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31 July, 2001 Monthly China Review |
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Real GDP grew by 7.9% in the first half Despite the slowdown in global economic growth, China's real GDP growth slid only marginally to 7.8% year-on-year in the second quarter from 8.1% in the first quarter. This brought economic growth in the first half this year to 7.9% comparable to the 8% growth in 2000.
The robust performance was mainly due to the strong pick up of domestic demand, which contributed to 93% of China's economic growth during the first six months of 2001. Apart from continued government infrastructure spending in the western provinces which boosted fixed asset investment growth to 15.1% year-on-year in the first half, the increase in residents' income and rising consumer prices also supported a 10.3% growth in retail sales during the period. The pick up in domestic demand helped to offset the impact of the plummeting export growth, which plunged sharply to 8.8% in the first six months this year, compared to 38.3% a year ago. In June, exports contracted for the first time in two years by 0.6% year-on-year.
Looking ahead, as the US economy is expected to show stronger recovery in the coming months, thanks to the aggressive cuts in interest rates this year and the US$ 40 billion tax rebates that will be handed out to taxpayers during the third quarter, exports from China would grow at a faster pace towards the end of the year. Supported by robust domestic demand and a rebound of exports, real GDP growth is expected to remain strong at around 7.9% in the second half.
Fixed asset investment continued to expand During the first six months this year, overall fixed asset investment in China increased by 15.1% year-on-year, spurred mainly by state sector spending. According to the National Bureau of Statistics, state sector investment grew 17.9% year-on-year, substantially higher than the 12.1% growth recorded in the first half of 2000. However, investment made by the private sector rose only 6.5% down from the 8.6% recorded in the same period of last year. The robust state sector investment growth was mainly attributed to the government's policy to industrialize the inner China regions. Investment spending in the central and western regions surged by 28.8% and 17.8% respectively during the period. Affected by the slack in global economic growth, however, investment sentiment in the private sector was slightly held back.
Looking ahead, in view of the slow down in export growth during the first half of this year, the Chinese government would likely continue to bolster domestic demand by further stepping up investment in fixed assets. For funding, the government has proposed to issue another RMB50 billion treasury bond in the second half of this year. Should the proposal gain the approval of the National People's Congress, China would pour in a total of RMB200 billion into capital construction and technical upgrading of state-owned enterprises this year.
Weak export growth not a threat to foreign exchange reserves The slowdown in global economy has begun to put a drag on China's exports. In June, exports from China declined for the first time in two years. Along with the contraction in June, export growth was down to 4.5% year-on-year in the second quarter, from 14.7% in the first quarter and 27.9% last year. On the back of the slower export growth, China's trade surplus narrowed to US$ 8.6 billion in the first half this year, down from $ 12.4 billion in the same period last year.
Despite the decline in trade surplus, China's foreign exchange reserves have continued to expand. From US$ 165.5 billion at the end of 2000, the country's foreign exchange reserves increased US$ 15.3 billion to US$ 180.8 billion at end-June, thanks to the strong inflow of foreign direct investment. In the run up to China's completion of its World Trade Organization (WTO) bid, the country's utilized foreign direct investment (FDI) had shown strong growth since late 1999. For the first six months this year, utilized FDI reached US$ 20.7 billion, up 20.5% from last year. Contracted FDI surged even higher by 38.2% year-on-year to US$ 33.4 billion during the period. Looking ahead, China's balance of payments position should remain favorable. On external trade, export growth should regain momentum later this year, thanks to an expected rebound of US consumer demand. As the stimulus effects of the aggressive interest rate cuts by the US Federal Reserve since January filter through the economy, and the US$ 40 billion tax rebates are handed out to US taxpayers in the third quarter, US consumers are likely to resume their shopping spree in the second half of this year. The resumption of consumer spending would in turn prompt US companies to increase imports to replenish the depleted inventories. FDI, meanwhile, would continue to show steady increase as China draws nearer to becoming a formal member of the WTO. The country's foreign exchange reserve position is thus expected to remain robust, and would reach US$ 200 billion by the end of next year.
Economic reform The government would monitor the process to ensure that price controls on the deregulated items are indeed lifted at the local levels and that large local companies do not take advantage of the relaxation by forming price cartels. Moreover, China would unveil rules for holding public hearings on government pricing policy decisions concerning the 13 "strategic commodities" to make the pricing mechanism more transparent. The timing for liberalizing price controls is deemed appropriate as China has already built up a strong manufacturing base and commodities are generally in over-supply. Given the current environment, even if price controls are lifted on the wide array of commodities, inflation would unlikely surge. Moreover, the easing of price controls is in line with China's long-term objective to move towards a market-oriented pricing mechanism, under which keener competition would encourage enterprises to enhance their efficiency. After the latest round of relaxation, the prices of over 90% of retail, agricultural and capital goods are up to market forces to determine.
Foreign investment Currently, China's securities laws pertain only to domestic enterprises and do not apply to FIEs. However, policies prohibiting the listing of FIEs in the local stock markets also do not exist. China had first expressed its intention to allow FIEs to issue shares in the local stock markets in September 1999. According to the Foreign Investment Administration of the MOFTEC, an increasing number of FIEs are applying to convert into joint-stock limited companies in anticipation of the government's approval for FIE share issuance in China even before the MOFTEC notice was released. For foreign investors, being able to raise capital from China's stock markets would enable them to tap the massive domestic savings of mainland residents. This would lower their funding cost and reduce the foreign exchange risks. As for China, providing FIEs with an additional funding channel would help the country entice more foreign direct investment. To Chinese investors, the listing of FIEs in the local bourses would also enhance the diversity of the stock markets which remain dominated by state-owned enterprises (SOEs).
