SARS

Economic Impact: Summary of latest developments

Impact on industries and companies

The mainland tourism industry so far remains the biggest casualty. Dragonair's passenger numbers have fallen to just 700 to 800 a day, compared with the 10'000 to 13'000 passengers it averaged this time last year. Air China cut at least half of its regular flights during the May Day holidays, a traditional transport peak. Quantas, China Airlines, Cathay and Dragonair are seeking to delay accepting aircraft they have ordered, suggesting that widespread expectations that the region would provide critical growth for the struggling global aviation industry could be off course. In the service sector, companies are lowering sales targets as consumer sentiment starts eroding. Occupancy at leading Beijing hotels is below 10%. Restaurants are hurting badly.

The good news is that the negative impact has so far been limited to the consumption/sales side, whereas most manufacturing centers haven't yet been hit that badly. "Nobody has reported an outbreak in a factory, and we anticipate minimal impact on second-quarter earnings," says one analyst. This does not prevent companies from drawing up contingency plans. Acer, Taiwan's biggest computer vendor, is delaying plans to shift production of notebook computers to China. Sony has instructed all its 52 overseas factories to build up inventories of audiovisual equipment components to cope with a possible disruption of the goods distribution market. If other major electronics companies follow Sony's lead, parts demand and their prices may surge, dealing a blow to the firms' earnings. Phil Murtaugh, General Motors China president, says he has seen "no impact" from SARS so far. ABB, the Swiss-based engineering conglomerate, sticks by its 15%-40% growth targets this year. "SARS or no SARS, if the intention by the government is to continue to grow, there is a need for electricity," says Peter Leupp, chairman of ABB China.

Thousands of Beijing office workers have begun tele-commuting to avoid the streets or crowded buildings. Equipped with company-issued computers, employees set up shop in their apartments, send their work in via e-mail and call the office once or twice a day. Motorola closed its Beijing headquarters after an employee was diagnosed with SARS. Cleaners spent two days disinfecting the premises. Local health authorities instructed that the office should be closed for 10 days as a further precaution.

Impact on economy and forecasts

The Asia Development Bank cut its economic growth forecasts for the region for a second time due to SARS. While the bank estimated that growth in China would fall by 0.2 percentage point to an annual rate of 7.3%, its predictions for Hong Kong, Singapore and Taiwan are much more pessimistic, with growth declining by 1.8, 1.1 and 0.9 percentage points, respectively.
The World Bank has lowered the China's economic forecast this year from 8 to 7.5%.
JP Morgan Chase predicts that China's economic output will shrink by 2% in the second quarter of the year. But it remains confident that overall, the country will still grow at 7.4% this year.
Morgan Stanley forecasts a 6.5% growth for the year, mainly due to lost tourism revenues, the travel ban on China, the decline in retail sales and the fall in foreign direct investments.
Goldman Sachs expects GDP growth to slow to 7% this year, from the 7.5% forecast earlier, if SARS can be brought under control by the end of July. If the manufacturing sector was also affected, SARS could reduce annual GDP growth to 6%.
Credit Suisse First Boston lowered their full-year-growth forecast to 6.9% from 7.3%.

Notwithstanding recurring cases of exuberant propaganda ("China's economic upsurge irreversible by SARS", People's Daily, 10 May), the Government clearly admitted that the economic loss caused by SARS was starting to emerge. Economists at Peking University came out with a report estimating that the mainland economy may only grow between 6% and 7% this year, due to the fatal strike on tourism, foreign trade and other related areas by SARS. A leading government think-tank said the virus outbreak could cost China up to USD17 billion in lost exports and foreign investment, cutting 0.5 percentage points off growth in GDP.

