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17 October, 2000 Monthly China Review |
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Economy grew by 8.2% in the third quarter
Continuing the momentum in the first half of this year, China's real GDP grew by 8.2% year-on-year in the third quarter, as stronger domestic demand compensated for the moderation in China's export growth during the period.
Externally, China's export growth eased from 38.3% year-on-year in the first half but remained nonetheless robust at 25.1% in the third quarter. Slower export growth was due to the higher comparative bases in 1999 and more moderate growth in demand from the US and European economies in wake of the tightening of the countries' monetary policies.
Internally, fixed asset investment growth picked up further from 12.1% year-on-year in the first half to 12.9% in the first nine months, as the government stepped up infrastructure spending to speed up the development of the central and western regions. Thanks to robust external demand and stronger domestic fixed asset investment, industrial output grew faster by 12.5% year-on-year in value-added terms during the third quarter, compared to 11.3% in the first half.
Meanwhile, retail sales value increased by 9.3% year-on-year during the third quarter, slower than the 10.1% recorded in the first half. The slack was, however, mainly attributed to the absence of long holidays during the period comparable to the week-long New Year and Labor Day breaks in February and May which rendered unusually strong support for retail sales growth in the first half.
Looking ahead, although export growth is likely to ease further in the remainder of the year due to the expected moderation in US and European economies following the tightening of the countries' monetary policies, domestic demand is expected to remain strong. State sector investment in fixed assets is likely to pick up further in the fourth quarter, as the government is issuing more special treasury bonds to finance infrastructure investment in the central and western regions. Domestic consumption would also remain robust as China moves to increase the income of rural residents and stepped up social welfare payments to the retired and unemployed. As a result, real GDP growth is likely to surpass last year's 7.1% and reach 8% in 2000.
Consumer prices increased by 0.3% in the third quarter
China's consumer prices stayed flat in September after posting four straight months of increase between May and August this year, as manufacturers further reduced prices of electric appliances, particularly refrigerators and air-conditioners, to clear inventories at the end of the summer season. As a result, the consumer price index (CPI) improved only marginally from the 0.1% increase recorded in the first half and rose by 0.3% during the third quarter.
Looking at the consumer price sub-indices for the first seven months of 2000, higher fuel costs have led to steeper hikes in transportation charges and partly contributed to the 14.5% year-on-year increase in services fees, up from 8.9% in the same period of 1999. Housing rents also increased by 4.8% year-on-year in the first seven months, compared to the 0.8% growth recorded in the same period of 1999, thanks to recovering real estate market which enabled the government to step up the adjustment of housing rents from less than 1% in the first half of 1999 to over 5% in the second quarter of 2000. Prices of durable consumer products, such as appliances for home, traffic and telecommunication uses, however, continued to decline and fell by 6.1% as manufacturers and retailers, who are cautious not to deter the recovery of consumer confidence, continued to hold prices down to reduce inventory.
Looking ahead, as the government is likely to continue reducing its subsidies on housing and services fees to ease its financial burden, and the ongoing upward adjustments in domestic oil prices to reflect international trends would in due time be passed on to the retail level, consumer prices are expected to rise further in the coming months. China's CPI is thus expected to increase by 0.5% in 2000, reversing the declines recorded in the last two years.
Enterprise reform
AMCs move to dispose assets acquired
In a bid to restore the commercial viability of the state-owned enterprises (SOEs), China launched a debt-for-equity swap scheme last year to restructure the bank debt of the state firms. Under the debt-for-equity swap scheme, asset management companies (AMCs) set up by the government to take over the bad loans of the four state commercial banks are to covert the debt into equity stakes in the debtor SOEs. The scheme would not only help ease the heavy debt service burden of the SOEs, but also help discipline the management of the enterprises through the equity ownership of the AMCs. In the end, the AMCs could opt to sell part of its equity stakes in the SOEs to private investors, who could steer the enterprises into better efficiency and higher profitability.
