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16 February, 2001 Monthly China Review |
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- China's export growth slid to 15.5% in the fourth quarter of
2000 and is expected to ease further in 2001 due to the sharper
slowdown in the US market. The extent of its moderation, however,
should not be overstated, as China's exports to the US are mainly
low-cost consumer products that are less sensitive to the contraction
of income and wealth in America. It is estimated China's export
growth would remain robust this year and average about 11.5%.
- China's contracted foreign direct investment (FDI) surged by 50.8%
in 2000 partly due to foreign investors' expectations of wider market
opportunities in China after the country's accession to the World
Trade Organization. The surge in contracted FDI in 2000 is expected
to translate gradually into higher growth of utilized FDI which
would, in turn, be crucial in supporting the stability of the Renminbi
in the coming year, given that the country's trade surplus is expected
to be dragged by the moderation of export growth.
- The growth of retail sales value slid marginally to 9.2% year-on-year
in the fourth quarter of 2000 due to a higher comparative base in
1999 when China first observed a week-long National Day holiday
during October. Nonetheless, full-year retail sales growth improved
substantially from 6.8% in 1999 to 9.7% in 2000. For 2001, further
hikes in civil servants' salaries and pension payments should continue
to lend support to robust retail sales, offsetting the moderation
of exports and helping China sustain a robust GDP growth of 7.9%
in 2001.
- Beginning January 1, China reduced its average import tariff
to 15.3%. The recent round of tariff reduction would allow more
foreign goods to enter the domestic market at lower prices. Although
the availability of cheaper imported goods would put pressure on
Chinese manufacturers who would enjoy increasingly less price advantage
over their foreign counterparts, it would also allow domestic enterprises
to gradually adapt to the less protective trade environment that
would result from China's admission to the World Trade Organization.
- On January 19, the PBOC issued a set of "Administrative
Measures for Trust and Investment Companies" to consolidate
previous notices issued to speed up the reform of the TICs. Under
the measures, TICs meeting the minimum registered capital requirement
of RMB300 million will have to re-register with the PBOC to be able
to continue with their trust businesses. Measures are also undertaken
to minimize the financial risks of the TICs and place them under
stricter supervision by the central bank. Better regulation would
hopefully help shape up the sector and allow the surviving TICs
to take up other financial services roles in the long run.
- The CSRC will scrap the quota system for IPOs beginning March
this year, and allow securities firms to nominate enterprises for
public listing subject to screening by an independent listing committee
of the CSRC. With the quota system scrapped, the selection of listing
companies would be more transparent and less dependent on the government,
helping to ensure that listing companies are of higher quality and
that the investment funded by equity financing is more efficient
and profitable.
- On January 15, the CSRC allowed two property developers to launch
their initial public offerings in Shanghai, effectively putting
an end to a seven-year ban on listings by real estate companies.
With the listing ban lifted, real estate developers would have an
added access to lower-cost funds via the stock market and be able
to increase their investment to meet the growing demand for housing
by the private sector.
- On January 5, the CSRC issued a set of guidelines requiring securities brokerages to implement stricter internal control measures. The move was part of the authorities' clean up process to reduce market irregularities caused by alledged brokerages' manipulations in the stock markets and is deemed an important first step to improve the soundness of the local exchanges in the long run.
Top
Export growth slowed down to 15.5% in the fourth quarter
Having reached 33.1% in the first nine months of 2000, China's export growth began to ease noticeably in November to 13.8% year-on-year, and further to 8.5% in December, bringing export growth for the fourth quarter of 2000 to 15.5%. The slowdown was mainly due to the weakening of global demand as higher interest rates have dampened consumption in the US and European countries.
In view of the sharper slowdown in the US economy since the fourth quarter of 2000, China's exports would experience more moderate growth in 2001. The extent of moderation, however, should not be overstated. Firstly, China's exports to the US are mainly low-cost consumer products that are less sensitive to the contraction of income and wealth in America. Chinese exporters are also less vulnerable to the decline in demand for computers that accompanied the IT industry downturn in the US, as electronics goods accounted for only 19% of the country's US-bound exports. It is estimated that China's export growth would remain robust this year and average about 11.5%, compared to 27.3% in 2000.
