SARS

Up-to-date information
For up-to-date information on the situation of SARS, or severe acute respiratory syndrome, and about prevention measures, you may want to visit specialist Websites such as the World Health Organisation (WHO) and the Beijing United Family Hospital.

Business contingency planning
On 25 April, the Ambassador of Switzerland met with a number of representatives of Swiss companies employing large numbers of people in and around Beijing. The level of impact from SARS felt by the companies depends on their field of business and their geographical location - even within the Beijing area. Companies in the service industry encounter difficulties enforcing preventive measures on some of their customers, as there is little support from the Government side (penalties etc.). Manufacturing companies are increasingly worried about production breakdown. Most say that the current panic in Beijing is as bad as the virus. However, all of them agree that this is the worst crisis China has been facing in years. So far, none of the companies has reported an actual or suspected case of SARS among their employees. None of the companies intend to repatriate their foreign staff or families. One company encourages the families of their expatriate staff to leave the country (on R&R or home-leave packages) and offers help for schooling of children where necessary. Meanwhile, the following actions were taken in response to the virus:
Preventive measures

Contingency planning

In addition, Dezan Shira & Associates advise companies to consider the following items in their contingency plans (see http://www.china-briefing.com for details):

Economic impact

One month after first hitting the international headlines, the economic impact of SARS is spreading well beyond airlines, hotels and conferences to virtually all businesses within the region, and beyond. It is now endangering supply chains and depressing consumer demand. SARS threatens to reduce product quality, delay new ranges and, if production is forced to move, raise manufacturing costs. Nestlé said that the overall impact of SARS should be limited, but could hurt the company's ice cream and catering business in Asia. China is one of the company's strongest-growing areas, with double-digit growth rates. Switzerland-based Logitech, the world's biggest manufacturer of computer mice, has not seen any negative impact from the epidemic on their production. About half of Logitech's production is in China. Nike, the world's biggest sports-goods group, is ready to shift production out of Asia, probably to Latin America, if the disease is not brought under control in the next six to 12 months. Adidas-Solomon is considering moving some of its production from Guangzhou to Vietnam or Indonesia. Nissan Motor Co. said the public health crisis could hold up the launch of its Sunny model in China in June, because it may delay the arrival of support staff and engineers needed to begin production in Guangzhou. Toyota plans to evacuate virtually all its Japanese employees and their dependents from Beijing due to fear of a spread of SARS. Airbus may not meet its goal of delivering 300 planes this year because the onset of SARS is causing Asian carriers to push back orders.

Perhaps the most concrete impact of SARS so far is the cancellation or postponement of major trade shows. The Canton Trade Fair, once the single most important event in China's economy, "is effectively dead," say observers. According to official information, the first phase of its 93rd edition ended with total transactions worth USD3.31 billion, down roughly 60% from last year. The China International Machine Tool Show (16 - 22 Apr) in Beijing started successfully but saw a sharp decline in visitors and closed a half day early, after the Chinese Government admitted the actual level of the SARS crisis in Beijing. The Auto Shanghai Fair - planned from 21 to 27 April - was shut down before it opened for the public. The prestigious car show in Shanghai was expected to get about 400'000 visitors and was initially pushed ahead by the local government, despite doubts of foreign participants. Shanghaitex 03 - originally scheduled for early June - has just been postponed to December.

An immediate impact on the Chinese economy will also be felt due to a sharp decrease of travelling and consumer spending. A week ago, Central Government ordered that Labour Day holidays be limited to 5 days and discouraged students and workers to travel at all. This week-end, Beijing's government closed the city's theaters, cinemas, Internet cafes and other public entertainment venues in an attempt to stop the spread of SARS. Credit Suisse First Boston said May retail sales could show negative growth versus 9.2% growth in the first quarter. Citigroup estimated Labour Day holiday receipts would fall as much as 60% compared to last year's, which amounted to nearly CNY40 billion. Some analysts predict that more than 40% of China's annual USD67 billion in tourism-related income may be lost this year. Although revenue from foreign tourists are tiny compared to domestic travelers, it is significant that the number of tourists visiting China fell 6.5% in March on the year, the first monthly decline in two years, and well before the crisis really broke.

Recent surveys of companies with manufacturing operations in Guangdong found the disease had so far had minimal effect on their production. However, the current crisis threatens to make itself felt in months to come. Usually between February and May buyers come to place orders for the goods that will be under the Christmas trees eight months from now. Toy retailers bring over new molds. Watch sellers arrive to see which strap goes with which model. Clothes retailers are checking quality control for the fall season lineup. Small companies hooking up with small traders do the bulk of this business. That's all been put on hold, and come fall the repercussions for the Pearl River and Yangtze River manufacturing areas will be huge.

