The Australia-China Chamber of Commerce and Industry of New South Wales

Newsletter No. 14

11 February 2000

 

 

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CONTENTS

Official Forecast

What to Look For This Year

Sources of Information

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ACCCI ELECTRONIC NEWSLETTER NO. 14

The Chamber's E-Letter is back after a break during December and January. This issue is focused on China in the Year of the Dragon, giving brief summaries of expectations and forecasts for the current year. A main point in this focus is that circumstances in China continue to change rapidly.

To know anything that is substantial and practical about China it is necessary to be current.

Equally important, however, it is necessary to consider carefully what is said and read, since it is very easy to become misled.

 

 

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OFFICIAL FORECAST OF 7 PER CENT GROWTH IN REAL GDP

The forecast was announced on 9 January by Zeng Peiyan, Minister of the State Development Planning Commission. If that growth rate is realised at the end of this year, it will represent a drop of 1 percentage point as compared to 1999.

Other forecasts that were published recently vary from a low range of 4-to-5 per cent (Credit Lyonnais Securities Asia) to 8.2 per cent (Morgan Stanley). The Chinese Academy of Social Science predicted a GDP growth rate of 7.5 per cent to 8 per cent.

Exports. China's exports are expected to exceed US$210 billion in the year 2000, which would be an increase of nearly 8 per cent over the 1999 (preliminary) figure. The latter, in turn, is 6 per cent greater than the 1998 figure.

Much of the increase in exports in 1999 occurred during the second half of the year and was attributed largely to the continued strength of the US economy (about 12 per cent over the previous year). An export surge in October and November (21 per cent and 29 per cent, respectively, on an annual basis) reflected the recovery in demand from Asia.

Imports. China's imports grew at a rate of 18 per cent during 1999, but nevertheless represent less in US dollar terms than export earnings. A lower rate of growth in imports is predicted for 2000, with an official projection of 8 per cent. A rise in consumer spending above the 6.8 per cent increase that occurred in 1999 will probably raise import growth beyond the projected level, but even then it is not likely to exceed the level that was experienced in 1999.

Foreign exchange reserves. The trading account surplus in 1999 contributed to an increase in China's foreign exchange holdings of US$9.7 billion, for a total of US$154.7 billion. Since a trading account surplus is expected to continue this year, the prospect of a devaluation of the renminbi in the near future is substantially reduced.

Consumer prices. Deflationary pressures arising from over production in China continued throughout 1999, producing a decline in the CPI of 1.3 per cent. Chinese officials suggested that these pressures will cease this year, but if so the result will probably be due more to rising import prices than to substantial increases in consumer spending.

Foreign direct investment. All indicators of FDI inflows (number of new projects, amount contracted and amount realised) declined during 1999. An improvement is expected this year as a result of the overall improvement in neighbouring economies and the likely entry of China into the WTO.

Fiscal deficit. Including interest payments, China's 1999 deficit is reported to be RMB 280 billion (US$34 billion), which is RMB 100 billion (US$12 billion) greater than the government expected earlier that year. The difference is attributed to additional spending on infrastructure projects (which also pushed up imports).

China's Vice Minister for Finance stated early in January that the deficit for this year would be less, but an expansionary fiscal policy is likely to continue. New development projects are planned for the relatively underdeveloped western provinces, as well as an express railway between Shanghai and Beijing and a major project to divert water from the south to the north. Social welfare programs and recapitalisation of the banking sector will add to the deficit.

National debt. China's current national debt is estimated to be RMB 800 billion (US$96.74 billion), or about 10 per cent of GDP. The debt level rose during 1999 as a result of new Treasury bonds totalling more than 210 billion yuan (US$25.3 billion) that were used to finance the infrastructure projects.

State media reported in December that China will issue an additional RMB 100 billion (US$12 billion) in Treasury bonds this year. It is therefore unlikely that the debt level will fall this year, but the ratio of debt to GDP may improve.

 

 

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WHAT TO LOOK FOR THIS YEAR

Changing Composition of China's Exports

We mentioned in previous reports that China's traditional exports of labour-intensive products were declining in comparison with exports of capital-intensive and skill-intensive products. This indicated that China was beginning to move up the "technology ladder" in relation to exporting activity.

Several weeks ago China's Ministry of Information announced that the IT industry became the nation's leading exporter. Exports of machinery and electronics that are directly related to information technology increased by 45 per cent in 1999, reaching RMB 322.5 billion (US$39 billion). This accounted for about half of the nation's machinery and electronics exports, and boosted the IT industry's proportion of the nation's total exports from 14 per cent to 20.6 per cent.