A survey by Deutsche Bank of 29 major multinational companies found 88% of respondents felt FDI to China would be affected by the delay in business trips due to SARS. Many suggest that actual FDI inflows will be much less affected than contractual FDI. 39% of the respondents were concerned that disruption to supply chains due to SARS might influence future investment decisions. Companies that produce low-end electronic products are more concerned than others. Investors from the oil, real-estate, auto and health-care sectors appear unconcerned about this risk, at least for the moment. (Dow Jones, 7 May)

For all the panic that SARS has generated, it has not fundamentally undermined China's economy. China's high growth in the first three months of the year will almost surely give way to an awful second quarter. In the long run China is likely to be resilient, as most businessmen see the underlying fundamentals of growth in China - a huge market that is quickly modernizing and beginning to consume products, low-cost manufacturing, bolstered with investment from government and multinational firms - as extremely strong. (SCMP, 2 May) The biggest wild card is whether the impact of SARS will spill over into the manufacturing sectors, which are accounting for 56% of Chinese GDP. So far, these sectors have been resilient. The Pearl River delta, the heartland of China's export economy, has maintained production throughout the crisis, with no significant factory closures or loss of orders to rival countries. The ability of exporters to work through the outbreak is giving rise to guarded optimism that China can contain its economic damage. (FT, 30 Apr) The other big question is whether Beijing is able to control the spread of SARS into interior provinces, where hospitals aren't equipped to deal with a major epidemic. If China's leaders succeed, most economists believe the economy will bounce back quickly. But if SARS spreads into China's countryside, growth is almost certain to slow further, perhaps sharply. (WSJ, 29 Apr) Some economists say a SARS-induced slowdown might not be such a bad thing because it could give some parts of the economy, such as the overheated real-estate sector, a breather.

Government measures to counter negative impact on the economy

In a significant acknowledgment of the threat posed to China's economy by the SARS crisis, the State Council put forward some sort of an economic-rescue package covering areas from rural industry to consumption. It called for more investment and faster construction of major schemes, and sought more input from treasury bonds and budgetary construction funds for projects crucial to the fight against SARS. The State Council stressed industries such as automobiles, real estate, telecommunications and Internet-related business should be cultivated as engines for consumption and economic development. The government also said that enterprises in SARS-hit areas should not fire employees at will, while local governments should provide assistance to those whose living conditions have slipped below the minimum level due to SARS. There are few details on these measures available, but it seems safe to say that the Government very much relies on the same instruments it has employed since 1997 in its efforts to push economic growth. It remains to been seen, whether throwing money down the same old alleys will do the trick. There is also the problem that China's state-owned banks are already sitting on an estimated USD400 billion in bad loans and that Government debt has skyrocketed to 25% of total economic output this year (pre-SARS), from a little more than 11% in 1997, the result of past government efforts to keep growth strong.

The Ministry of Commerce announced the establishment of an office to regulate the markets of goods considered vital necessities in the prevention and treatment of SARS. It also issued a circular to local departments in charge of foreign trade and economic cooperation and state-level economic and technological development zones, requiring them to help foreign-funded enterprises prevent SARS and maintain normal business operations.

The State Development and Reform Commission announced the reduction of administrative fees levied on some of the industries affected by the outbreak of SARS. The reduction involves more than a dozen categories of fees levied both by the central and local governments. The beneficiaries include restaurants, hotels, trading markets, and tourism, entertainment, civil aviation, road transportation, water transportation, taxi and bus industries. The fee reduction is effective from May 1 to September 30.

The People's Bank of China required commercial banks to step up financial support for businesses that produce or sell drugs and equipment used in fighting SARS, and urged them to implement faster loan approvals. Furthermore, the Central Bank is putting more new cash into circulation and holding used banknotes for 24 hours before putting it back into people's hands. Some banks are reported to sterilize grimy bills and showering them with ultraviolet radiation to try to kill any potential SARS virus.

A series of governmental policies was launched in Hangzhou, Zhejiang Province, to help local enterprises pull through the SARS crisis. The minimum taxable monthly sales volume figure was increased to CNY5'000. Hotels, restaurants, travel agencies, transportation and entertainment industries are entitled to apply for tax reductions. Guangdong Province published a series of preferential tax policies aimed at supporting enterprises seriously affected by SARS. The basis of business tax is lowered to varying degrees and individuals will be free from income taxes for their anti-SARS donations.

