26 May - 01 June 2003

No 142


Economic Impact: Summary of latest developments

  • On Friday 30 May, the central government declared that the SARS epidemic was being brought under control, as the number of infections had stabilized in recent weeks. Meanwhile, WHO's travel warnings for Beijing, Hebei, Inner Mongolia, Shanxi, Tianjin and Taiwan remain in place.
  • Chinese leaders and media insist on spreading good news about positive SARS development and scarce impact on the economy. Meanwhile, the Government clearly worries that negative effects of SARS may appear in the latter half of the year.
  • Liu Mingkang, head of CBRC, says official directives urging increased lending to SARS-hit industries could add to the State Banks' bad-loan burdens and delay reform.
  • Restrictions on domestic and outbound travel are being relaxed; inbound travel remains weak.
  • Entertainment and retail in cities like Beijing is picking up.
  • Lost consumption and exports in the second quarter will force manufacturers to limit their inventories, which will curb overall economic growth in the third quarter.
  • Retail sales will slow down, urban unemployment will go up, contractual FDI will decrease, deflation may be back, deficit will increase.

SARS fallout is being felt in Asia
SARS infections have ebbed across East Asia, but the economic consequences will continue to be felt for months to come. Tourism has proved very slow to recover across all of Asia. Retail sales have only begun to rebound. Stuck with huge inventories of goods that went unsold at the height of fears over SARS, stores are reluctant to order more from factories. Electronics companies complain that the development of new products has been badly delayed because companies, afraid of SARS, barred engineers from traveling between the United States, Taiwan and China. (NYT, 31 May)

China relaxes SARS-related travel restrictions
Relaxing SARS-related restrictions, China will allow domestic tourism to resume in June on a limited basis and will begin welcoming group tours from overseas in July. However, a national order against group tours between provinces and to overseas destinations remains in effect. (AP, 30 May)

Foreign companies remain confident in Chinese market
Representatives of foreign-based multinationals voiced their confidence in the Chinese market, despite the SARS epidemic. J. M. Mueller, head of Nestlé China, said: "Caring for people has always been and will continue to be part of our corporate culture and we therefore value the courage and commitment of all the medical workers who care for the people in need and are helping to save their lives." Nestle donated CNY1 million in food and beverage products to the Ministry of Health to support medical professionals fighting SARS. (China Daily, 30 May) The article also mentions other multinational companies.

In age of SARS, Wal-Mart stores adjusts its global buying machine
Because of international travel restrictions imposed to contain the spread of SARS, Wal-Mart has been forced to rethink the way it does business with China, where it spends about USD12 billion a year. Unable to send buyers to China, Wal-Mart is using e-mail and videoconferencing to hold meetings with suppliers. And in a major undertaking, it asked hundreds of suppliers, most of them from Asia, to fly to the Dallas showroom, exhibit their wares and conduct the final rounds of negotiating and ordering for next year's spring season. As a result, Wal-Mart plans no decrease in the amount of goods it sources from China this year. (WSJ, 28 May)

SARS slows China's economy
SARS-related losses within the tourism sector for the year are expected to amount to CNY120 billion, or 1.1% of China's GDP for the year. The food and catering sector's business volume nationwide is expected to decline by CNY45 billion resulting in a 0.3% drop in China's GDP growth. Losses in other retail sectors are expected to reach CNY20 billion, about 0.2% of China's GDP growth rate. FDI and private investments are likely to be affected in hard-hit regions within the next few months. The country's actual FDI this year will fall an estimated USD3 billion. The spring session of the 93rd China Export Commodities Fair, also called Canton Fair, ended on April 30 with a transaction volume of USD4.42 billion, down from USD16.8 billion last year. Apart from the losses during the Canton Fair, China's exports are expected to decline more than USD6 billion due to SARS. China's imports, in particular imports of equipment as FDI, are expected to decline. Moreover, the country will import less as the Chinese Government slashes imports to balance foreign trade, experts predict. China's foreign trade this year will decrease an estimated USD7 billion, or 0.5% of GDP. (Business Weekly, 27 May)


