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29 May, 2001 Monthly China Review |
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- China's contracted FDI soared by 38.3% year-on-year to US$ 30.2 billion in the first four months this year, while utilized FDI rose by 12.4% compared to only 0.9% growth in 2000. Increased FDI inflow has supported a robust growth of foreign exchange reserves and a stable Renminbi.
- China's fixed asset investment expanded strongly by 18.6% year-on-year in April, due mainly to increased spending on large-scale infrastructure in the western provinces. The current rate of investment growth, however, may not be sustainable throughout the year, because spending on projects that started before 2001 would decline as they draw nearer to completion.
- China's CPI rose by 1.6% year-on-year in April, the largest increase since September 1997, thanks to a one-off hike in fees for telephone services. Consumer prices are likely to continue to record positive growth in the coming months, as domestic demand picks up steadily. Substantial inflation is, however, not expected as prices would remain checked by the country's large pool of under-employed labor force that helps keep wages stable.
- Recent tensions between China and the US could prompt anti-Chinese politicians in the US Congress to block the renewal of China's normal trade relations (NTR) status this year. Without the NTR, China's exports to the US will face prohibitively high tariffs, and in retaliation China may block US businessmen from the numerous opportunities of penetrating the Chinese market.
- Finance Minister Xiang Huaicheng disclosed that the government would soon announce new plans to sell state shares in listed companies. The government's ultimate intention in disposing state shares is to introduce more private sector involvement in state-owned enterprise reform. Funds raised from the state shares could also help the government finance the country's fledging social security system.
- On May 18, the PBOC issued a directive urging banks to tighten their internal controls, as they step up efforts to protect their market shares in the consumer banking sector in anticipation of increasing foreign competition after WTO entry. Under the directive, banks are particularly reminded to maintain a balance between its expansion targets and risk management.
- Since the opening of the B-share markets to individual Chinese investors at the end of February, the Shanghai and Shenzhen B-share indices have soared by 151.1% and 216.3% respectively. Apart from the large discounts of B-share prices against their A-share counterparts, investors were also drawn to the market by the lower rates of on-shore foreign currency bank deposits.
- The CSRC exercised for the first time its authority to delist a company from the stock exchange in April. The delisting has effectively sent out a warning that poorly performing companies would not be allowed to maintain their listing status perpetually, prompting companies to increase their efficiency to restore profitability.
- On April 6, the CSRC announced that listed companies have to issue financial disclosure reports every quarter, instead of twice a year. The more stringent disclosure requirement would not only provide retail investors with more timely access to listed companies' information, but would also instill greater sense of accountability on the part of the company's management.
Top
Foreign direct investment growth remained robust
During the first four months this year, China's contracted foreign direct investments (FDI) soared by 38.3% year-on-year to US$ 30.2 billion, outpacing the 28.2% growth recorded in the same period of last year. Mounting interest of foreign investors in China's market is driven by the country's pending entry into the World Trade Organization (WTO). China has committed that after its entry to the WTO, the country would gradually allow more market access for foreign enterprises operating in China, prompting foreign firms to start positioning for the eventual opening of China's populous market.
Meanwhile, the robust growth of contracted FDI last year is gradually translated into increased capital inflows. Against the 52.2% increase of contracted FDI in 2000, utilized FDI surged by 12.4% year-on-year during the first four months this year, reversing the 4.9% decline recorded in the same period of 2000. Apart from spurring investment growth, increased inflow of FDI had also offset the narrowing trade surplus due to the country's export slump and supported a robust growth of foreign exchange reserves. At the end of March this year, China's foreign exchange reserves reached US$ 175.9 billion, up 6.2% from end-2000. The steady increase in foreign exchange reserves has lent strong support to the Renminbi, which remained stable within a narrow band of RMB8.2763-8.2784/US$ during the first quarter.
Looking ahead, given the growth potential envisaged on China's massive market, foreign investors' interest is expected to sustain. For 2001, utilized FDI is expected to grow by 8% and reach US$ 44 billion, up substantially from the 0.9% growth recorded in 2000.
Fixed asset investment increased by 16.5% in the first four months
China's fixed asset investment continued to gather momentum in April, growing by 18.6% year-on-year. This brings total fixed asset investment in the first four months to RMB423.6 billion, an increase of 16.5% over the same period last year. The sharper rise in investment was due mainly to increased government spending on large-scale infrastructure in the western provinces.
Apart from infrastructure, investment in the other sectors also recorded strong growth. During the first four months, investment in technical upgrading increased by 24.8% as state-owned enterprises stepped up investment in information technologies, while investment in real estate also picked up 22.8% thanks to increasing popularity of home purchases.
The National Bureau of Statistics warned, however, that the current rate of investment growth may not be sustainable throughout the year. Although the value of new projects launched in the first four months this year increased by 26.9% year-on-year, the value of ongoing projects grew by only 3.7%. As spending on projects that started before 2001 would decline as they draw nearer to completion, investment growth is also expected to edge lower accordingly. For 2001, the government is aiming at a 10% growth in fixed asset investment, up marginally from the 9.7% growth recorded in 2000.