While Ministries are busy drawing up plans of how to counter the negative impact of SARS, their new focus might perversly create negative impact as it distracts them from regular work. In addition, many government agencies had SARS victims or suspected victims among their staff. The result is a a near freeze in outside contacts and a considerable fall-off in contract approvals, meetings and negotiations with key ministries.

Last, but not least: SARS won't delay manned space shot
After SARS appeared in some places in the country, the manned space launch program used effective measures and increased prevention work to assure that Shenzhou No. 5's launch would proceed in a stable and orderly way. (People's Daily, 10 May) The message makes us feel better, and it is significant in so many ways…

Swiss-Sino trade

Swiss exports to China up 37.1%, January to March 2003
In the first quarter of 2003, trade between Switzerland and China was CHF1.089 billion. Imports from China to Switzerland stood at CHF573 million (down 4.1%), exports to China at CHF516 million (up 37.1%), leaving only a very small trade deficit in favor of China. Machinery again took the largest share (55.0%) of total exports with chemical and pharmaceutical products on second place (19.1% of total exports). Watches continued their extremely strong performance with 179.6% growth compared to the same period of last year, meanwhile taking 9.1% of total Swiss exports to China. Swiss exports to Hong Kong increased 3.1% to CHF673 million during the same period; imports from Hong Kong increased to CHF146 million (up 3.7%). In total, Swiss exports to China (incl. Hong Kong) reached CHF1.189 billion, representing 3.87% of worldwide Swiss exports. Imports were CHF719 million. Swiss exports to Taiwan increased 12.2% to CHF302 million; imports from Taiwan went down -20.8% to CHF134 million. (Embassy of Switzerland, 10 May) See attached data for details (pdf, 1 p., 11 kb).
Notice: Trade figures are based on so-called "Total 1" of foreign trade, not including precious metals and stones, art objects and antiques.

War in Iraq

Mainland TV producer nets USD50 million order from Iraq
Sichuan Changhong Electric, has landed a USD50 million contract to supply one million digital satellite colour TV tuners to Iraq. The company will be the first on the mainland to resume trade with Iraq after the war ended. Iraq owes Chinese firms USD1.35 billion, of which USD880 million is for construction contracts and USD466 million for imports. (SCMP, 7 May)

Economy

Official redefine jobless people
Chinese workers earning less than the local living allowance will be categorized as unemployed and encouraged to find new jobs, according to a new classification by the Ministry of Labour and Social Security. China's unemployment rate for the first quarter of the year was more than 4.1%. The figure would have been much higher if people earning less than the basic living allowance were taken into account. (China Daily, 9 May)

SMEs greet financial backing
The head of the China Banking Regulatory Commission, Liu Mingkang, said that SME funding will be a priority as he restructures China's financial system. Institutional investors, especially venture capital, will be cultivated to provide start-ups with sufficient funds for their technology and management initiatives. Opening a second board, resembling NASDAQ, would help SMEs access public funding for further growth needs, and ensure an exit for venture capital. There are more than 8 million SMEs in China currently, accounting for 99% of enterprises. SMEs contribute 60% of China's industrial output, 40% of tax revenues, and 60% of total exports. SMEs also create 75% of China's urban jobs. (Business Weekly, 8 May)

Export insurance to boom this year
A growing share of China's exports is likely to be insured in the future, according to China Export Credit Insurance Corporation (Sinosure). So far, only about 1% of the country's total exports is covered by such insurance, compared with the world average of 12%. (China Daily, 6 May)

Nation to map out development strategy for car industry
The State Development and Reform Commission is to invite recommendations from the public and industry insiders to help map out a new development strategy for China's car industry. The advice is expected to be essential to ward off blind investment and vicious competition and lead to the healthier development of the industry. (Xinhua, 1 May)

Record joblessness in Chinese cities set to worsen
China's urban jobless rate rose to 4.1% at the end of March - a 22-year high - and economists predicted it would climb further, with waiters, sales clerks and tour guides losing their jobs as consumers stay home and tourists head elsewhere to avoid contracting SARS. Employment in private companies grew by 2.1%, self-employed jobs expanded by 5.8% from a year earlier, while employment at state-owned companies fell by 1.1%. (SCMP, 1 May) Remember that inofficial figures for urban unemployment are much higher.