Price rise slows down in April
Ex-factory prices for Chinese industrial products grew more slowly in April year on year, due to lower oil prices and the SARS outbreak. Last month's rise of 3.6% compared to 4.6% year-on-year growth in March. (China Daily, 28 May)

China issues marine economy blueprint
The State Council issued its first special marine economic development program aimed at boosting the country's marine industries (ocean fisheries, communication and transport, ocean oil and gas, seaside tourism, ocean shipping, marine bio-medicine, sea water utilization and salt production). The country's marine economy is expected to contribute about 4% of the country's GDP within two years and over 5% by year 2010. (China Daily, 28 May)

China's Jan-Apr vehicle imports more than double on year
China's vehicle imports more than doubled on year in the first four months of 2003, driven by a surging domestic market for automobiles. Passenger car imports were 34'100 units, up 98% on year, while imports of sport utility vehicles reached 17'200 units, roughly triple the figure for the same period last year. (China Daily, 27 May)


Challenge to Viagra Patent
A coalition of local drug companies petitioned China's State Intellectual Property Office to nullify Pfizer's patent for sildenafil citrate, the main ingredient of the treatment for erectile dysfunction on the argument that the patent failed to fulfill the novelty requirement under China's recently upgraded patent law. The case is expected to be a litmus test of China's commitment to the standards of international patents and intellectual-property rights. (Dow Jones, 30 May)


China 'deeply regrets' US possible import restrictions
China "deeply regrets" the United States' decision to start procedures governing the use of a safeguard mechanism to restrict textile and apparel imports from China. Under the terms of China's accession to the WTO, members may impose specific safeguard measures or quotas on Chinese textile and apparel products if the importing country determines that such shipments from China disrupt or threaten to disrupt the market. (People's Daily, 27 May)


Chinese banks could require state bailout
Liu Mingkang, head of the new China Banking Regulatory Commission, outlined the CBRC's work and objectives as well as the state of China's banking system in a high profile media conference last week. China's state-owned banks continue to swoon under a mass of bad loans and may require another government bailout. Liu's comments mark the highest-level indication yet that the country's efforts to overhaul management, lending and deposit operations at its four biggest banks are proceeding far more slowly than hoped. His remarks also suggest that China could see lengthy delays in the implementation of a raft of financial reforms, including interest-rate and currency liberalization and the eventual listing of the banks on the stock market. Liu said the big four state banks had an average NPL ratio of 24.13% (about USD500 billion). Standard & Poor's estimated the mainland banking sector had an NPL ratio close to 50%, with most of the bad debt sitting on the books of mismanaged state-owned enterprises. Bankers and politicians have suggested that China can outgrow those bad loans within 10 years of continuous economic growth. Signs of faltering economic growth in the mainland economy now suggested that this expectation might be a bit optimistic. (various sources)

Hua An becomes China's first private non-life insurance company
Mainland authorities have approved the creation of China's first private non-life insurance company, Shenzhen-based Hua An. (SCMP, 29 May)

CCB curbs loans to luxury developments as risks rise
China Construction Bank has imposed curbs on loans to developers of luxury homes, hotels and offices to help rein in lending risks. "There are structural problems in the property sector: demand for affordable homes cannot be met while the market for high-end property is not big", a senior official said. (SCMP, 29 May)

Electronic transactions increase at Bank of China
Bank of China said the volume of electronic transactions jumped almost 60% in the year's first four months as more customers used online and phone services because of concern about SARS. (Bloomberg, 28 May)

Minsheng creates insurance landmark
In a milestone for the private sector, Minsheng Life Assurance, the first private insurance company since 1949, has opened for business. The company has a national license and is preparing to open subsidiaries in Beijing and in Hebei, Jiangsu and Zhejiang. (SCMP, 28 May)

Yuan's Peg to Dollar benefits exporters' business in China
Asian companies already are scrambling to compete with the low-cost manufacturing centers of China. Now, what looks like a change in U.S. policy on the dollar may help China become an even tougher competitor. If the U.S. economy is slow to recover, and a weaker yuan helps China take a bigger slice of global trade at a time when other countries are suffering, the clamor from China's trading partners could grow against the yuan-dollar peg. (WSJ, 28 May)

