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Flat export growth recorded in October

China's exports increased by a meager 0.1% year-on-year in October, down from 4.4% in the previous month. The slowdown reflected the impact of the US terrorist attacks on external demand for Chinese goods. According to the China Customs, exports to China's two largest markets, US and Japan, both contracted during the month, while those to neighboring Asian nations also grew at a less rapid pace.

In terms of product kinds, exports of traditional items continued to show lackluster growth as consumer demand for these finished manufactured goods was weak amidst the global economic slowdown. Although exports of high-technology goods and machinery were still growing at robust rates of 23% and 12.2% respectively during the first nine months this year, they were sharply lower than those recorded in 2000, as weak investment sentiments also dampened demand for such capital goods.

Looking ahead, with the global economy sinking into recession in the wake of the September 11 terrorist attacks on the US, the demand for China's exports will continue to falter. As a result, exports are likely to grow by only 5.5% this year, compared to 27.9% in 2000.

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OTHER BUSINESS NEWS

Foreign trade and investment

China formally gains WTO entry on December 11

On November 10, the Fourth Ministerial Conference of the World Trade Organization (WTO) held in Qatar unanimously approved China's bid to join the multilateral trade body, putting an end to the country's 15-year stretch of negotiations. After the signing ceremony on November 11, Foreign Trade Minister Shi Guangsheng presented a document signed by President Jiang Zemin as proof of ratification of the WTO agreement by the Chinese government, paving the way for China to formally gain entry to the WTO on December 11, 2001.

With entry to the trade body secured, China becomes fully integrated into the international trading system. The country will be participating in global trade talks to counter possible changes in international trade rules that may be unfavorable to its exports, and would be able to better protect itself from unilateral sanctions by aggrieved trading partners. In return, China will have to gradually phase out the protectionist policies that have shielded its enterprises from foreign competition in the past years, reduce tariffs on imported goods and allow foreign investors greater access to the local market.

On import restrictions, average tariffs on industrial products will be reduced from 24.6% in 1997 to 9.4% by 2005, by which time the 13.3% tariff on high-tech goods such as semiconductors and computer equipment will also be abolished. Non-tariff protective measures such as import quotas on industrial products will also be phased out within five years. Moreover, China will gradually relax the regulations which require foreign-invested companies to import and export through government middlemen, and also allow them to distribute and sell products directly in China.

On relaxing controls over foreign investment, China has agreed to gradually open the highly protected sectors such as financial services and telecommunications to foreign participation. Upon entering the WTO, for example, foreign companies are allowed to own 25% stake in mobile telecommunications ventures, and the ceiling could be raised to 49% after three years. Up to 50% foreign stakes would also be allowed in the life insurance business, in which geographical restrictions will be lifted in three years, and participation in group, health and pension categories will be allowed in five years. Wholly foreign-owned non-life subsidiaries will be permitted in two years. Meanwhile, five years after China's WTO entry, all geographic and customer restrictions on foreign bank branches will also be removed.

The government is currently holding seminars to explain to civil servants details of China's entry to the trade body. The lectures also stress the importance for all sectors of the economy to embrace the changes that would be ushered in with the WTO entry. With the liberalization of the mainland market, local enterprises will face rising competition from their foreign counterparts, forcing them to improve their efficiencies and enhance their competitiveness. Enterprises that survive the competition would not only be able to protect their local market shares but could also emerge to become bigger players in the international market.

To handle the tasks that follow the country's WTO entry, the government has set up the new Department of WTO Affairs and the Bureau of WTO Information and Consultation under the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). The Department of WTO Affairs will handle all matters related to the WTO, including monitoring the enforcement of the WTO agreements reached, examining the trade policies of other WTO members, and preparing for future participation in multilateral trade negotiations and resolution of trade disputes. The Bureau of WTO Information and Consultation, on the other hand, will be responsible for fielding information about China's trade policies to other WTO members and foreign investors and enterprises interested to enter the mainland market.

