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26 March, 2001 Monthly China Review |
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- During this year's NPC session, the authorities unveiled another
series of fiscal spending measures to spur economic growth. To boost
consumer confidence, the government would raise the basic salaries
of civil servants and increase social security funding again this
year. The government would also continue to invest in public infrastructure
works, particularly in the western regions. With public expenditures
expected to increase by 8.2%, the government would run a budget
deficit of RMB259.8 billion in fiscal year 2001/02.
- China's state sector fixed asset investment grew by 9.7% in 2000
from 6.1% in 1999, thanks to the launching of several large-scale
infrastructure projects in China's western provinces. For 2001,
fixed asset investment will continue to be boosted by government
infrastructure spending in the western region, supported by another
RMB150 billion special treasury bonds issue. Domestic enterprises
are also expected to step up investment to improve their competitiveness
ahead of wider market opening after China's WTO entry.
- Having recorded two years of decline, China's CPI posted a 0.4%
growth in 2000, thanks to the more rapid hikes in service fees and
housing rents. Looking ahead, despite the upturn of CPI in 2000,
inflation is expected to remain well contained this year, thanks
to the country's large pool of under-employed labor force that helps
to keep wages stable. Moreover, increased price competition between
foreign and local products after the country's WTO entry is also
likely to keep price increase at bay. China's CPI is thus expected
to post a modest growth of only 1% this year.
- At the opening of this year's NPC session on March 5, China's
leaders unveiled the key economic blueprint for the country's development
in the Tenth Five-Year Plan period. The authorities promised to
continue with the ongoing reform of ailing state enterprises and
help domestic enterprises prepare for China's WTO entry. Meanwhile,
the government would also inject more resources into the lagging
western region and rural areas to achieve a more sustained and balanced
economic growth across China.
- From February 28, 2001, the CSRC allowed individual Chinese nationals
to invest in the B-share markets. This boosted investment sentiments
in the long-ignored B shares which are priced at large discounts
compared to their A-share counterparts. Following the relaxation,
combined B-share market capitalization more than doubled to RMB15.5
billion on March 22.
- News on the opening up of the foreign currency denominated B-share
markets to Chinese nationals triggered a surge in the demand for
US/HK dollars in China's black market as Chinese investors who do
not have their own captive pool of hard currencies resorted to the
black market for funds, hoping to capitalize on the expected surge
in prices of the heavily-discounted B shares. The impact was, however,
short-lived given the small market capitalization of US$ 6.9 billion
for B shares against China's sizable foreign currency deposit base
of US$ 75 billion.
- On February 24, 2001, the CSRC announced that it would suspend
share trading of listed companies that report losses for the third
consecutive year in their 2000 results and delist them if they fail
to turn around in 2001. The new rule will force poor quality companies
out of China's stock markets and encourage investors to be more
prudent in making investment decisions.
- Total cross-strait trade surged by 25.8% to a record high of
US$ 32.4 billion in 2000 as robust global demand for Taiwan products
triggered a surge in the export of raw materials and intermediate
products for processing in the Taiwan-invested plants in China.
Given the requirement of non-discriminatory and reciprocity treatment
among WTO members, cross-strait trade is expected to expand further
when both China and Taiwan enter the WTO.
- Latest negotiations on China's WTO entry had failed to reach an agreement due to differences over agricultural subsidies. As the Chinese government is unlikely to weaken its stance, given it apprehensions that full liberalization of agricultural imports would hit the income of the country's rural population and breed social unrest, negotiations could take a longer time to conclude.
Top
Economic growth to remain robust 2001
Thanks to robust external demand, China reversed the declining growth trend since the early 1990s and attained an 8% real GDP growth in 2000. This was despite the substantial slowdown in export growth during the last quarter of 2000, which led real GDP growth in the fourth quarter to narrow to 7.3% year-on-year from 8.2% in the third quarter. Although export growth is expected to remain weak in the first half of this year on the back of slower demand from the US and Japan, the government's proactive fiscal policy is expected to bolster domestic demand and help keep the country's economic growth momentum going.