Since the first AMC was set up in April 1999, a total of RMB1.3 trillion of bad loans have been taken over from the state commercial banks, and 569 SOEs have entered into verbal agreements with the AMCs for debt-equity swaps as at the end of August 2000. Representing a first attempt by the AMCs to sell part of the non-performing bank loans they acquired, the Cinda Asset Management Company announced in September a list of 38 asset-restructuring projects, which involve the converting of several hundred million Renminbi of SOE debt due to the China Construction Bank into equity stakes of the AMC, for sale to domestic and foreign investors. The debt was due by state firms in a wide range of industries including chemicals, power, gas, food, paper, and environmental protection. Apart from selling directly to investors, such as what Cinda did, the AMCs are also preparing to dispose part of the restructured bank debt of SOEs via public listing. All the four AMCs have already sought the approval of the China Securities Regulatory Commission (CSRC) to underwrite domestic A-share initial public offerings and additional stock issues. So far, two of them, Cinda and Huarong, have been granted securities underwriting licenses.
As enterprises qualified for the debt-equity swap scheme are those that have shown good profit potential and captured substantial market shares in their respective sectors, there should be reasonable investor interest in the equity stakes on offer. By selling their stakes in the state enterprises to private investors, the AMCs are hoping to introduce new management and operating expertise to help the SOEs improve their efficiency. The participation of private investors, particularly the foreign ones, would also bring new market opportunities and boost the profitability of state enterprises. The turning around of the debt-ridden SOEs would not only ease the pressure of rising unemployment on the economy, over the long run, the restructured state companies would also make more substantial contributions to China's economic growth and development.
However, there is a price that the government has to pay for the restructuring process. Whether sold directly to investors or via public listing, the restructured bank debts now under the management of AMCs would have to be priced at large discounts against their book value to attract investors. According to independent estimates by some Chinese academics, the AMCs are likely to recover only 30-40% of the value of non-performing assets they acquired at the end of the debt-equity swap exercise. Assuming a loan recovery ratio of 30-40%, the losses would amount to a massive 13-15% of GDP. The loan losses would be shouldered by the government and put a significant burden on the country's fiscal position.
TopChina approved national social security fund
In mid-September, the Chinese Communist Party Central Committee has approved the establishment of a National Social Security Fund (NSSF) to raise money for pensions, medical care and unemployment insurance payments. The government would initially inject only RMB100 billion into the fund but would at later dates transfer the proceeds from the sales of state assets to enlarge the fund size. Unlike existing pension funds, which are only allowed to place their money in bank deposits and government bonds, the NSSF would be allowed to invest part of its funds in the domestic stock markets through selected asset managers. Meanwhile, management of the fund would be left to a new board under the direct leadership of the State Council. The board would be in charge of allocating funds, selecting appropriate investment managers and reporting the fund's capital flow volumes and profits to the central government and the public.
The decision to set up the NSSF is aimed at providing additional funds at the national level to complement the current pension system which is being administered by the local governments and funded by old-age and medical insurance payments contributed by workers and employers of state enterprises and the local governments. Under the current pension system which was set up in 1997, only those workers who are hired after 1997, and will thus be making contributions spanning their entire work life, would enjoy the full retirement benefits of the scheme when they retire. Those who were hired before 1997, and will be making only partial contributions, will not enjoy the full benefits. For those who already retired before 1997 and made no contributions, they are not entitled to any benefits under the scheme. It is estimated that the pension obligations of the local government not funded by the current scheme amount to a massive RMB1.8 trillion. Meanwhile, inadequate funding in certain localities has also led to uneven levels of pension distribution across China under the current system and even triggered demonstrations in some provinces.
Moreover, existing pension funds are being drained more quickly by the rising number of jobless workers. Amidst ongoing state enterprise reform, the number of officially registered urban unemployed has reached 5.8 million as at the end of 1999 and the World Bank estimates that another 5 million state workers are likely to lose their jobs this year. In a bid to mitigate the impact of a surge in unemployment on domestic consumption and social stability, a more adequate social security system is thus called for.
Making up for the inadequacies of the current pension system sooner would also be beneficial to China in the long run, as pension payment to senior citizens is expected to see steady increase. This year, China has officially joined the rank of "aging society" (by United Nations standards) as 10% of the country's population or about 128 million people are aged over 60 years. By 2040, senior citizens are expected to grow to account for a quarter of the country's population. With the establishment of a better-funded national social security system, China would be well prepared to meet welfare demands of the rising population of retired workers.