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China prepares to list FIEs on the local exchanges

On November 8, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and China Securities Regulatory Commission (CSRC) issued a set of guidelines for foreign-invested enterprises (FIEs) to list on the country's A- and B-share markets. To qualify for domestic listing, an FIE must be a joint-stock company in operation in China for at least three years. After listing, the foreign shareholder should maintain a minimum of 10% ownership in the company. It should be noted though that once the foreign stake in the listed company fall below 25%, the company would no longer be entitled to the preferential treatments, such as tax benefits, normally granted to FIEs.

A week after the guidelines were unveiled, the CSRC announced that it would initially select a small number of FIEs to list on the A-share market. This would allow the authorities to test whether the existing framework facilitates smooth listing of the FIEs, and give more time for fine-tuning details of the listing rules where needed. The CSRC expects to come up with a more detailed set of guidelines after the listing of the first batch of FIEs. The local media reported that 14 FIEs have plans to issue A-share via initial public offerings (IPOs) and eight of them have applied with the CSRC.

By allowing FIEs to list on the local exchanges, China hopes to introduce better-quality firms to the local bourses and enhance the diversity of the stock market, which remains dominated by state-owned enterprises. For FIEs, listing on the local stock markets would allow them to tap the massive domestic savings of mainland residents, and help them enhance brand consciousness among local households.

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Taiwan relaxes restrictions on mainland-bound investments

Following President Chen Shui-bian's endorsement of the recommendations made by the Economic Development Advisory Council (EDAC) to advocate "active opening and effective management" of mainland-bound investments in late August, the Taiwan government announced on November 7 that restrictions on mainland-bound investments would be relaxed from January 1, 2002. Firstly, the ban on Taiwan companies from directly investing in China when projects involve over US$ 1 million in consideration was scrapped. This means Taiwan enterprises would no longer have to course their mainland investments through a subsidiary set up in a third country.

Secondly, mainland-bound investments not exceeding US$ 20 million would be eligible to apply for government approval under a simplified screening process which should take no longer than a month to complete. For projects entailing over US$ 20 million in investment, businesses have to seek approval from a government committee that has yet to be designated. Previously, only projects with investment sizes not larger than US$ 3 million received quick approvals from the government.

Thirdly, the US$ 50 million limit on individual mainland-bound investments was removed. In August, the Mainland Affairs Council (MAC) announced that the ceiling would be replaced by an annual limit on a firm's overall investment in China, but there was no mention on the details of such ceiling in the latest policy announcement.

Apart from the lifting of investment controls, the government also announced that offshore banking units (OBUs) of Taiwan financial institutions would be allowed to directly transact with their mainland counterparts. In effect, OBUs will be allowed to directly remit funds to and from the mainland. Previously, Taiwan banks had to course their remittances through subsidiary branches of mainland-based banks in Hong Kong. The change will make it more convenient for Taiwan companies to transfer funds to China, which will lower the financial transaction costs for Taiwan-invested enterprises on the mainland.

Taiwan's new mainland policy represents another effort by the government to reduce the discriminatory barriers against China. Beginning this year, Taiwan allowed the trial of cross-strait "direct three-links" (referring to trade, investment and postal links) between the islands of Kinmen, Matsu and Penghu, and ports in China's Fujian province. In October, Taiwan also eased the restrictions on mainland professionals visiting the island, shortening the visa application period from two months to five days and according them a maximum length of stay of six years instead of three. The introduction of more accommodating policies is in line with Taiwan's preparation to enter the World Trade Organization (WTO) which requires reciprocity and non-discrimination amongst its members. Taiwan's WTO entry was approved a day after the 142 WTO members passed China's application for membership on November 10.

The actual impact of the new mainland policy is, however, likely to be limited given that many of the Taiwan businesses have already established their presence in China without formal approval from Taiwan's government, or by coursing their mainland-bound investments through companies registered overseas, mainly in Hong Kong. According to China's statistics, utilized Taiwan investment in China totaled US$ 27.6 billion between 1979 and August this year. A significant part of Hong Kong's US$ 180 billion cumulative investments in China during the period is also believed to have come from Taiwan-funded Hong Kong enterprises in China.