Will this trend continue? It probably will. Chinese authorities are determined to boost efforts in achieving higher value added per worker. Nevertheless, the shift to higher technology and higher skills is likely to be uneven for several reasons, including the following:

First, China's imports of IT equipment also increased substantially during 1999, especially from the US. It is therefore possible that the surge in the value of IT exports from China resulted mainly from a corresponding rise in the value of imported components. This would suggest that China's IT industry is not yet mature.

Second, China's exports of clothing and textiles suffered disadvantages in recent years as a result of quantitative restrictions under the Multi-Fibre Agreement. This forced some Chinese enterprises to shift production to other countries and led to a downgrading of operating efficiency in the domestic industry. This could be reversed, however, with China's entry into the WTO (since the Multi-Fibre Agreement is to be phased out for WTO members) and with continued restructuring of the domestic industry.

This restructuring already produced results. China's textile industry is reported to have returned to profitability in 1999, as a result of technical upgrading (eliminating 9.1 million redundant spindles) and a massive lay-off of about 1.2 million workers.

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Foreign Direct Investment (FDI)

Actual foreign investment inflows to China fell 11.4 per cent to RMB 334.1 billion (US$40.4 billion) during 1999, while contracted foreign investment fell 21.3 per cent to RMB 340.7 billion (US$41.2 billion) over the same period. A trend reversal will be necessary in the near future for several reasons:

·         An increase in government spending for the purpose of adding to the expenditure stream some or all of the amount foregone through a smaller FDI component is necessarily associated with an increase in the national debt.

·         The transfer of technology that generally accompanies FDI is needed for China to move more rapidly into capital-intensive and skill-intensive production.

·         Increases in FDI flows are important symbolically since they would show that China has regained the confidence of the global investment community. If that occurs, it will almost certainly give a boost to consumer spending in China.

Will increases occur during this year? The most that can be expected is a capital inflow for 2000 that is nearly the same as for 1999. China was perceived to have structural weaknesses that are similar to those of the four Asian economies most affected by the Asian crisis (Thailand, Indonesia, Malaysia and South Korea). These weaknesses include the following:

·         corruption in the public sector,

·         relatively weak corporate governance, and

·         a large proportion of non-performing loans in the banking system.

It is unlikely that investor confidence will be fully restored unless substantial progress is perceived for each of these weaknesses.

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Public Sector Corruption

That some form of public sector corruption exists (or has existed) in most developing and developed countries is rarely questioned. The relevance to investor confidence is whether it is so pervasive as to become entrenched at the upper level of government administration. Corruption at lower levels comprises a nuisance but can be accepted by many investors as a micro-market "test" to determine the going price for expediting transactions.

Upper-level corruption is generally perceived to be destabilising since it undermines the authority of public officials who support (or previously supported) other officials who were caught with their "hands in the till". In this context, China's hierarchical linkages make the nation especially vulnerable to these adverse perceptions.

China's leaders generally seek to retain influence after their official tenure ceases. Their "place in history" seems to require this, and such an incentive has frequently been beneficial to China's development. An almost universal view maintains that China's progress toward a market economy would have been much slower if Deng Xiaoping had not retained substantial influence after relinquishing his official positions.

In the present context, most of China's top leaders have already reached the 70-year-old level. The repositioning within the Politburo that began in November 1997 was presumed to be achieved through a promise that many of these over-70s would step down in 2002. In the interim, the process of inserting protégés into lower level positions is certain to continue.

The entire protégé system would be threatened if any of the newly elevated officials become exposed to corruption charges. At the very least, it would undermine the perceived capacity of the higher-level leaders to pick the "right" protégés. The process is also associated with unknown favours owed to the mentors.

How do these hierarchical linkages in China differ from similar mentor-protégé arrangements elsewhere? In China, the nature of the favours owed is not always made explicit to the debtor. They may be held as future claims. More than anything else, this makes the process non-transparent.

Second, the linkages comprise institution-building that is identified solely with the individual who created the linkages. In most Western countries, the institutions out-lived their creators and have thus protected those who have added to or augmented the institutions. Of all Asian nations, only Singapore is in a position to make a similar claim. For the others, the passage of time is necessary to demonstrate durability.

In early January of this year, Jiang Zemin took personal control over fighting corruption in China, but suspicions nevertheless exists that anti-corruption will be aimed mainly at neutralising rivals. If that does occur, it will not add durability to the relevant institutions. This, in turn, will affect global investor confidence.

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Corporate Governance

The way in which shareholder interests are protected and promoted within the corporate boardrooms is, to a large extent, a private sector variation of the mentor-protégé system in the public sector. Both have been heavily influenced in China by the imperial dynasty model. Historically, most Chinese businesses have been family owned, and most have been managed with a principal view of perpetuating the family dynasty.