China's emergence affecting trade patterns, growth in Asia
The emergence of China as a major trading power has had a significant impact on the pattern and growth of trade in developing Asia, the Asian Development Bank said in its new Asian Development Outlook 2003 report. The report noted concerns that China, as an important producer and exporter of wide-ranging manufactured goods, will displace other economies in the region also exporting such goods. However, it pointed out that other countries in the region have benefited from the dynamism of China's mainland and Hong Kong through rapid increases in trade and are in aggregate net exporters to the two economies. (People's Daily, 28 Apr)

WTO

China targeted in dumping probes
China's exports were the most heavily targeted in the 149 investigations into possible dumping initiated in the second half of 2002, the WTO said. China was subject to 27 anti-dumping investigations, compared to 29 during the second half of 2001. Base metals including iron, steel and aluminium products were the most affected sector, followed by chemicals and plastics. (FEER, 15 May)

Government

China updates accounting for economic data
China plans to implement a "statement of national accounts" rather than the production-based system used since 1992 to calculate GDP growth. That system was a hybrid of the old Marxist method for measuring the size of a national economy by focusing on material production, a method used since the Communist takeover of China in 1949. But as services become a greater part of China's economy, the old methodology for calculating GDP has failed to take proper account of this mainly privately owned sector's contribution to growth. (Dow Jones, 9 May)

China Banking Regulatory Commission officially established
The China Banking Regulatory Commission, the country's new banking watchdog, has been officially set up and started its work. The commission will be responsible for monitoring the operations of financial institutions, such as banks, trust and investment companies, financial assets management corporations and other deposit-related financial institutions, and for safeguarding the legal interests of these entities. (People's Daily, 28 Apr)

Finance

Rural reform of financing to speed up
The China Banking Regulatory Commission has given top priority to rebuilding the rural financial system, which has become weaker in recent years despite efforts to reform it. In a bid to sharpen their competitiveness in the face of fierce foreign competition, China's four State-owned commercial banks have withdrawn from most counties and rural areas to refocus on more profitable operations in the big cities. This has left the burden of financing agricultural needs with rural credit co-operatives. But the rural credit co-operatives are already in dire straits. Their non-performing loans stood at CNY515 billion at the end of last year, a staggering 37% of their total outstanding loans. (China Daily, 10 May)

China's 2002 current account surplus widens to USD35.42 billion
China's current account surplus more than doubled to USD35.42 billion in 2002 from USD17.41 billion in the previous year, reflecting the country's strong export performance. China maintains tight controls on its capital account and its currency is mainly convertible on the traded account. This allows the government to carefully monitor foreign direct and portfolio investment in China as well as offshore capital flows. (Dow Jones, 9 May) The accounts indicate the staggering amount of USD7.79 billion in "Errors & Omissions" (outflowing). So much for tight control…

China unlocks pension fund
Fund managers expect the National Social Security Fund to spend more than CNY20 billion of its CNY124 billion of reserves to buy stocks and bonds, as part of a strategy to boost returns. The NSSF was set up in 2000 to plug the shortfall in provincial social security systems with state-allocated funds and proceeds from the sale of state-owned shares. A 2001 Bank of China International report estimated the country's unfunded pension debt at USD850 billion, or 80% of China's GDP in 2000. (SCMP, 9 May)