Consumer prices recorded largest increase in more than three years
Following the modest growth recorded in 2000, China's consumer price index (CPI) rose by 1.6% year-on-year in April, representing the highest level of price rise since September 1997. The retail price index (RPI) also rose for the first time in April, after having fallen by 2.6%, 3% and 1.5% respectively in 1998, 1999 and 2000. According to the National Bureau of Statistics, the stronger pick up in prices last month was mainly due to a one-off hike in service fees for fixed line local telephone calls and higher prices of vegetable and fruits as drought caused a decline in crops harvest.
Looking at the price index components for the first quarter this year, the recreational, educational and cultural articles category recorded the highest rise of 9.2% year-on-year, followed by residential rents which rose by 2.4%, and prices of medicines which increased by 0.4%. Meanwhile, the decline of transportation and communication charges narrowed to 1.4%, while prices of household and clothing articles continued to fall by 2.1% and 1.9% year-on-year respectively during the first quarter.
Looking ahead, consumer prices in China are likely to continue to record positive growth in the coming months, as domestic demand picks up steadily. The upward trend, however, should not raise concerns of massive inflation, as price rises will remain checked by the country's large pool of under-employed labor force that helps keep wages stable. The recent weakness of other Asian currencies in response to the Japanese yen depreciation should also keep imported inflation low. As a result, consumer prices are expected to increase only moderately by 1% in 2001, from 0.4% in 2000.
Trade and investment
Increased Sino-US tensions could hit bilateral economic relations
Sino-US relations have deteriorated in recent weeks to the lowest level since the bombing of a Chinese embassy in Belgrade by the US-led NATO in May 1999. On April 1, a US surveillance plane collided with a Chinese jetfighter and landed on China's Hainan Island. The incident, which led to the detention of the 24-member US crew for 11 days and the loss of a Chinese pilot, had provoked a tense standoff between the two countries. Tensions further escalated in late April, when US President George W. Bush approved the country's largest arm sales in nine years to Taiwan and pledged that he would be prepared to defend the island if it came under attack from China. The permission of Taiwan President Chen Shui-bian to stop over the US during his visit to Latin America in late May put further strains on the souring Sino-US relations.
Rising Sino-US tensions would hit economic relations between the two countries. When the US Congress granted permanent normal trade relations (NTR) to China last year, the status was conditional on the country's accession to the World Trade Organization (WTO) by June 3 this year. With the deadline drawing near and talks on finalizing the agreement for China's accession grounded to a halt due to worsening relations with US, China would unlikely be able to gain WTO entry in time to qualify for the permanent status. This means the US will have to go through the usual process of debating the annual renewal of China's NTR status this year. Given the current tensions between the two countries, anti-China politicians in the US Congress would be eager to block the renewal.
Without NTR, China's exports to the US will face prohibitively high tariffs, which could seriously undermine the competitiveness of Chinese products in the US market. In retaliation, China may block US businessmen from the numerous opportunities of penetrating the Chinese market. In wake of recent deterioration of Sino-US relations, the Chinese government has already deferred the purchase of airplanes from US company Boeing. When economic interests reassert themselves, China and the US are expected to soften their stance against each other. The scheduled visit of Bush to Shanghai in October should provide an opportunity for both sides to mend their damaged relations.
Enterprise reform
Government plans limited sales of state shares in listed companies
According to Finance Minister Xiang Huaicheng, the government would soon announce new plans to sell part of the state-held shares in listed companies to the public. China's intention to reduce the government's holdings in listed enterprises was first unveiled in October 1999. At that time, the government intended to initially reduce the average proportion of state shareholdings in listed companies from 65% to 51% and eventually to 31%. The government had made an initial attempt to dispose of shares in two listed companies in December 1999. However, the exercise had failed to trigger sufficient market interest reportedly due to the high prices set on the shares.
Although details of the new state share disposal plan has not been formally disclosed, the state media has reported that the government will dispose of the state shares at a gradual pace, possibly taking a few years, to avoid unsettling investor confidence. The government envisioned that the move would introduce greater private sector participation in reforming the state-owned enterprises. With bigger shareholdings, private investors would be able to exercise greater authority in the corporate decision making processes, which will provide a means of disciplining the management and production of enterprises. Funds raised from the state shares could also help the government finance the country's fledging social security system.
As at the end of 2000, the government held about 190 billion shares in the 1,088 listed companies in China. These non-tradable shares are estimated to worth about RMB3.2 trillion or two-thirds of China's total market capitalization of RMB4.8 trillion at end-2000.
Banking sector
PBOC urged banks to strengthen internal control
In line with the country's ongoing efforts to reform the banking system to gear up for increasing foreign competition after China enters the World Trade Organization (WTO), the People's Bank of China (PBOC) issued a directive on May 18 urging all banks to strengthen their internal controls. In particular, banks were reminded to maintain a balance between its business expansion targets and risk management.