This managerial style necessarily runs counter to openness and transparency in boardroom dealings. The family dynasty is believed to be threatened if secrets are exposed, and advice from outsiders is necessarily questioned since it is likely to be given with a view to weakening the dynasty.

The recent demise of many family-owned conglomerates (chaebols) in South Korea has most probably cast doubt on the long-term viability of that management style, but may not have eliminated it. The task required is similar to the management of Heritage Sites: How can the old appearance be preserved with the addition of a modern interior?

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The Banking System

This represents a third variation of the mentor-protégé system. As is generally known, for many years the state-owned banks in China were instruments of the state in allocating resources to those industries and sectors that were given a high priority. In this aspect, China did not differ substantially from South Korea and Indonesia in earlier periods.

In all three cases, the state has withdrawn from day-to-day decision making in the banking sector, but this does not guarantee that influence from the state will cease. A learning process is required for the protégés to develop independent methods for evaluating potential borrowers.

It also requires technical and legal infrastructure, much of which has already been started. For example, the People's Bank of China recently announced that a nation-wide information system for credit and loan registrations was put into effect at the end of 1999. More than 300 cities in China now have access to a working version of the system, giving financial institutions information on loan applicants. This includes key financial data as well as debts, payments and, if applicable, delinquencies, defaults and financial disputes.

Entry into the WTO is expected to result in a greater amount of foreign competition for renminbi loans. Tianjin and Dalian have already been designated as "open banking" cities. Some doubt nevertheless exists over the amount of loans that a foreign bank can make, relative to its capitalisation. Foreign banks will almost certainly be controlled, and the extent to which they will enjoy the same privileges as domestic banks remains to be seen.

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Concluding Comment

Since the beginning of the Asian crisis in July 1997, "transparency", "openness" and "corporate governance" have been widely promoted as preventive measures, so much so that there is now a risk of making them clichés. More attention should be placed on how they can be achieved and less on why achievement is needed.

Leadership in China is generally measured by the leader's capacity to inspire, and through inspiration to enable substantial progress to be made. Leaders are rarely called upon to explain what is being done or why it is being done. Globalisation nevertheless requires that some of these explanations be offered, since destabilising rumours and suspicions almost always arise if explanations are not provided.

In the same vein, however, international investors who seek participation in China's growing markets must adjust their standard benchmarks to suit that participation. It is a two-way learning process and the degree to which this occurs, on a reciprocal basis, during the year will have a substantial impact on economic and political outcomes at the end of the year.

 

 

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SOURCES OF INFORMATION

Forecasts:

China's 1999 Trade with U.S. Up Over 12%, ChinaOnline, 4 February 1999.

"One or Two More Years" of Active Fiscal Policy for China, ChinaOnline, 31 January 2000.

Active Fiscal Policy to Continue: Finance Minister, China Daily, 28 January 2000.

China's Debt Expanding Too Quickly, Finance Vice Minister, ChinaOnline, 12 January 2000.

China Predicts 7% Year 2000 Growth, Deflation To End, ChinaOnline, 5 January 2000.

China Set To Meet Tax Target For 1999, Wants 8% Increase For 2000, ChinaOnline, 27 December 1999.

Rising Deficit, Unemployment True Y2K Worries Inside China, ChinaOnline, 13 December 1999.

Exports

China IT Exports Rose 45% On-Year in 1999, ChinaOnline, 8 February 2000.

China Textile Sector Was Profitable In 1999, ChinaOnline, 4 February 2000.

Corruption

Court Intrigue, Asiaweek, 11 February 2000.

Fall of an Empire, Asiaweek, 7 February 2000.

Other articles on China in these two issues are also of interest.

Corporate Governance

The Chinese State as Corporate Shareholder, Finance and Development (International Monetary Fund), Volume 36, Number 3, September 1999.

Banking Sector

China To Open Tianjin, Dalian First To Foreign Banks, ChinaOnline, 4 February 2000.

China Weighs Restrictions on Foreign Banks Renminbi Business, ChinaOnline, 4 February 2000.

China Banks National Lending System To Be Networked, ChinaOnline, 3 February 2000.

Zhu Rongji Urges Banking Sector To Resolve Troubles, China Daily 28 January 2000.

Smooth Operation, Less Risk for Banks, China Daily, 28 January 2000.

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ChinaOnline: http://www.chinaonline.com/

China Daily and China Business Weekly: http://chinadaily.com.cn.net

Asiaweek: http://www.pathfinder.com/asiaweek

International Monetary Fund: http://www.imf.org

 

Send comments about this E-Letter to: j.zerby@unsw.edu.au

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