During the Fourth Session of the Ninth National People's Congress (NPC) held from March 5-15, 2001, the authorities unveiled another series of fiscal spending measures to spur economic growth. Following the pay hike in September 1999, the government would again raise the basic salaries of civil servants, particularly the military personnel, in 2001. The government would also increase social security funding to ensure that retired people and workers laid off from state enterprises would receive their basic living allowances on time. These income-boosting measures are aimed at bolstering consumer confidence which remains fragile amidst concerns of rising unemployment. Meantime, the government would continue to invest in public infrastructure works particularly in the western regions. Overall, these stimulating measures would entail an 8.2% increase in government expenditures in the fiscal year 2001/02 to RMB1,736 billion. As government revenue is expected to expand by 10.3% to only RMB1,476 billion, the government expects to incur a budget deficit of RMB259.8 billion in 2001/02, same as last year's. Although China's estimated fiscal deficit for 2000/01 is over 5 times bigger than it was in 1997, it remains at a prudent level equivalent to only 2.7% of the country's GDP.
State sector fixed asset investment grew by 9.7% in 2000
China's state sector fixed asset investment grew by 9.7% to RMB2,420 billion in 2000. Although slightly short of the government's original target of 10%, last year's investment growth was nonetheless higher than the 6.1% recorded in 1999. Thanks to the launching of several large-scale infrastructure projects in China's western provinces, investment in capital construction increased by 6.1% last year. Ongoing reform efforts aimed at improving the efficiency of the country's state-owned enterprises also spurred investment in technical upgrading by 13.2%.
For 2001, fixed asset investment will continue to be boosted by government spending. During the recent National People's Congress session, the government indicated that it would increase fixed asset investment by 10% this year. Apart from helping the country ride out the current economic downturn in the US, increased government investment spending is also aimed at speeding up the development of the western provinces so that the income disparity between the inner regions and coastal cities could be narrowed, and the fruits of economic development could be enjoyed by a larger fraction of its population. Increased government infrastructure spending in the west would create the much-needed employment opportunities that would help absorb an estimated 6.5 million workers to be laid-off from the state sector this year. To fund the increased spending, the government would issue another RMB150 billion special treasury bonds for the fourth consecutive year to ensure that infrastructure projects launched in the western provinces last year will proceed on schedule.
Meanwhile, domestic enterprises are also expected to step up investment, particularly in new technology, to boost their competitiveness in preparation for keener foreign competition after China's accession to the World Trade Organization (WTO). Fixed asset investment growth is thus expected to remain robust in 2001.
Consumer prices increased modestly in 2000
Having recorded two years of decline, China's consumer price index (CPI) returned to positive growth since May 2000, bringing full-year CPI up marginally by 0.4%, compared to a decline of 1.4% in 1999.
The reversal of deflation was largely due to higher prices of services, as the government gradually reduced its subsidies in public transportation, healthcare and housing rents. Last year, service fees, housing rents and healthcare charges increased by 14.1%, 4.8% and 0.3% respectively, compared to 10.6%, 1.7% and 0.9% in 1999. Despite the steep rise in service fees, however, inflation was well contained at 0.4%, as retail prices of consumer goods remained weak.
Looking ahead, despite the upturn of China's CPI in 2000, inflation is expected to remain well contained in 2001, thanks to the country's large pool of under-employed labor force that helps keep wages stable. Moreover, increased imports of foreign goods as China lowers trade barriers after the country's accession to the World Trade Organization (WTO) would also prompt keener competition between domestic and foreign producers and keep local price increase at bay. Consumer price inflation is thus expected to rise only modestly from 0.4% in 2000 to 1% in 2001.
NPC unveiled economic blueprint for the Tenth Five-Year Plan
At the opening of the annual National People's Congress (NPC) session held on March 5, 2001 China's leaders unveiled the key economic blueprint for the country's development during the Tenth Five-Year Plan (2001-05) period. The authorities promised to continue with the ongoing reform of ailing state-owned enterprises (SOEs) and help domestic enterprises prepare for the country's accession to the World Trade Organization (WTO).
By continuing its reform efforts, the government hopes not only to bring the ailing SOEs out of the red, but also to enhance their efficiency and competitiveness in preparation for more open competition against their foreign counterparts after China's WTO entry. Moreover, by turning these enterprises into truly viable businesses, the government would also have a better chance of attracting private capital investment into the state sector so that it could gradually reduce its stakes in the SOEs, paving the way for market mechanisms to be fully exercised.
