On his recent visit to Europe, Premier Zhu Rongji could not have been more explicit about China's exchange rate policy. Beijing is not going to devalue, he said repeatedly. "Please look at the record of my remarks," he entreated businessmen and financiers at a dinner in London. "Am 1 not someone who keeps his promises?"
Because the yuan is only partially convertible, Zhu can speak with the authority of one who knows that the decision to devalue rests with the Chinese government rather than currency speculators. In the short-term, there would appear to be little economic advantage in taking such action. Chinese devaluation would probably spark a wave of further devaluations across the region, thus harming those economies upon which Chinese exporters are most reliant.
Paying a price
However, Zhu concedes that there is a price to pay in helping to maintain stability in Asia by not devaluing. Inward investment levels are already falling off and export competitiveness is being eroded against those countries which have devalued. The value of the yuan against the dollar actually strengthened slightly between the end of June 1997 and last March, while Southeast Asian countries' currencies have plummeted (see below). The currencies of Thailand, South Korea and Malaysia valued against the US dollar fell by an average of one-third between June 20, 1997 and April 13 this year, while the Indonesian Rupiah dropped by 68 per cent. These four countries along with the other Asian markets of Taiwan, Hong Kong and Japan accounted for 51.1 per cent of the mainland's exports in 1997.
Falling demand in the troubled Asian economies will hit Chinese exports, as will the improved ability of these countries to compete with China in exporting light industrial goods. Anecdotal evidence suggests that many Chinese exporters are already struggling. Premier Zhu is thought to be under strong pressure from regional officials and township and village enterprises to devalue the currency.
Indeed, despite winning so many inter-national plaudits, Zhu knows that success as premier will be measured by his popularity at home. Continued inward investment and export competitiveness will be crucial in keeping a lid on the unemployment total and enabling him to effect far-reaching structural reforms to the economy.
At the national level, the likely impact of the Asian crisis on trade should not be overstated. First, certain important sec-tors such as textiles are covered by trade quotas.
Second, China exports a broad range of goods which the smaller countries of Southeast Asia cannot match. China's industrial capacity has progressed a long way since the 1980s when its exports were dominated by light industrial goods. For example, Chinese shipyards have become increasingly successful in breaking into international markets. In the first two months of 1998, China exported ships and boats valued at US$331m ?more than three times the amount of a year earlier. Nearly one-third of this total went to the Philippines, Thailand, Indonesia and Malaysia ?markets which have been particularly affected by the Asian crisis.
Third, while there is no getting away from the two big problem markets of Japan and South Korea, the economies of Taiwan and Hong Kong, which together make up one-quarter of the mainland's exports, have proved their resilience during this crisis. North America and Europe, which accounted for 35 per cent of China's exports last year, have so far remained largely unaffected.
Fourth, it is not yet clear how effectively Southeast Asian countries can improve their export performance in the export market at the expense of China. For one thing, labour costs in China are so low that it can still be competitive despite all the devaluations. According to Citibank estimates using prevailing exchange rates, manufacturing labour costs remain twice as high in Thailand and Malaysia and 1.5 times higher in the Philippines compared with wages in the mainland.
Furthermore, boosting production to take advantage of a more competitive exchange rate is not necessarily an easy or quick process. In particular, Southeast Asian companies may have trouble raising capital to boost production levels in an environment of generally tight liquidity and higher interest rates.
Because of these limiting factors, China hopes that it will experience no absolute fall in exports this year, only a decline in the export growth rate. Citibank concurs with this assessment, predicting a five per cent rise compared with 20.9 per cent in 1997. It goes on to forecast a US$30.6bn trade surplus.
This position of strength coupled with China's huge foreign exchange reserves is enough to persuade most economists to rule out the prospects for a devaluation in the short-term. Reinforcing this belief are political issues ?Zhu's personal credibility and the praise which has been heaped on China because of its decision not to devalue and thereby pre-serve stability in the region.
Differences of opinion
The first stirrings of the Asian financial crisis occurred last summer but the impact on China's export position can only now start to be monitored, due to the inherent time lags. Trade statistics are among China's most reliable macro-economic indicators, so Chinese policy makers and economists will be monitoring closely the trends in early 1998.
There continue to be significant differences between the US and China concerning the validity of the bilateral data published by each country. For example, there is a certain amount of illegal production going on in areas such as false labelling, but it probably accounts for only a small percentage of the total. The use of Hong Kong for transshipment purposes is behind much of the dispute between Washington and Beijing and the handover of the former colony has done nothing to change matters. Mr Don Brasher of Global Trade Information Services estimates that about 25 per cent of Chinese exports are sent to Hong Kong and then re-exported abroad. The same situation applies to other countries throughout the world, of course, but generally to a much lesser degree. For this reason, it is not possible to track with accuracy the final destination of a substantial part of the mainland's exports.
Imported figures are another matter. On the import side, [_Chinese] data is an excellent model of what the country is importing," says Brasher.