UBS and Nomura first to get the nod to buy yuan shares
The China Securities Regulatory Commission has named UBS and Nomura Holdings as the first overseas investors to be allowed to buy yuan shares under a qualified foreign institutional investor (QFII) program. The approval marks the opening of China's USD500 billion equities market. (SCMP, 27 May)

China's yuan is growing in use as hard currency
Although not fully convertible, the yuan is growing in use as a hard currency outside China. In Hong Kong and along China's borders with Southeast Asia, an emerging zone can be traced, fueled by burgeoning Chinese trade and tourism. As well as reflecting China's growing economic influence in the region, experts say that Beijing is counting on the currency acting as a strategic tool to consolidate China's power and influence in Asia, possibly paving the way for the yuan's debut as a regional reserve currency. (Dow Jones, 26 May)

New banking regulator seeks international advisers
China's newly launched Banking Regulatory Commission is forming a Council of International Advisers that it will consult on "the strategy to develop China's banking industry and banking supervisory system with reference to international best practices." CBRC said it is inviting people to join the advisory council, and the group's first meeting would take place "at a proper time in the near future." (China Daily, 26 May)

Firm yuan value lure funds back
The category for errors and omissions in China's balance sheet of international payments in 2002 turned black after being in the red for the previous 17 years. The category, the figure in which read USD7.8 billion last year, is closely related to capital flows that regulators are unable to track. The capital outflows in the 1990s were mainly attributed to a relatively weak yuan. As the possibility of a yuan depreciation diminished, capital outflow also eased. (China Daily, 26 May)

Investors from mainland to get market access
In what might be known as the qualified domestic institutional investor (QDII) program, mainland residents will soon be allowed to invest in the Hong Kong stock market as well as those of foreign countries, in a significant liberalization of the central government's foreign exchange policy. The move will provide a boost for the battered Hong Kong economy as the special administrative region's stock market is widely seen as being the primary beneficiary when the money begins to flow. (SCMP, 26 May)


Toshiba puts mainland chip investment on hold
Toshiba said that it was postponing a planned JPN5 billion investment in its mainland semiconductor plant due to SARS. Toshiba hopes eventually to go ahead with plans to boost monthly production capacity of microchips at its plant in Jiangsu province from the present three million units to 30 million by the end of next year. (SCMP, 30 May)

VW expanding in China with a 3rd production site
Volkswagen will shift production of the best-selling, 18-year old Santana car to Jiangsu province, freeing up space at its Shanghai plant to make new models such as the Gol, the Touareg sports-utility vehicle and the Golf. Volkswagen's China sales rose 86% in the first quarter to 162'000 units, surpassing those in the United States. (IHT, 29 May)


China shuts gates to block the mighty Yangtze
China blocked the Yangtze River, starting to fill a reservoir for the world's biggest hydroelectric project. China says the project is critical for national power needs and will help tame the 6'300 km Yangtze, whose annual floods killed 300'000 people in the last century alone. Critics at home and abroad say the USD25 billion project, begun in 1993 and due to finish in 2009, will bring ecological disaster as pollution seeps from the remnants of deserted towns, villages, factories and hospitals on the reservoir bed. (Reuters, 1 Jun)

China, Russia sign oil pipeline agreement
China and Russia inked one of the key final deals paving the way for a USD2.5 billion oil pipeline. Under the agreement, CNPC agrees to purchase up to 5.13 billion barrels of Russian oil, worth some USD150 billion, between 2005 and 2030 supplied via the pipeline running from Russia's Siberian oilfield to China's Daqing. The deal means the Russian Government will put off a rival project to the Japanese market, despite intense bidding from Tokyo to pull the oil its way. (China Daily, 29 May) The last bit of this information remains to be confirmed.