Meanwhile, the government would also strive to achieve better balance in the development of the western provinces and coastal cities, and narrow the income gap between the rural and urban residents. To speed up the development in the western region, the government will continue investing in large scale infrastructure projects such as highways and power grid construction to enhance the investment environment in the western provinces. Improved operating environment, together with the government's preferential tax policies, would attract more companies to venture into western China and boost the region's productivity. To improve the incomes of the country's rural population, particularly the farmers, the government would also increase spending on the construction of agricultural infrastructure and step up financial support to the agricultural sector.
By injecting more resources into the lagging economic regions, the government hopes to achieve a more sustained and balanced economic growth across China in the longer run. The government aims to achieve an average annual GDP growth of 7% in the next five years in order to double the size of GDP by 2010.
B-share markets opened to individual Chinese investors
On February 28, 2001, the China Securities Regulatory Commission (CSRC) started to allow individual Chinese nationals to invest in the foreign currency denominated B-share markets. The B-share markets were previously opened only to foreign investors and Chinese nationals who owned a passport and could afford to place a minimum balance of US$ 10,000 in a B-share trading account. Under the new regulation, the minimum balance was lowered to US$ 1,000.
The CSRC relaxation was met with warm welcome by local investors. According to the state media, a total of 324,000 B-share trading accounts were opened between February 26 and February 28, compared to the 280,000 accounts existed prior to the rule change. The keen interest of local investors was attributed to the heavy discounts of B-share prices vis-a-vis their A-share counterparts. Although 85% of China's 114 B-share companies also have A-share listings, the Shanghai and Shenzhen B-share markets were traded at average price-earnings ratios of only 24.2 and 12.9 times respectively, compared to 59.4 and 57.2 times for the A-share markets.
Although the opening up of the B-share market is largely regarded as a prelude to its eventual merger with the A-share market, it is understood that the final merger would hinge on the convertibility of the Renminbi under the capital account, which may not take place in the near future. The rule change would, however, help to revive the long-ignored B-share markets and help close the gap between the A- and B-share prices.
Since the market opening, China's B-share indices have edged sharply higher and hit the 10% upper limit for six consecutive trading days before a short stint of profit taking led the indices to slide temporarily on March 8-9. The market soon rebounded and as of March 22 the Shanghai and Shenzhen B-share indices gained 80.9% and 181.9% respectively from their closings on February 19.
Accordingly, the combined market capitalization for Shanghai and Shenzhen B shares more than doubled to RMB15.5 billion from RMB6.9 billion. Total B-share market turnover also surged to US$ 1 billion on March 22 from only US$ 24.5 million before the rule change. Amid rampant speculation by investors hoping to make an earning from the heavily-discounted B-shares, trading is expected to remain volatile in the coming weeks.
Renminbi to remain stable amid opening of B-share markets
News on February 19 that the government will open up the foreign currency denominated B-share markets to Chinese nationals had triggered a surge in the demand for US/HK dollars in China. As Chinese individuals are banned from the official foreign exchange market, Chinese investors hoping to capitalize on the expected surge in the prices of the heavily-discounted B shares but do not have their own captive pool of US/HK dollars have to obtain them from the black market. Increased demand for foreign currencies had led to a notable weakening of the Renminbi in the black market, but the impact was short-lived given the small market capitalization of US$ 6.9 billion for the B shares. With China's sizable US$ 75 billion foreign currency deposit base, the demand for US/HK dollars in the black market could easily be met by the supply of foreign exchange in the banking system.
Moreover, guidelines issued later by the government which prohibited Chinese investors from using foreign currencies obtained after February 19 to purchase B shares until June has helped further alleviate the pressure on the Renminbi rate. In order to prevent capital flight, the CSRC also restricted cash withdrawal from B-share trading accounts, and barred investors from transferring money in these accounts across cities or out of the country. In the official market, the Renminbi exchange rates has remained largely stable since February 19, moving within RMB8.2770-8.2783 against the US dollar.