Citibank gets a bigger toehold
Citibank secured the right to raise its stake in China's Pudong Development Bank to a quarter by the end of April 2008. If exercised, the option would give Citibank an unprecedented foothold in a largely untapped market of USD1.2 trillion in personal savings on the back of mid-sized Pudong Bank's 272-branch network. No foreign player now owns more than 10% of a domestic lender. (FEER, 8 May)

CDB planning loan guarantees
China Development Bank will implement a loan guarantee service for Shanghai's small and medium-sized enterprises. The service is expected to be expanded to other major Chinese cities. It is also an indication of the central government's determination to increase financial support to China's SMEs, which are having a difficult time finding sufficient loans. Shanghai's more than 218'000 SMEs provide more than 5.4 million jobs, and they employ 80% of Shanghai's labourers. (Business Weekly, 2 May)

Opening of China's A-share market delayed
With regulators turning their attention to efforts to reduce the spread of SARS, the opening of China's A-share market to foreign investors appears to be delayed. Analysts said that the postponement was unlikely to have an impact on the amount of foreign investment queuing up for the stock market. Even without SARS, the onerous timetables for repatriating capital has kept many foreign investors away. (Dow Jones 30 Apr)

ABN Amro raises USD320 million in China fund
ABN Amro's fund management joint venture in China has raised USD320 million from the launch of its first China sector product. The Dutch bank and its partner Xiangcai Hefeng were pleased with the result of the launch, achieved despite the difficult trading conditions customary in the A share market and the uncertainty caused by SARS. (FT, 29 Apr)

BOC, PWC face fraud charges
The Bank of China and PricewaterhouseCoopers are facing charges of fraud for their alleged involvement in the liquidation of Tele-Art, a bankrupt consumer products components maker, once listed on Nasdaq. The lawsuit is the latest in a string of scandals involving BOC and the accountancy sector. (SCMP, 28 Apr)

Business

DaimlerChrysler in talks about JV
DaimlerChrysler is in talks with Beijing Automotive Industry Corp. and Southeast (Fujian) Motor Corp. about setting up joint ventures to produce cars and trucks in China. (FEER, 15 May)

Internet portals again boost profits
After posting their first quarterly profits last year, China's top Nasdaq-listed portals - Sina.com, Sohu.com and Netease.com - built on that breakthrough with first-quarter profits this year. More than half of revenues for all three companies came from their SMS offerings for mobile-phone users. (FEER, 8 May)

Jet production set to start in China
Shanghai Aviation Industrial (Group) Corp. will begin production of the country's first self-designed regional jet this year. The ARJ21 is expected to make its debut flight in three to four years. The new jet will enter service at the end of 2006 or early 2007. (People's Daily, 7 May)

Weak US dollar hits Volkswagen in China
The weak US dollar is buffeting Volkswagen, whose business in China is highly susceptible because of the yuan's link to the greenback. While Volkswagen's US sales are significant, its Chinese business is even more vital to its future. VW is not able to remit home Chinese earnings, but they do show up in its accounts, and parts sales to the Chinese plants are a big revenue source. (Deutsche Presse-Agentur, 5 May)

Motorola faces tough time in China
Motorola Inc will have to work harder to keep its market-leading position in China amid a growing challenge from local competitors. However, Motorola might be fighting a losing battle as a growing number of competitors clamour for a piece of the market, and are willing to sell phones at rock-bottom prices. (Business Weekly, 2 May) Another case of bad "China Dream" in the making?