In anticipation of increased competition from foreign banks, which will be allowed to conduct businesses with Chinese residents five years after China's entry to the WTO, domestic banks have stepped up efforts to protect their market shares in the consumer banking sector. In the process, however, some banks have become less stringent about credit control. In some instances, banks were found to have aggressively extended loans to consumers, adopting loose credit assessment procedures. Some other banks have even exempted mortgage loan borrowers from making any initial down payment hoping to attract more customers. To secure the funds needed for the expansion of their loan business, some banks were also found to have violated government rules and offered interest rates above the PBOC stipulated benchmark to attract large-sum deposits.
To lower the loan default risk faced by banks against the irregular practices, the PBOC stated in the issued directive that banks are now prohibited from granting non-specific-purpose personal loans and offering zero-down payment mortgage loans. Banks are also urged to implement stricter controls on their employees to ensure that they do not violate any financial regulations when negotiating business with their clients.
Capital market
B-share indices surged since opening to local retail investors
Since the opening of the B-share markets to individual Chinese investors at the end of February, the Shanghai and Shenzhen B-share indices have soared by 151.1% and 216.3% respectively. In line with the surge in prices, the average daily turnover of B-shares in the Shanghai and Shenzhen exchanges collectively soared to US$ 514.3 million in April this year, compared to US$ 40.8 million recorded in December 2000.
Apart from the large discounts of B-share prices against their A-share counterparts, local investors were also drawn to the market by the lower rates of on-shore foreign currency bank deposits. Following the aggressive monetary easing by the US Federal Reserve, the People's Bank of China (PBOC) has cut interest rates on foreign currency deposits of less than US$ 3 million four times this year. Accordingly, one-year US dollar deposit rates fell to 2.6875% on May 23 from 4.125% at the start of the year. This, coupled with a 20% tax on interest income, leaves the effective interest earnings from the one-year US dollar deposits at only 2.15%. The lower deposit return has encouraged depositors to look for better investment opportunities in the stock market.
Looking ahead, B-share trading could soar further in the coming weeks. In June, the ban imposed in February which prohibited Chinese investors from using foreign currencies obtained after February 19, 2001 to purchase B shares, as part of the government effort to alleviate the speculative pressure during the initial stage of the liberalization of the B-share market, will be lifted. As a result, more funds would be channeled to the B-share markets.
CSRC delisted company from the stock exchange for the first time
Following the announcement in February that the China Securities Regulatory Commission (CSRC) would delist from the stock exchanges companies which persistently reported losses, appliance maker Shanghai Narcissus Company was stripped of its mainland listing status on April 23 for posting four consecutive years of losses. This was the first time that the CSRC exercised its authority to actually delist a company.
The move was widely interpreted as an indication of the government's determination to upgrade the quality of China's listed companies. By delisting Shanghai Narcissus, the CSRC has effectively sent out a warning that poorly performing companies would not be allowed to maintain their listing status perpetually, prompting companies which have reported losses to speed up their restructuring plans to restore profitability. Investors, meantime, were also taught by the CSRC move to make their decisions more rationally, instead of blindly buying into shares of poorly performing companies that are rumored to be targets for bail out by the government.
Meanwhile, to facilitate future transfer of shares of the delisted companies, the CSRC intends to select 4 to 6 brokers with extensive office network in suitable locations across the country to offer over-the-counter trading service for delisted shares. The CSRC reported that the idea was welcomed by local securities firms and a number of them have already applied for approval to conduct such transactions.
Based on the 2000 company results announced as at the end of April, the local media reported that 20 mainland listed firms have recorded three or more consecutive years of losses and could thus face delisting. The CSRC has so far granted 8 of these companies a grace period of six months and one company a grace period of twelve months to return to profitability. If these companies fail to turn their business around in the coming year, they will be delisted.
Tighter disclosure rules imposed on listed companies
In another bid to tighten market supervision and improve company transparency, the China Securities Regulatory Commission (CSRC) announced on April 6 that listed companies have to issue financial disclosure reports every quarter instead of twice a year. Listed companies that reported losses for two or more consecutive years based on the 2000 financial results just released will have to issue their first quarterly report by the third quarter this year, while all other listed companies are required to comply with the new rule by 2002. Although listed companies need not have their quarterly reports audited, they should ensure that details such as revenue, expenses and net profit figures are included. A listed company should also disclose in its quarterly report its latest developments, including lawsuits, loan guarantees, and changes in government policies that affect their businesses. If a company experienced over 10% change in its net income or over 5% change in its total assets during the period, the reasons for such changes should be included in the report.
The more stringent disclosure requirements would not only provide retail investors with more timely access to a listed company's information, but would also instill greater sense of accountability on the part of the company's management, as they will have to adopt the habit of regularly conveying their development plans and progress to the public shareholders.
 CITIBANK, N. A. Jason Kwok Joe Lo Ellen Cheuk Alice Chan |