If the virus - or the panic - can not be contained within weeks, investor confidence will be a SARS victim, and that would have far greater consequences for China's economy. Foreign direct investment, along with trade-related industrial production and state spending, is one of the key drivers of Chinese economic growth. Analysts keep downgrading their forecasts for growth of the Chinese economy. Citigroup revised downwards its 2003 growth forecast for the mainland for the second time in less than a month, from 7.3% to 6.7%. Just a month ago, they estimated the mainland economy would grow 7.6%. JP Morgan Chase cut mainland growth forecasts from 8% to 7.4%, while Credit Suisse First Boston cut the growth forecast from 7.9% to 7.3%. Morgan Stanley Dean Witter revised its forecast from 7% to 6.5%. In their latest reports - which had been drafted before the full extent of SARS was revealed by China's health authorities - the World Bank and the OECD seem more concerned about the public debt, the increasing wealth gap and the lack of support to a nascent private sector than about SARS. The World Bank predicts China's growth will slow to 7.2% this year from 8% in 2002. The OECD forecasts growth of 7.7% this year, slowing to 7.1% in 2004.

Even if the virus can be prevented from spreading around the world, events in China alone will have considerable fallout on the world economy, i.e. on global trade, foreign multinationals with large exposure to Asia and global investment flows. Last year, China's trade expansion alone accounted for more than one fifth of the increase in world merchandise exports and imports. More than half of the world's silicon chips and 85% of its personal computers are assembled in Asia. Foreign fund houses hit the panic button over the SARS outbreak and cut their exposure to Asia. Asset allocators in London and New York were deciding to sell first and ask questions later about the impact of the outbreak on regional economies and corporate earnings. Fund managers worldwide are concerned that Asia's new growth locomotive, China, was being derailed as it came clean about the extent of the SARS outbreak.

One analyst said the SARS emergency highlights the struggle of China's leaders to reconcile their secretive, authoritarian politics with the needs of an increasingly international, market-driven economy. Moreover, the current crisis also draws the light on the price China inevitably has to pay for its one-sided focus on economic growth. For years, the government has paid little attention to its rural health-care system, which has been run down even as the country grew wealthier. Last October, Vice-Premier Li Lanqing told a national rural health conference: "The possible spread of contagious diseases and endemic diseases would cause consequences that are too dreadful to think of; and such diseases not only mean a catastrophe for the families of sick peasants but will also cause great harm and heavy losses to the state and society."

Timeframes for Normality

SARS has a bit of a head start in being brought under control in China. It will be a difficult task with localized naivety, ignorance and sheer scale of logistics all needing to be overcome. We do not expect much improvement in China over the next two months, with possibly July & August being the earliest we can expect to see any improvement or stabilization of the spread of the illness. This means September and possibly October this year is going to be a likely timeframe before things start to get back to normal. (Dezan Shira, 24 Apr)

Economy

China has cheapest Big Macs in Economist index
In its latest "Big Mac index", the Economist found that a Big Mac in China is now cheaper than anywhere else surveyed. The survey found that the average price of a Big Mac was USD2.71 in four U.S. cities and just USD1.20 in China, implying that the yuan was undervalued by 56% against the dollar. The index is a rough-and-ready measure of a concept that economists call purchasing-power parity, valuing currencies according to what they will buy at home, rather than in international exchange. In terms of Big Macs, the Swiss franc was the most overvalued currency, with the burger costing a whopping USD4.52. (Economist, 24 Apr)

Minister says 2003 a tough year for job seekers
The country's registered average unemployment rate in urban areas reached 4% last year and is expected to go higher this year. There are nearly 14 million laid-off workers in urban areas so far. And more than 10 million new graduates are predicted to enter the work force. To make things worse, the nation's agricultural adjustment has forced more than 150 million rural workers to quit farming. Many of them will head to the cities to seek employment, posing uncertainties for the State. The State will make efforts to create more than 8 million new jobs this year, mostly in the service and building industries. The country's employment population reached 737.4 million last year, absorbing 7.2 million more employees than the previous year. (People's Daily, 24 Apr) And that was before SARS…

Nation imports more vehicles
China imported more than 45'000 vehicles during the year's first quarter, up from around 17'200 units during the same period last year. Passenger cars continued to account for more than 50% of the vehicle imports. Vehicle imports this year are expected to reach 180'000 units, up from 127'000 units last year. (Business Weekly, 22 Apr)