TopChina boosts development of small-and medium-sized enterprises
In early September, China's State Council approved the implementation of a list of "Policy Suggestions on Encouraging and Promoting the Development of Small- and Medium-sized Enterprises" drafted by the State Economic and Trade Commission (SETC). According to the suggestions, China's small- and medium-sized enterprises (SMEs), over 85% of which are privately owned, would be treated the same as state-owned enterprises. That means the approval process for the establishment of SMEs would be simplified and patterned after those applied to state-owned enterprises. Moreover, government at all levels would be directed to clear all administrative laws, regulations, policy decrees, and even fees and charges that are unfavorable to the development of these companies. In particular, local governments would be required to set up venture investment funds to support initial investments in the science and technology categories of SMEs to help them convert research results into viable products.
The suggestions drafted by the SETC also addressed the dire funding needs of SMEs. Financial institutions, including banks, would be encouraged to raise the ratio of loans allocated to these firms. In this light, the People's Bank of China (PBOC) would decide on a wider floating range of lending rates applicable to SMEs. Currently, bank lending rates to these companies are allowed to float up to 30% above or below the base level set by the PBOC, compared to the 10% band applicable to larger companies. In due time, qualified SMEs would also be permitted to raise funds by issuing bonds and listing in China's stock exchanges.
The allocation of additional resources to the more efficient SMEs would help to boost the overall productivity of the economy. Through promoting the development of the SMEs, the SETC also hopes more private enterprises could absorb the workers being laid off by the state sector amidst the ongoing enterprise reform to alleviate the impact of rising unemployment on the economy.
TopShenzhen prepares to launch second board
According to the China Securities Regulatory Commission (CSRC), preparation for the launching of the second board of the country's stock market in Shenzhen is near completion. Proposed regulations, ranging from those governing stock listing application to trading and financial reporting, drafted by the Shenzhen Securities Exchange (SSE) have been presented to the CSRC for consideration and would be submitted to the Standing Committee of the National People's Congress for approval within the year.
According to the draft regulations, candidates for listing on the second board, be they Chinese or foreign funded, should be registered under the Chinese company law. As the second board is aimed at providing a fund-raising channel for the mainland's fledging technology and high-growth enterprises, many of which are established in recent years, profit track record of the listing companies would not be required. The companies should, however, have at least two years of operating history, demonstrate a potential for sustained earnings growth, and possess at least RMB5 million in turnover or RMB10 million in assets. The SSE also recommended that a sponsor system be set up for the second board. Sponsors of listing companies must ensure that the details reported in the companies' listing applications are true, and make sure that the companies continue to comply with the listing rules in the two years following their debut to provide better protection for investors.
The establishment of a second board would be timely in meeting the rising funding needs of the country's emerging technology and high-growth enterprises. As these firms are not backed by sturdy profit track records and are often involved in more risky technology-related businesses, obtaining bank loans to fund their capital needs has been relatively difficult. With a second board in place, these firms could have an additional venue for raising funds to convert their research and development efforts into viable commercial projects.
Meanwhile, the second board is also part of the government's larger plan to restructure the country's securities exchanges. Proposals have been made to merge the country's two bourses by transferring the stocks listed in Shenzhen to Shanghai. The objective is to bring together all listed companies under a single regulatory framework, so that the authorities could better utilize the exchanges' technical resources to improve stock trading efficiency. As the merger would mean a loss in stamp duty revenue for the Shenzhen government, the SSE had not been enthusiastic about the proposal. The establishment of a second board in Shenzhen, however, would partly compensate for the lost revenue and pave a smoother path for the two exchanges to proceed with the merger plan.
Although the exact time for launching the second board has not been fixed, the SSE has reportedly issued notices urging domestic brokerages to complete technical preparations for second board trading by November.
