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News Selection: October, 2005

Related entries: General, News

Selected news stories on economic, trade and investment issues are listed below.

Chinas 3rd quarter growth hit 9.4 percent, and full-year growth is expected to be in the range of 9.3 to 9.4 percent. This strong growth is expected to continue into 2006, with new estimates ranging from 8.5 to 9 percent. While the headline figures remain the focus, it is important to note that domestic demand is expected to play an increasingly important role in future GDP growth. Credit Suisse First Boston estimates that the Chinese consumer market will grow by 18 percent a year, and that by 2014 Chinas consumer market will be second only to the US.

The emergence of domestic consumption as a major force will assist in reducing the reliance on export sales as a driver for growth – and the associated high trade surpluses. Over time it is hoped that this trend will help reduce tensions with Chinas major trade partners such as the EU and the US.

China’s rapid economic development has created relative riches for the urban elite, but has left behind the majority of the rural population – average urban incomes last year were RMB9,400 (US$1,164) while rural incomes were just RMB3,000 (US$372). This wealth gap increasingly presents the risk of social instability, and official emphasis is now being placed on solving social tensions, and associated issues such as corruption. Tax breaks for the lowest earners have also been announced – people earning under RMB1,600 a month (US$198) will no longer need to pay income tax.

China’s trade surplus in September may have surpassed US$10 billion for the third month in a row, and could increase to a record US$100 billion for the year.

The surplus is causing tension with trade partners, including the US – which had a US$162 billion trade deficit with China in 2004, and which is threatening to impose import tariffs on Chinese goods unless there is a further appreciation in the RMB.
The US-China textiles dispute remains to be solved, though both sides expressed positive sentiments on trade issues at the 17th meeting of the Sino-US Joint Economic Commission in Beijing.

While no agreement has been reached on the textiles issue, the US Treasury Secretary John Snow noted the positive impact of China’s revaluation of the RMB, and said that legislation threatened by US senators – that would impose a 27.5 percent tariff on all imports from China in the absence of more currency reform – was “ill-conceived”.

In addition, China now faces a WTO probe (initiated by japan, Switzerland and the US) into its crackdown on piracy.

According to a new UN report, Foreign Direct Investment (FDI) in China rose from US$54 billion in 2003 to a record US$61billion in 2004 – making it the third largest investment destination in the world after the US (US$96 billion) and the UK (US$78 billion). While investment in traditional sectors has continued, there has been a dramatic increase in inflows from the financial sector investors, including banks, insurers and private equity groups.

At the end of 2003, foreign equity stakes in Chinese banks were just US$500 million, or about 1 percent of total banking assets. Since then (and with the impetus provided by opening of the banking sector under the WTO schedule) over US$13 billion has been invested – by the likes of HSBC, Standard Chartered, RBS, Bank of America and Temasek. It is estimated that foreign financial groups will own around 17 percent of the Chinese banking sector by 2007.

On the private equity front it has been reported that, in the eight months to August this year, US$2.3 billion was invested, against $2.06 million in the whole of 2004. The latest significant deal to be reported was by Carlyle which, with its US$375 million investment in Xugong Group Construction Machinery, has become the first foreign private equity group to take majority control of a Chinese state-owned business. With returns of 25 percent or more over the past two years in Asia, it is thought that buyout groups have allocated funds of around $10 billion (which could increase to US$80 billion when leveraged by debt) for investment in the region in the next few years.

    Foreign investment in China tops $61bn
    CCER / Financial Times
    … FDI flows into China rose from $54bn in 2003 to a new high of $61bn in 2004, making it the third largest investment destination in the world after the US ($96bn …

    Foreign capital pours into China’s banks
    Asian Tribune – Bangkok,Thailand
    When China joined the World Trade Organization (WTO) in 2001, Beijing agreed to open up its banking system to foreign investors by the end of 2006. …

    Carlyle investment is a first for China
    Telegraph UK
    Carlyle has become the first foreign private equity group to secure majority control of a Chinese state-owned business…

While many people still think of China as simply a low-cost manufacturing base, there is increasing focus on research and development by Chinese companies and foreign investors. A recent survey conducted by Unctad ranked China third in the list of locations for R&D by transnational businesses. It has also been reported that within five years China will be investing a higher proportion of its GDP in R&D than the European Union, as more western companies relocate their R&D activities.

View the “News” section of the Blog for more China business news.

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