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The Australia-China Chamber of Commerce and Industry of New South
Wales Newsletter No. 14 11 February 2000 |
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 CONTENTS |
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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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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. ------------------------------------------ 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. ------------------------------------------ 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. ------------------------------------------ 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? ------------------------------------------ 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. ------------------------------------------ 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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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. ========================================= 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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