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June, 2001
China update - June 2001
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Summary |
- The economy continues to recover, against global slowdown, and is expected to grow by 8% in 2001 sustained by strong domestic demand.
- The RMB will remain stable, while interest rates are likely to increase.
- The chance for China to join WTO late this year or early next year remains high.
- FX reserves will continue to rise, while foreign debt remains well under control.
- SOE reform, stock market reform and banking reform are expected to jointly address corporate governance issues for SOEs and banks.
- The government needs to intensify efforts in addressing unemployment, rural income and western development issues.
- The uncertainty over political relationship with US, as well as with Taiwan, has increased. But economic ties will continue to strengthen.
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1. Economic performance
China has surprised the world again by continued economic recovery against global economic slowdown.
| a) |
GDP rose by 8.1% in Q1 2001, as compared to 7.4% for Q4 2000 and 8% for 2000 as a whole. April 2001 saw the momentum to continue, with industrial growth accelerating to 11.5% from Q1's 11.2%. |
| b) |
Domestic demand has strengthened, sustaining the recovery. Retail sales and investment increased 10.1% and 16.5% in Jan-April 2001, as compared to 9.7% and 11.6% for 2000, respectively. |
| c) |
Export growth slowed to 13.2% in Jan-April from last year's 28%. But the slowdown is less drastic than expected, and had a limited impact on GDP growth as import growth weakened at a similar pace. |
Looking into H2 2001, while exports are set to weaken further, domestic demand is expected to maintain its strength. The prospects of another salary increase and upbeat stock market would provide new driving forces for consumption, while improving investment sentiment by enterprises and continued proactive fiscal policy by the government would hold up investment growth. We therefore keep our full year growth forecast at 8% for 2001. Meanwhile inflation should continue to rise gradually, with CPI expected to record 1.2% for the whole year.
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2. Economic management
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The RMB will remain firm. With a larger FDI expected to offset a smaller trade surplus, the country's balance of payments should continue to record surplus. Thus downward pressure on the RMB will remain virtually absent. Meanwhile, the long-expected widening of RMB floating band is not likely to materialize in short term, as there are more urgent things on PBOC's agenda. |
| b) |
Also defying global trend, interest rates in China are however likely to be raised in coming months. The determinant is the pace of inflation rebound. If the CPI rises to over 1.5%, then there would be a chance for the PBOC to increase the rates. But the increase would be moderate, as inflation rebound is expected to be modest anyway. |
| c) |
The chance for China to join WTO late this year or early next year remains high. The controversies over technical details could delay, but should not destroy a historical deal, which are expected to be largely resolved in the coming around of WTO negotiations scheduled for late June. The new tensions between China and the US in recent months seem to cast more shadow on the issue. But given that President Bush has asked the US Congress to renew the PTR to China for another year, the tensions are not anticipated to ruin the deal either. |
| d) |
The government's targets for this year's government deficit and bond issues are set at the same levels as last year's. Hence the fiscal position of the country in terms of the deficit and bound issues as percentages of GDP should improve. Meanwhile, given non-state investment expected to continue to pick up, the reliance of investment and in turn economic growth on the government's proactive fiscal policy should decline. |
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3. External debt & reserves
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Outstanding foreign debt recorded USD145.7 bn at end- 2000, falling by 4% from end-1999. With the government policy that annual borrowings are controlled at a level largely covering the repayment of principles and interests, the liability ratio has been kept at around 15% in recent years. Such a trend with the policy is expected to continue. |
| b) |
With exports and imports expected to grow by 8% and 10% respectively, net exports will fall by about 10% (USD2.4 bn) in 2001. But actual FDI should increase by over 10% (over USD4.1 bn), given a 38% growth in contracted FDI registered in Jan-April. Thus foreign exchange reserves, which recorded USD166 bn at end-2000 and USD177 bn at end-April 2001, are set to exceed USD180 bn by end-2001. |
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4. Structural factors
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Enterprise performance is continuing to improve, with net profit of industrial enterprises rising by 46% in Jan-April. But corporate governance issues for SOEs are far from addressed. The target of SOE reform at the next stage is thus to address the corporate governance issues, including ownership structure, shareholder right, accountability, transparency, financial disciplines, sales culture, risk controls, and incentives, etc. |
| b) |
The most fundamental is the ownership structure. Stock market is now expected to be a major platform for SOEs to rationalize their ownership structure, by bringing in private investors. The reform of stock market, therefore, has been put on the top of reform agenda, with a series of restructuring and opening-up initiatives to be launched in coming years. B-share prices have surged by near 200% since the B-share opening to local people in Feb. |
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Banking reform will also focus on addressing corporate governance with ownership as one of the priorities. Almost all the 10 shareholding commercial banks are planning to list on A-share market, while Bank of China, Hong Kong seeking overseas listing, this year or next year. |
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Market opening-up is to enter a new phase after WTO entry, with much of the tertiary sector, almost all the manufacturing sector, and a part of agricultural sector, to be opened in coming 5 years. This is in turn set to provide new driving forces for the reforms in all these markets. |
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5. Politics & social
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Unemployment remains the biggest threat, which currently stands at about 7% taking into account step-down workers. More SOE workers are expected to step down, and hence unemployment to remain high, in coming years amid accelerating SOE reform. But an encouraging progress has been made in establishing social security system, so that the government is now in a stronger position to deal with the situation than before. |
| b) |
Rural stability, particularly in poor areas, has also become a concern in recent years, with slowing rural income growth as well as expanding regional disparity. To address the concern, the government has been working on a series of policies to boost rural income, and has launched the "Developing the West" drive. If these efforts cannot work, the social stability would become a real issue |
| c) |
The whole world is watching in what direction the Sino-US relations will go. As far as economic relationship is concerned, both countries have expressed willingness to continue cooperation. With regard to political relationship, the key issue is the cross-Taiwan Straight issue. It seems that more time is needed for the US policy on the issue to become clear. |
| d) |
Economic ties across the Straight have greatly strengthened in past year, with Taiwanese investment in the mainland growing by 108% in 2000. Political relationship has however worsened, with the stance on "One China" between the two sides remaining divergent. While it largely depends on the US policy, a significant improvement in the relationship is not anticipated in coming years. On the other hand, as no side is seeking and expecting a quick solution, a serious confrontation is not anticipated in near future either. Longer term, economic ties should play a bigger role. |
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| By Liao Qun |
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| This memorandum is issued by Standard Chartered Bank and is based on or derived from information generally available to the public from sources believed to be reliable. No representation orwarranty is made or implied that it is accurate of complete. Opinions expressed herein are subject to change without notice. This memorandum has been prepared solely for informationpurposes and for private circulation and no responsibility is accepted for the use or reliance on information herein. This memorandum does not constitute any solicitation to buy or sell anyinstrument or engage in any trading strategy. Standard Chartered Bank, or a company of the group of which it forms part, may have a position in any of the instruments or currencies mentioned in this memorandum. |
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