China plans to unify tax systems for local and foreign-invested enterprises According to the Xinhua News Agency, a plan to unify tax laws for Chinese and foreign-invested enterprises (FIEs) has already been submitted to the National People's Congress (NPC) for approval and is expected to take effect after China's entry to the World Trade Organization (WTO). China has been offering preferential income tax policies to encourage foreign businesses to invest in China since 1978 when the country started to open up its economy to the outside world. Against the 33% income taxes paid by Chinese enterprises, foreign invested enterprises (FIEs) that invest in designated special investment zones, such as the Special Economic Zones and the open coastal cities, enjoy much lower rates of 12-15%. In addition to the reduced income tax rate, local governments often offer other incentives, such as tax holidays to attract foreign investors. The tax reform plan submitted to the NPC reportedly sought to unify the income tax rate for Chinese and foreign-invested enterprises at around 25%. FIEs operating in industries encouraged by the state, such as ecology construction, environment protection, water conservation, and other advanced technologies, as well as those investing in the 19 underdeveloped western provinces and regions would continue to enjoy preferential tax rates. However, additional forms of taxes, such as those on land-use, housing, and vehicle-use that are currently applied to Chinese enterprises may be introduced. Market analysts predict that the full integration of tax systems applicable to Chinese and foreign-invested enterprises would complete in about three years' time. The tax policy change is called for in view of China's pending entry to the WTO. As the country lifts its trade barriers and opens up further to foreign investors, Chinese enterprises would be at a disadvantage if they continue to be burdened by higher tax levies compared to their foreign counterparts. Despite the removal of the preferential tax policies, FIEs are not expected to scale back their investment in China. The impact of higher income tax on their earnings would be partially offset by the easing of other trade barriers such as tariffs and import quotas which would enable them to improve their price competitiveness against their Chinese counterparts. Moreover, China's WTO accession is expected to usher in unprecedented business opportunities for foreign investors.
International trade and relations As the host of the 2008 Olympics, the city of Beijing will benefit considerably from the massive investment spending in the pipeline and the numerous job opportunities it will create. The Beijing municipal government has already announced an ambitious plan to spend US$ 20 billion in the next seven years to modernize the city's infrastructure. This translates into an average annual spending of about US$ 3 billion, which is equivalent to 10% of the city's GDP in 2000. The sum will be spent on developing sports facilities, public transportation, and communication networks. Apart from the infrastructure spending, a further US$ 12 billion will be ploughed into environmental protection projects. Meanwhile, the marketing hype that goes with the Olympics would also have a significant impact on raising the awareness of Beijing, and help accelerate the growth of the city's tourism industry. Judging from the experience in other host cities of the Olympics, tourist arrivals in Beijing could increase by 20% during the year of the Games, which would provide a strong boost to retail sales in the city. According to some rough estimates, increased infrastructure spending and the gain in tourism income would add an average of about 2-3 percentage points per year to Beijing's GDP growth in the next seven years. In 2000, Beijing's economy grew by 11%. Outside of Beijing, however, the economic impact would likely be much limited other than the spillover effects on the country's tourism industry at large. In the context of China's overall economy, the US$ 20 billion infrastructure spending of the Olympics is less than 2% of the country's GDP in 2000. Meanwhile, as the government would finance the bulk of the spending out of its tight fiscal budget, the gain in investment in Beijing may well mean a reduction elsewhere in the country. Some estimates put the net contribution of the Olympics to China's national GDP growth in the next seven years at only 0.1 percentage points per year. The Chinese economy grew by 8% in 2000. As a major travel hub to China, Hong Kong will stand to benefit from the take-off of China's tourism business. The hotel and travel industries would be the obvious winners, as tourists stop over Hong Kong when they visit China during the sporting event. Hong Kong's companies may also win a handful of construction contracts, and pick up some production orders for logo-related items of the Beijing Olympics, such as clothing and gift souvenirs. The value of these deals, however, would likely be small compared to the overall business that Hong Kong's companies are now doing across the border. Judging from the experience in other cities hosting the Olympics in the past, contracts of the big infrastructure projects are likely to go to companies in the host countries. Meanwhile, many of the big branding contracts will also probably be awarded to large multinational merchandisers that have a larger budget. The economic benefit of Beijing Olympics to Hong Kong other than the boost to the SAR tourism industry would therefore likely be negligible. While many are quick to point to the monetary benefits of hosting the Olympic Games, which seem to be quite limited outside of Beijing, the real significance of the sporting event lies beyond economics. In the run up to the Beijing Olympics, China will become more integrated into the global community, not just in terms of sports but also culturally. The hosting of the sporting event will also expose China to greater international scrutiny and foster better understanding about the country. Through engaging China closer with the wider world, the Olympic Games will help strengthen the forces of liberalism in the country and hasten the pace of social, if not political, change.
? CHINA
MAJOR ECONOMIC INDICATORS
CITIBANK, N. A. Jason Kwok Joe Lo Ellen Cheuk Alice Chan Monthly China Review is available for retrieval in the following Citibank internal systems: CitiWeb, EMLink, Hong Kong e-BM Website, and Hong Kong GCIB Website. For soft copies of this report, customers are advised to contact your Account Manager. The report is also available for public viewing at the Economic Forum subsite of hktdc.com. This report is for information only. While the information contained in this report has been obtained from sources which we believe to be reliable, we can make no guarantee as to either the accuracy or the completeness of the information. |
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