Parmalat bails out of China milk market
Italian dairy giant Parmalat has followed two other multinationals, Kraft Foods and Danone Group, in withdrawing from China's milk market because it can not compete with domestic rivals. (SCMP, 28 Apr)

Energy

Oil companies spurn Goverment foreign oil policy
Chinese oil companies are ignoring a government policy aimed at offsetting the country's widening oil deficit through acquiring foreign oil assets and shipping the crude back home. Chinese companies have been on a major buying spree, taking stakes in oilfields around the world. However, they are selling their "foreign" oil in local or international oil markets, hindering China's plan to build up a strategic oil reserve. (Dow Jones, 29 Apr)

Beijing

Office, luxury apartments meet bleak spring
Beijing's office and luxury apartment market continued falling in the year's first quarter, amid indicators oversupply of office buildings will affect the market in 2005 or 2006. Office vacancy rates in Beijing increased slightly, from 15.3% in the fourth quarter 2002 to 15.7%. The overall rent level of luxury apartments was USD27.5 per square metre, down 3.8%. Facing rising vacancy rates, the Beijing Municipal Government has encouraged more foreigners to buy properties in the capital. A new policy allows senior foreign officials to receive a personal income tax return of up to 80% of the amount they paid to Beijing in the year before they purchased their property. (Business Weekly, 2 May) Thanks for those foreign devils…

Shanghai

New Shanghai retail giant
Shanghai brought four of its largest retailers under one company to prepare for battle with foreign chains like Carrefour and Wal-Mart. The newly created Bailian Group is China's top retailer with annual revenues of more than CNY70 billion, assets of CNY28 billion and outlets in more than 20 provinces. (FEER, 8 May)

Foreign capital rises in April
April's foreign investment in Shanghai grew by 27.8% from the previous year, but slower than the first quarter growth rate of 59.2%. Shanghai drew USD917 million in contracted FDI and approved 520 investment projects. From January to April, the city landed 1'504 foreign investment projects and lured USD4.3 billion in contracted funds. (Shanghai Daily, 3 May)

Shanghai limits luxury housing to cool down overheated market
Shanghai will limit the number of new luxury housing projects this year after officials called for measures to cool the overheated property market. Local residents complain that property speculation has driven home prices beyond the reach of many households. More than half the people buying high-end housing in Shanghai come from overseas or outside the city, many with an eye on investment. (SCMP, 30 Apr)

Pearl River

Number of overseas visitors to Guangdong Fair declined
The 93rd China Export Commodities Fair (April 15 to 30) scored USD4.42 billion worth transactions. 23'128 businessmen from 167 countries and regions had participated in the fair. The Secretary General of the Fair admitted that the number of overseas visitors to this year's fair declined noticeably compared with last year. However, he pointed out that the trading efficiency was much higher. (Xinhua, 1 May) In spite of "increased trading efficiency", the transactions were hardly more than 20% of least year's result.

Guangzhou to pump huge investment into auto industry
Guangzhou plans to invest CNY5 billion for the growth of its automotive industry and to build itself into the biggest producer of finished vehicles and auto parts in southern China. (People's Daily, 28 Apr)

Various

China labor leaders sentenced on subversion charges
Two labor activists who led some of China's biggest protests in 50 years were sentenced to prison on subversion charges. The men were arrested last year after protests by tens of thousands of laid-off workers demanding better benefits from bankrupt state-owned factories. (AP, 9 May)

Warmer climate may derail Tibet railway
Global warming may prove the latest problem for designers and builders of the Qinghai-Tibet Railway. The frozen earth of the Qinghai-Tibet Plateau is degenerating because of global warming and the increase in human activities in the region. (China Daily, 2 May)

China launches first 24-hour news channel
CCTV launched China's first 24-hour news channel, imitating Western models and promising faster, more thorough coverage. The livelier format could revolutionize China's entirely state-run broadcasting, whose turgid newscasts frequently feature long reports on grain harvests and factory visits by Communist Party bosses. (AP, 1 May)

China-based U.S. companies cry foul over visa issuance policy
U.S. companies in China say they have become an unintended victim of ongoing efforts to bolster U.S. homeland security against the threat of terrorism. Tighter U.S. visa requirements imposed after the Sep. 11, 2001, terrorist attacks hurt the ability of U.S. companies to secure visas for Chinese nationals needed in the U.S. to conclude commercial deals, undergo training on purchased U.S. equipment as well as attend business development and strategic planning meetings. (Dow Jones, 30 Apr)