CSRC to delist poor quality companies
In another bid to shape up the country's stock markets, the China
Securities Regulatory Commission (CSRC) announced on February 24,
2001 that it would delist from the stock exchanges companies which
persistently report losses. According to the announcement, shares
of listed companies which report the third consecutive year of loss
in their 2000 results will be suspended from trading and delisted
45 days thereafter. However, a suspended company may, within the 45-days
trading curb period, apply to the CSRC for a grace period of up to
12 months before delisting. Its application will be considered on
the merit of its 2001 earnings estimate and strategies lined up to
realize such earnings target. Companies which are denied the grace
period or fail to turn their business around in 2001 will be delisted.
Currently, China already adopts a system classifying shares of ailing
companies. The shares of companies which reported two consecutive
years of loss are classified as "special treatment" (ST)
whose daily price movements are limited to +/-5% instead of the normal
10% bandwidth, while those for companies that reported loss for three
consecutive years are classified as "particular treatment"
(PT), which are allowed to trade on Fridays only. Other than these
trading restrictions, however, the CSRC sets no requirement for the
delisting of the PT shares. To date, the shares of about 60 listed
firms in China are labeled ST and another eight are labeled PT.
In China's highly speculative stock markets, investors often bought into shares classified as ST and PT in anticipating that the government would finally bail these companies out. The practice sent prices of some classified shares surging while blue chips are ignored by the market. With the new regulations in place, poor quality companies will be forced out of China's stock market. This would not only force listed companies to improve their performance, but would also encourage investors to be more prudent in making investment decisions, lest they would be permanently stuck with shares of delisted companies. As such, the new regulation would help direct funds to listed companies that offer better business prospects and pave the way for more efficient allocation of funds via the equity market.
Cross-strait trade reached record high in 2000
According to Taiwan's Board of Foreign Trade, trade between China and Taiwan expanded substantially by 25.8% in 2000 and reached US$ 32.4 billion. Taiwan's exports to China increased by 23.3% to US$ 26.2 billion while imports from the mainland grew by 37.5% to US$ 6.2 billion.
The surge in cross-strait trade last year was attributed to robust growth in global consumer demand in the first half of the year. As a growing number of Taiwan businesses have set up production lines on the mainland to take advantage of the lower manufacturing costs there, increased demand for Taiwan goods in 2000, particularly electronics and chemicals, triggered a surge in exports of raw materials and intermediate goods from Taiwan for processing in China. Taiwan thus accumulated a trade surplus of US$ 19.9 billion against the mainland in 2000 - more than double the island's total trade surplus of US$ 8.4 billion.
Looking ahead, growth in cross-strait trade activities is expected to gain further momentum when both China and Taiwan become members of the World Trade Organization (WTO), widely expected to take place within this year. Under WTO rules which call for non-discriminatory and reciprocity treatment among members, the Taiwan government will have to extend the mini-three links practiced between its offshore islands of Kinmen and Matsu and the Chinese ports of Xiamen and Fuzhou since January 1, 2001 to the rest of Taiwan, further stimulating cross-strait trade growth.
Latest talk on China's WTO entry failed to reach an agreement
The latest round of multilateral talks on China's accession to the World Trade Organization (WTO) held in Geneva in January ended without an agreement mainly due to differences over subsidies to the agricultural sector. Recognizing the vulnerability of its agricultural industries to foreign competition after WTO entry, China insisted on entering the multilateral trade body as a developing country, to allow the government to subsidize its farmers for up to 10% of the value of the agricultural production. Although the arrangement is acceptable to the European Union, the US insisted the limit be set at 5% which applied to developed country members. As the Chinese government is unlikely to weaken its stance, given its apprehensions that full liberalization of agricultural imports would hit the income of the country's rural population and breed social unrest, negotiations could take a longer time to complete. According to China's Foreign Trade Minister Shi Guangsheng, the country's WTO entry may take until October/November to materialize.
Given that the granting of China's permanent normal trade relations (PNTR) status by the US last September draws on China becoming a member of the WTO before this year's normal trade relations (NTR) status expires on June 3, the possible delay in China's WTO entry may give US the prerogative to table the PNTR issue for the Congress to vote on again.
Jason Kwok
North Asia Chief Economist
Joe Lo
Senior Economist
Ellen Cheuk
Economist
Alice Chan
Senior Information Officer
Tel:(852) 2868-8443