Given that exports accounted for only 23% of China's GDP, the decline of export growth would unlikely have a devastating impact on the overall economy. Meanwhile, China's domestic demand is likely to remain robust, thanks to the government's proactive fiscal policy including increased social security payments and higher infrastructure spending, which will boost consumption and investment. Supported by increasing domestic spending, which would offset the moderation of exports, China's real GDP growth is expected to remain robust at 7.9% in 2001, compared to 8% in 2000.
More foreign investors prepare to enter China
Reversing a 20.9% decline in 1999, contracted foreign direct investment (FDI) in China surged by 50.8% to RMB62.7 billion in 2000. The substantial improvement was in part due to foreign investors' expectations of wider market opportunities in China after the country's accession to the World Trade Organization (WTO). The growth of contracted FDI gathered faster momentum particularly after China reached its WTO accord with the European Union (EU) in May 2000, which brought the country another step closer to become a formal member of the multilateral trade body. In the second half of 2000, the growth of contracted FDI edged up to 76.2% from 24.6% in the first six months. Apart from the prospects of China's imminent WTO entry, the government's aggressive campaign to attract foreign investment into the central and western regions of China via the introduction of preferential tax treatments and other privileges is also believed to have drawn much interest from foreign investors to commit investment in the mainland.
The surge in contracted FDI in 2000 is expected to translate gradually into higher growth of utilized FDI, which increased only marginally by 0.9% in 2000. The increased inflow of foreign funds that would accompany the faster growth of utilized FDI would, in turn, be crucial in supporting the stability of the Renminbi in the coming year, given that the country's trade surplus is expected to be dragged by the moderation of export growth due to the global economic slowdown.
Retail sales growth slid marginally to 9.2% in the fourth quarter
China's retail sales value growth slid marginally to 9.2% year-on-year in the fourth quarter from 9.4% in the third quarter. The narrower growth was in part due to the higher comparative bases in the fourth quarter of 1999 when China first observed a week-long National Day holiday during October.
For the whole of 2000, retail sales value growth improved significantly from 6.8% in 1999 to 9.7% in 2000. Apart from longer holidays introduced for the first time during the year to celebrate the Labor Day in May, faster retail sales growth in 2000 was also due to an increase in the salaries of civil servants and urban residents in late-1999. Consumer spending was further boosted by the 80% increase in government social security spending in 2000, which helped to boost the purchasing power of the middle- and lower-income residents, as well as the retired and unemployed workers. The declining return on bank deposits, thanks to the levy of a 20% interest tax beginning November 1999 and the resumption of consumer price inflation since May 2000, also tended to encourage consumers to save less and spend more. The after-tax real return on one-year bank deposits had fallen from 3.5% in January 1999 to 1.6% in September 2000. Accordingly, the growth of non-demand savings deposits declined substantially from close to 20% at the start of 1999 to 9% as at the end of September 2000.
Looking ahead, the government's decision to further increase social security expenditure and to grant another pay rise to public servants this year should bolster consumer confidence and lend continued support to robust retail sales growth in 2001. Increased consumer spending would offset the moderation of exports and help China sustain a robust GDP growth of 7.9% in 2001.
China cuts import tariffs in preparation for WTO entry
On January 1, 2001, China reduced its average import tariff by 1.1 percentage points to 15.3%. China has gradually lowered its average import tariff since 1996 following remarks by President Jiang Zemin during an Asia Pacific Economic Cooperation (APEC) meeting to lower the country's average tariff to around 15% by 2000. In 1997, China's average import tariff was slashed from 23% to 17% and further to 16.4% in 1998.
According to the Tariff Regulation Committee Office of the State Council, tariffs have been reduced for 3,462 import items in the latest cut. The average import tariffs for chemical products are now down to 10.6%, electronics and machinery 14.3%, building materials 17.8%, agricultural products 19%, textiles 21.1% and transportation goods 24%. Tariffs levied on imported cigarettes and alcoholic drinks brought into China by tourists and travelers are also reduced to 70%. The recent round of tariff reduction would allow more foreign goods to enter into the domestic market at lower prices, making smuggling activities less attractive.