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First international auction of NPLs staged in November

On November 19, Huarong Asset Management Company staged the country's first international auction of non-performing loans (NPLs). Huarong, which took over RMB407.7 billion of bad loans from the Industrial and Commercial Bank of China, packaged RMB15.6 billion worth of the NPLs into five blocks, consisting of loans extended to state-owned factories, commercial properties, industrial parks, hotels and residential properties involving a total of 356 enterprises. The offer drew the interests of seven consortiums and Huarong successfully sold four blocks of the NPLs worth RMB10.8 billion to a US-led consortium.

The consortium agreed to pay cash equivalent to about 10% of the face value of the NPLs to Huarong, which in turn would join efforts with the consortium to help recover the NPLs through various methods such as turning around the bankrupt company, swapping the debt for equity or fixed assets. According to the agreement, once the consortium recovers 20-25% of the cash it paid, Huarong will be entitled to share half of any additional proceeds recovered from the NPLs. The arrangement is an incentive for the Chinese side to help the foreign investors speed up the process of recovering the NPLs. According to Huarong's estimates, it expects to collect about 21% of the face value of the disposed NPLs in the end.

Following Huarong, two other asset management companies (AMC) announced plans to auction part of their NPLs to foreign investors. Great Wall, which took over bad debts from the Agricultural Bank of China, is planning to sell RMB15 billion of the acquired NPLs in April next year, while Orient plans to sell RMB40 billion worth of NPLs taken over from the Bank of China in the coming months.

As at the end of September, the four asset management companies had only disposed of RMB93.1 billion of the RMB1.4 trillion NPLs acquired. Assets worth RMB37.8 billion were recovered from the disposal, including RMB23.3 billion in cash. Through the sales of NPLs to foreign investors, the AMCs hope to speed up the pace of asset recovery. In ten years' time, the AMCs hope to recover 30% of the total value of the NPLs they acquired from the state banks.

Capital market

State share sales put on hold to ease market plunge

In a bid to arrest the sharp fall in share prices, the China Securities Regulatory Commission (CSRC) announced on October 22 that the government's sale of shares in listed companies would be suspended temporarily. Since June 13, companies launching initial public offering (IPOs) or additional share issues were required by the government to raise an amount equivalent to 10% of their share offers by selling state shares. The move, however, raised fears amongst investors that the sale of state shares would result in a supply glut as the government owned about two-thirds of the stakes in China's state-owned listed companies.

Hit by the fear of supply glut due to the plan to sell state shares, together with the government's crack down on the illegal flow of bank funds to the stock market which stirred concerns of a deterioration in market liquidity, the Shanghai and Shenzhen composite indices plunged by 32.2% and 33.9% respectively to their lowest levels since early 2000 on October 22. As a result, China's total stock market capitalization lost 17.8% of its value between end-May and end-October.

With the suspension of the state share sales, the Shanghai and Shenzhen indices have rebounded by 15% and 15.4% respectively as of end-November. According to the CSRC, the suspension would give the authorities more time to consider other methods of disposing state shares, and the sale will resume once the detailed procedure is finalized.

Although a more precise timeframe is not available, the suspension is expected to be a temporary measure. Given the dire funding need of the national social security fund, the government is unlikely to scrap the plan for state-shares sale, which had already raised about RMB11 billion for the government during the past four months. Market analysts estimated that the reduction of state ownership in listed companies from 65% to a target 51% would raise about RMB200 billion for the government. Moreover, the reduction of the government's stakes in the listed companies would also pave the path for increased private sector participation in the economy, and allow the private sector to play a larger role in monitoring the management performance and operational efficiency of China's listed companies. This change would, in turn, better prepare the enterprises for the increased competition against their foreign counterparts in the wake of the country's entry to the World Trade Organization.

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CHINA MAJOR ECONOMIC INDICATORS

CITIBANK, N. A.
49/F Citibank Tower
3, Garden Road
Central, Hong Kong
Tel : (852) 2868-8443

Jason Kwok
North Asia Chief Economist

Joe Lo
Senior Economist

Ellen Cheuk
Economist

Alice Chan
Senior Information Officer

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.