Beijing extends special loans to boost economy
Banking institutions in Beijing have responded to a program initiated by the Beijing Municipal Government to boost the local economy by extending a CNY6 billion line of credit to the local enterprises most affected by SARS. The special loans will be offered mainly to SMEs in the fields of catering, recreation, tourism, exhibition, retail sales and transportation. (People's Daily, 1 Jun)

Tianjin pledges to invest heavily in port construction
Tianjin pledged to invest CNY27 billion from 2003 to 2010 to speed the development of Tianjin Port with a view to making it a major international port and container transport hub in Northeast Asia. By 2010, Tianjin Port will be China's second largest port, and its stated goal is to eventually be listed among the world's top ten or to contribute CNY42.8 billion. (People's Daily, 29 May)

Beijing 2008

Smoke fills air again as bidders fight to own 'nest'
Judges selected the nest-like design by the China Academy of Architecture Design and Switzerland's Herzog & de Meuron as the style for the National Stadium. Now, a quiet, but fierce, bidding war is under way to determine which of five competitors will own "the nest." Beijing Municipality will provide more than 51% of the project's funding. The successful bidder must provide the remainder of the funding. The winning design is estimated at CNY3.8 billion. (Business Weekly, 27 May)


Officials probe Shanghai tycoon
Chinese authorities have launched an investigation into the dealings of Shanghai's richest man, Zhou Zhengyi, a property tycoon with close links to Liu Jinbao, the former head of the Bank of China in Hong Kong who was abruptly recalled from his post this month. (FT, 31 May)

New rules ease travel restraints
Shanghai eased its traveling rules, asking only those with close contact to SARS patients and suspected patients to go through medical quarantine. Local residents now returning to the city, including from such areas as Beijing and Hong Kong, will not be quarantined as an earlier document required. The new measures become effective on June 2nd. (Shanghai Daily, 31 May)

SARS harms local exports
A report by the Shanghai Special Commissioner's Office under the Ministry of Commerce concludes that the SARS crisis has made it more difficult for manufacturers of exports to secure new sales contracts but has caused no major production problems. The businesses surveyed said the orders they were currently fulfilling were mostly agreed at the end of last year or earlier this year. Some even forecast that their exports will be cut by 30% this year as major exhibitions have been cancelled or postponed, depriving exporters of venues to do deals and court new clients. (China Daily, 28 May)


70% of wine sold in Mainland China's cities fake
More than 70% of "imported" wine sold in restaurants and hotels in four of China's largest cities is fake, a survey by the China National Administration for Industry and Commerce in Beijing, Shenyang, Zhengzhou and Chengdu said. Beijing fared better than the rest, but it still could only manage 60% authenticity. (China Post, 29 May)

China's air traffic mileage in 2002 ranks world's 5th
China's aggregate air traffic mileage in 2002 rose to 16.2 billion ton-kilometers, up 17% on a yearly basis and pushing China's world ranking from the 6th to 5th. The four countries ahead of China are the United States of America, Japan, the United Kingdom and Germany. China's passenger traffic volume also increased 17% in 2002. (People's Daily, 29 May)

China's Northeast provinces hit by record drought
About 2.62 million hectares of farmland have been declared drought-affected as China's Northeast region faces a record dry spell. Nearly 3 million people and 360'000 head of livestock are facing severe water shortages due to the dry spell, which has lasted for almost 100 days. (Dow Jones, 25 May)

Weekly Market update  30 May 2003  23 May 2003
Shanghai A 1650.30 1634.75
Shanghai B 119.50 116.14
Shenzhen A 464.40 456.43
Shenzhen B 225.57 218.48
Hong Kong Red Chip  1003.66 982.27
Hong Kong H 2460.23 2397.63
Source: South China Morning Post

China Business Briefing is a random selection of business related news gathered from various media and news services covering China, edited by the Embassy of Switzerland in Beijing and distributed among Swiss Government Offices and other interested parties. The Embassy does not accept responsibility for accuracy of quotes or truthfulness of content. Upon request and depending on the resources available, the Embassy will provide further information on the subjects mentioned in the China Business Briefing.

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