Although the availability of cheaper imported goods would put pressure on Chinese manufacturers who would enjoy increasingly less price advantage over their foreign counterparts, it would also allow domestic enterprises to gradually adapt to the less protective trade environment that would result from China's admission to the World Trade Organization (WTO). In accordance with the terms of WTO entry, China has agreed to further reduce its average import tariff to 10% by 2005.
Meanwhile, beginning this year, China adopts the standard freight-on-board (f.o.b.) method of valuing imports for the levy of tariffs. Under the f.o.b. method, the value of imported goods is calculated according to the item's actual price listed in the invoice. Previously, imports were valued by the cost, insurance and freight (c.i.f.) method, which calculates the value of imported goods not only based on the costs of production, but also on marine insurance, and transportation costs. This valuation method was prone to disputes particularly when importers reported transportation and insurance costs based only on the costs of transshipment, prompting customs officers to reassess the reported value of imports. The shift in import valuation method represents another government bid to adopt a more transparent import regime.
PBOC issued regulations on trust and investment companies
To further streamline the number of trust and investment companies (TICs), which was reduced from 240 in January 2000 to 188 at year-end, and better regulate the surviving ones, the People's Bank of China (PBOC) issued a set of "Administrative Measures for Trust and Investment Companies" on January 19, 2001. The measures seek to consolidate previous notices issued by the central bank on the reform of the TICs. Following the reform initiatives set out by the PBOC in May 2000 requiring TICs to have at least RMB300 million in registered capital, the new measures further require TICs that meet the minimum capital requirement to re-in effect, be forced to terminate their operations due to the lack of capital.
The new measures also specify the scope of business for the TICs. While the TICs should continue to focus on businesses that involve capital trust, trust in movables, immovables and other properties, and legal trust fund businesses, they could also seek permission from the PBOC to operate financial intermediary businesses such as fund management, underwriting of government and corporate bonds, and offer financial consultancy services such as those involving asset restructuring of enterprises or mergers and acquisitions.
Meanwhile, to lower the financial risks of these firms, the PBOC also strictly forbids TICs from undertaking savings deposits business, issuing bonds or borrowing capital from overseas. Moreover, TICs are required to set up provisions for bad loans by allotting 5% of their profit after tax to a reserve fund until the reserves reach 20% of their registered capital. For TICs engaging in foreign currency businesses, at least US$ 15 million of the registered capital must be kept in hard foreign currency.
The new administrative measures place the TICs, which were set up by local government units as "window companies" to raise funds, under stricter supervision of the central bank. Better regulation would hopefully help shape up the sector and allow surviving TICs to move on to take up other financial services roles. As the TICs' intended role of channeling funds for the local government units into the mainland has faded following the deepening of the country's capital markets, the authorities may consider expanding the roles of the reformed TICs and allowing them to manage mutual, pension and social security funds in the long run.
Capital market
IPO quota system to be scrapped by March
In a bid to liberalize the market for initial public offering (IPO), the China Securities Regulatory Commission (CSRC) will formally scrap the quota system for IPOs beginning March this year. China used to follow a quota system under which the central government would set a quota for the capital value of shares to be issued every year. The sum would then be allocated among local governments which in turn were directed to identify key industries and nominate worthy companies for listing on the local stock exchanges. In practice, however, the quota for public listing often went to state-owned enterprises regardless of their performance. China first announced plans to scrap the decade-old IPO quota system in June 1998, but full implementation was delayed because local governments were slow to use up the outstanding quotas allotted to them in previous years following the onset of the Asian financial crisis in late 1997 which made equity fund raising less attractive to enterprises. Part of the quotas allotted for 1997 and 1998 remained in the hands of the local governments and were allocated to enterprises only late last year.
With the quota system scrapped, securities firms are now allowed to nominate enterprises for public listing and their nominations will be screened by an independent listing committee of the CSRC. The independent listing committee would assess the qualifications of a listing company based on its operation and financial information submitted, which means the disclosure requirements on listing companies will be tightened. Securities firms, meantime, will also have to adopt higher standards of practice as they play an increasingly important role in advising companies preparing for listing. The CSRC has earlier issued regulations holding securities underwriters responsible for any act of misrepresentation in the listing companies' IPO prospectuses. The scrapping of the quota system for listing companies would thus make the selection of listing firms more transparent and less dependent on the government. The move would also help to ensure that companies listing on the local stock exchanges are of higher quality and the investment funded by the equity financing is more efficient and profitable.