China issued guidelines on open-end funds
On October 11, the China Securities Regulatory Commission (CSRC) unveiled a set of regulatory guidelines on the operation of open-end funds in China. According to the guidelines, open-end funds should have a minimum value of RMB200 million and fund managers should be able to pool together no less than 100 subscribers to each fund during the offering period. Investors would be allowed to subscribe to or redeem fund units at least once a week and fund managers could charge handling fees of up to 5% of the subscription value and up to 3% of the redemption value.
China currently offers only closed-end funds on its two stock exchanges and there are now 31 such funds with a combined value of about RMB80 billion trading on China's two A-share markets. With the introduction of open-end funds, fund management companies would play an expanded role in the country's stock markets. Investors' interest in the new investment product is likely to be keen as they are allowed to redeem their shares in the funds at least once a week. To retain investors' interest in their funds and avoid frequent redemption, fund managers of the open-end funds would be prompted to manage their portfolios more carefully.
According to state media reports, the newly announced regulations are immediately in effect, and the CSRC would begin to evaluate proposals once they receive them from the fund managers. As the local media had periodically reported the government's intention to allow open-end funds to grace the market in the past few months, a number of fund management companies are reportedly well-prepared to launch their new products once they receive approval from the authorities. As such, the first batch of open-end funds could possibly begin to trade in China before the end of this year.
Foreign trade
PNTR status enables more secured access of China-goods to the US
On September 21, the US Senate approved a trade bill which would grant China the permanent normal trade relations status (PNTR). The passing of the bill puts an end to the annual congressional review on China's normal trading rights that had been ongoing since China and the US resumed diplomatic relations in 1979. The PNTR status would allow Chinese goods to permanently enjoy the same low tariff access to the US market as products from almost every other nation.
The US had accounted for over a third of China's total exports (those channeled via Hong Kong included) since 1992. Excluding re-exports through Hong Kong, goods sold directly from China to the US still accounted for 21% of China's total exports in the first half of 2000. More secured access of Chinese goods to the US market that comes with the PNTR status would thus allow China's exports to grow more steadily in the years ahead. The increased contribution of foreign exchange income from exports would, in turn, lend support to the Renminbi in the longer run. Meanwhile, 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.
Cross-strait relations
Taiwan's MAC recommends "mini three-links" before year-end
In line with the timetable laid out in June 2000, Taiwan's Mainland Affairs Council (MAC) has completed the assessment report on the feasibility of opening "mini three-links" with China in September. The report, which was submitted to the Taiwan parliament for approval, recommended that direct trade, transport and postal links between two of Taiwan's offshore islands -- Kinmen and Matsu -- and the mainland be implemented on a gradual basis starting mid-December. Links between a third offshore island, Penghu, and the mainland would be considered thereafter.
According to the MAC proposal, Taiwan would initially allow cargo and passenger vessels to sail from the Liaolo Port of Kinmen to mainland's Xiamen and permit vessels from the Fuao Port of Matsu to sail to Fuzhou. The two islands would be able to import directly from China all items that are currently channeled through a third party. However, Taiwan exporters would have to continue to ship their mainland-bound products through a third party. Meanwhile, while the Taiwan government would not restrict the number of residents of Kinmen and Matsu visiting the mainland, it would limit the number of mainland Chinese traveling to the two islands to below 700 and 100 respectively per day.
Despite the limited impact of the "mini three- links" to both Taiwan and China economies, MAC's recommendations raised hopes that full liberalization of direct three-links could be possible in the future. Although the MAC offered no timetable as to when direct links would be opened to the rest of Taiwan, the pending entry of Taiwan to the World Trade Organization (WTO) following China's accession is expected to leave little room for further delays. Under WTO rules, which call for non-discriminatory and reciprocity treatment among members, Taiwan government would likely have to abolish the ban on direct shipping with China. When materialized, direct three-links would reduce the shipping costs of Taiwan exporters, who are currently still compelled to ship their goods to China through a third party. The resulting increase in economic exchange between Taiwan and China may, in turn, help to foster better cross-strait relations, possibly paving the way for a smoother resolving of the long-standing cross-strait issue.
Jason Kwok
North Asia Chief Economist
Joe Lo
Senior Economist
Ellen Cheuk
Economist
Alice Chan
Senior Information Officer
Tel:(852) 2868-8443
