structures among China listed state-owned enterprises.
Given that H- and B-share listed companies have already obtained government approval to list their shares and have complied with all the listing requirements in their respective stock exchanges, the CSRC would regard any A-share issues by these companies simply as another tranche of the existing share issues. As such, the companies would be exempted from the extensive initial public offering (IPO) application process of obtaining local government approval for the A-share issue and queuing up with other IPO candidates. They would only need to apply to the CSRC for A-share listing and their applications will be regarded same as those submitted by existing A-share companies seeking additional share issues.
The regulatory change is aimed at helping H- and B-share companies raise new capital from domestic investors, as foreign investors' interests in the Chinese stocks had weakened substantially after the Asian financial crisis. By allowing these companies to issue A-shares, the government hopes these companies could raise the needed funds from the flourishing A-share markets to finance their restructuring and technical upgrades. Of the 46 H-share companies currently listed on the Hong Kong stock exchange, 26 have not issued any A-shares and are therefore expected to benefit from the relaxed regulation. Following the announcement, the H-share index surged to an eight-month high of 552 points on July 24. The B-share indices, however, were less affected as only 27 of the estimated 107 B-share listed companies have not issued any A-shares.
Enterprise reform
China eased control on finance management companies
On July 23, the People's Bank of China (PBOC) announced that finance management companies formed by big state-owned enterprise groups would be allowed to conduct a wider range of financial activities. These companies are non-bank financial institutions which at present provide medium- to long-term financial advice to companies of their enterprise groups in relation to technical changes, new product development and sales. Under the new rules, these companies would be able to issue medium- to long-term domestic bonds, borrow in the interbank market and invest in securities after obtaining approval from the central bank. The new regulations would affect the finance management companies of about 69 enterprise groups, whose assets make up a third of all state-owned enterprises' assets.
To ensure that these finance management companies have ample financial backing to support the wider range of activities they can now conduct, the PBOC has raised the minimum requirements for the establishment of such companies by big enterprise groups. The minimum registered capital required of a finance management company was raised from RMB100 million to RMB300 million. Moreover, for an enterprise group to set up a finance company, it must have total assets of at least RMB8 billion against equity of RMB3 billion, and generate a turnover of RMB6 billion and gross profit of not less than RMB200 million. The new rules also required the finance management companies to show a capital adequacy ratio of 10% instead of the previous 8%.
Through allowing finance management companies to borrow in the interbank market and issue bonds, the new rules would help improve the liquidity of big enterprise groups and provide better funding back up for their reform. Meanwhile, the permission given to finance management companies to invest in securities would help expand the pool of investible capital in the stock market and lend further support to share prices.
China Major Economic Indicators
Jason Kwok
North Asia Chief Economist
Joe Lo
Senior Economist
Ellen Cheuk
Economist
Alice Chan
Senior Information Officer
Tel:(852) 2868-8443