Listing ban on real estate companies lifted
On January 15, 2001, the China Securities Regulatory Commission (CSRC) allowed two property developers to launch initial public offerings in Shanghai, effectively putting an end to a seven-year ban on listings by real estate companies. China's State Council banned the listings of real estate developers in 1993 amid rampant speculations in the property market. The ban was extended to the entire property sector including real estate investors and agents in 1996 in the formal "Notice on Regulations Governing Stock Issuance" issued by the CSRC. As a result of the ban, only 35 of the over 27,000 real estate companies registered in China are listed on the local bourses as at the end of 2000, accounting for approximately 1% of the country's total market capitalization.
The turnaround of the property market in the past two years, which has helped strengthen the financial positions of real estate companies is probably a main factor prompting the authorities to relax the listing ban. In the first eleven months of 2000, completed residential housing units increased by 21% after having grown 24.5% in 1999, while sales of residential housing also increased by 36.7%, up from 23.9% in 1999.
With the listing ban lifted, qualified real estate firms would have wider access to lower-cost funds via the stock market. This would, in turn, help them expand their investment to meet the country's growing demand for private housing. Since the mid-1990s, China has been encouraging people to buy their own homes as part of an effort to overhaul the existing system which allocates housing as a form of social welfare that requires massive subsidies from the government. According to forecasts by the Ministry of Construction, as the government continues to reduce subsidies on housing, the demand for private housing units is expected to see strong growth. By 2005, private purchase of housing units is expected to account for 15% of the total housing sales in the market, compared to less than 5% in 1999.
CSRC issued guidelines on internal control of securities brokerages
In a bid to safeguard the stability of the securities market, the China Securities Regulatory Commission (CSRC) issued the "Guidelines on Internal Control of Securities Brokerages" on February 5, 2001, which required securities companies to set up more stringent internal control measures on their operations, investment management, accounting systems and information-technology.
On daily operations, securities companies are reminded to closely track the funds flow of their clients and uphold confidentiality of trading records. When nominating companies for listing on the stock exchanges, securities firms should ensure the accuracy and comprehensiveness of the information that the listing companies submit to the CSRC for screening. On investment management, securities companies should adopt a check and balance system and refrain from assigning too much discretionary powers to a single investment officer. Proper risk management controls should be adopted even when investing the company's own funds. Securities firms are also reminded to regularly assess their investment positions and avoid incurring massive losses.
In terms of accounting systems, securities brokerages must separately account for transactions undertaken on behalf of their clients from those of the company's investment and those conducted for the firms' shareholders. Clients' funds should also be singled out and should not be accounted for as part of the firm's own assets. On information technology, securities brokerages are expected to design, develop and conduct tests on its information systems to ensure that it is adequate to meet the brokerage's daily operations. Securities firms should apply stringent security and firewall controls to ensure the confidentiality, validity and timeliness of the electronic data kept on its systems. Electronic records of the brokerage's daily transactions should also be audited regularly to ensure their accuracy.
Stricter internal control on securities companies was called for amidst the authorities' probe into alleged participation of more than 20 brokerages in the manipulation of stock prices of two listed technology firms last year. The CSRC began to investigate the irregular price movements of two Shenzhen A-share listed firms in mid-December 2000, targeting at brokerages, institutions and other investors who traded heavily in the shares of the firms. Brokerages allegedly bought and sold stocks between their own funds to increase the stock's turnover. This generated a false impression of strong market interest in the share, bidding up its price. When substantial retail investor interest has been attracted, these brokerages sold the shares at the higher prices and cashed in on the price difference.
During the nine trading days following the issuance of the guidelines, which signified serious efforts of the government to curb abnormal practices in the market, the A-share indices of Shanghai and Shenzhen had declined by 4.7% and 5.1% respectively. Despite depressing the market, the move represents an important first step taken by the authorities which would help to improve the soundness of the stock market in the long run.
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