Government

France Invites China to G8 Summit in June
France asked Chinese leader Hu Jintao to join the seven most industrialized economies and Russia at a summit in France in June. The so-called Group of Seven leading economic powers - the United States, France, Germany, Britain, Japan, Italy and Canada - only recently decided to widen their gatherings to include Russia. (Reuters, 25 Apr)

Finance

China's Central Bank tries to contain yuan
Bolstering its ability to keep the yuan from appreciating, the People's Bank of China sold CNY5 billion of six-month bills in its own name onto the nation's interbank money market. The issue moderately expands the national debt load, already estimated by most foreign economists at more than 100% of the USD1.2 trillion GDP. (Dow Jones, 22 Apr)

Business

Strong Swiss presence at CIMT 2003
58 Swiss companies participated in this year's China International Machine Tool Show (16 - 22 Apr) in Beijing. They hosted clients and business partners at the traditional "Swiss Evening" and they invited 22 engineering students from Techincal Universities around China to learn about the latest manufacturing technology in the "Swiss Program for China's Young People". (Embassy of Switzerland, 22 Apr) See the interview with a representative of Swissmem in Business Weekly.

China signs contract to purchase 30 Airbus jets
A Chinese aviation materials supply company signed a contract with the Airbus company on the purchase of 30 Airbus A319, A320 and A330 planes, in a deal that is expected to be worth well over EUR1 billion. Other deals set to be concluded during French Prime Minister Raffarin's visit are likely to involve French engineering and transport group Alstom, insurance company Groupama and bank Credit Lyonnais. (People's Daily, 25 Apr)

VW sold more cars in China than in Germany in 1Q
Volkswagen sold more cars in China than in Germany during the first quarter. The roughly 150'000 cars sold in China - compared with 114'000 in Germany reflect VW's "excellent" position in a huge, unfolding market, Chief Executive Bernd Pischetsrieder said. (Dow Jones, 24 Apr) The really interesting thing to know would of course be, how much they earned in Germany and China respectively.

Domestic handset makers struggling
Domestic handset manufacturers are struggling to complete with foreign makers, due to lack of core technology, limited production scope and oversupply. The main CDMA handset technologies are still in the hands of foreign makers. Moreover, the domestic handset sector has a surplus of total production capacity, but each domestic maker has a relatively limited scope of production, limiting profits. Twelve domestic handset makers are predicted to manufacture 150 million mobile phones this year, but market demand is expected to be only 80 million. Some domestic makers are trying to spark a price war to grab a slice of the market, pushing profits down even further. (Shanghai Daily, 24 Apr)

China's real estate heats up in March
China witnessed a three-year high monthly growth in the real estate sector in March, featuring surging sales prices, completed housing and land developments. Real estate investment amounted to CNY128.5 billion, up 34.9% over the corresponding period of 2002. House sales soared 45.2% to 31.25 million square meters and the unsold housing area increased 8.5%. The developed land area soared 66.6% and the purchased land area increased 38.8% year-on-year. (People's Daily, 23 Apr)

Beijing

Increased influx of foreign capital in Beijing
Beijing approved 329 foreign-funded enterprises in the first quarter of this year, an increase of 27.5% over the same period last year. The involved contractual foreign investment totaled USD738 million, up 69.4%. Of the 329 newly approved enterprises, 202 were in the service sector. (People's Daily, 23 Apr)

Beijing to complete 90 infrastructure facilities before 2008
Beijing has kicked off 90 major construction projects, which will all be completed before the year 2008. In the coming five years priority will be given, besides Olympics gyms, to projects concerning city environment, transportation, water supply and city communication. Accordingly, investment for city infrastructure will be raised to around CNY225 billion in five years to come. By 2010, the city will basically solve the problems of transportation, water resources and ecological environment. (People's Daily, 23 Apr)

Various

Text messaging worries authorities
More than six billion text messages were sent by mobile phone over the Lunar New Year holiday, with the medium increasingly being seen on the mainland as an easy, affordable way to keep in touch. But the popularity of the SMS has also left the authorities worried that it is being used to spread rumours and reactionary views. Unlike the Internet, which is controlled by multiple government agencies via filters and routine Web site checks, mobile text messages remain unregulated. (SCMP, 19 Apr)

Markets
Shares in Chinese companies took a pounding on the Hong Kong, Shanghai and Shenzhen exchanges as growing fears over the SARS outbreak washed away investor perceptions that the mainland was a haven of stable and robust growth.