Exports hold up well
The official statistics contained within GTI's World Trade Atlas China Edition (see box) show that China's total exports climbed 15.73 per cent in the first two months of 1998 compared with the same period last year. Import levels over the same period remained static, meaning that the trade balance actually widened.
However, far from indicating a continuation of previous trends, a more detailed investigation of the trade patterns reveals some interesting developments. For example, exports to Thailand, Indonesia and South Korea all registered a fall of more than 20 per cent, while those to Japan recorded a small increase and Malaysia, surprisingly, grew by 20 per cent. Overall, Chinese exports seem to have held up well in the first two months of 1998, even in potentially vulnerable sectors such as footwear and toys. The likely explanation is that international wholesalers and retailers so far have not chosen, or have not been able, to switch their production sources to alternative suppliers from elsewhere in Asia.
Imports into China from all SoutheastAsian countries rose slightly, with well above average growth rates recorded by the electrical machinery and plastics sec-tors. The sole exception is Indonesia, the country to have suffered the biggest trauma in recent months. Plunging crude oil exports largely account the fall in exports from Indonesia, a country suffering from stagnating oil production levels and expected to become a net oil importer within the next decade or so.
Trade data made simple
Chinese trade figures are published in a timely fashion by customs authorities. The delay before publication is just five weeks ?February 1998 statistics were made available on April 3. This makes China one of the world's most efficient publishers of trade information, according to Mr Don Brasher, president of Global Trade Information Services.
Formerly an employee of the US Commerce Department where one of his tasks was trying to make sense of Sino-US trade volumes, Brasher is well acquainted with the world of trade statistics. He has launched a series of world trade atlases on CD-ROM, the latest of which is a China edition launched last September. The product is based on official data supplied by Chinese customs but it is displayed in a format which allows users to download historical information quickly. Themajor users are governments, multinational corporations and libraries.
Last year, his company struck a deal with Chinese customs involving the sup-ply of national trade data. Negotiations took just a couple of months to sort out. "Chinese customs are very approach-able," says Brasher. "They are also extremely organised in giving us the data and they are highly computerised. China is the first data we publish, followed by japan."
Chinese customs charge GTI a fee for using their information ?10 times the amount charged by US customs for providing an identical service. However, Brasher says their main incentive is not monetary gain but to encourage more people to analyse Chinese trade patterns and thereby form a more sophisticated international view of China.
Top-level information shows China's leading import and export destinations, enabling users to track the largest andfastest-growing of China's trading partners. The set-up allows the user to extract more detailed layers of information with a single keystroke ?such as country and product information by two-, four-, six- and eight-digit product code classifications which are standard across the world. For example, within a few seconds users can trace how many dolls China exported to Spain in a single month or year compared with up to three years earlier and showing the percentage change for each selected period. All this information could be extrapolated from the publications sold by Chinese customs but it would be a lengthy and cumbersome exercise.
The price of the World Trade Atlas China Edition ranges from US$1,500 for an annual subscription to US$4,920 for a monthly subscription. GTI also offers a report-on-demand service. Contact GTI on tel: (1) 803 765 1860.
Reform despite downturn
China's leading financial and commercial centre is feeling the impact of the Asian crisis but the city is still pushing ahead with a restructuring of the state-owned sector.
especially from within Asia. The number of new foreign investment projects fell by nearly one half in the first quarter of 1998 on a year ago, although the combined value rose two per cent to USS870m.
Mr Sam Crispin, associate director at the First Pacific Davies in Shanghai, notes from his real estate business that many Japanese and Korean executives have been sent home Each year a new look; every three years a big change in appearance. Shanghai officials are chanting this slogan to describe the city's transformation since the launch of its ambitious urban renewal pro-gramme in the late 1980s. From a weary city with 18 million people densely packed into dilapidated pre-1949 buildings and narrow lanes, Shanghai is starting to look like a mod-em metropolis. Gleaming new high-rise blocks are everywhere, depai lment stores line newly paved boulevards and people are moving into new apartments in the suburbs.
More important, the infrastructure has been upgraded to sustain Shanghai's rapid growth into the next century Over the course of just a few years, the city. has built a fast, clean subway and three highways linking the city to its eastern side across the river. An air-port, a light-rail system, a cross-harbour pedestrian tunnel and a second railway are also being built. Most ambitious of all is a brand new business town of skyscrapers, modern amenities and high-technology production bases being built on the former farm-land in Pudong.
Shrinking export volumes
Making all this possible was the given light Shanghai received in 1990 from Beijing to raise money independently to fund local projects and to open more economic sectors to foreign investors. The result is a massive inflow of foreign and domestic capital, which has facilitated double-digit growth rates.
Even in the relatively slow year of 1997, Shanghai clocked a GDP growth of 12.7 per cent, far above the national average of 8.8 per cent. This year, though, even the economic machine of China's biggest city has to slow down because of the gloomy business environment in Asia and at home. Mayor Xu Kuangdi said the city's GDP is to grow 10 per cent in 1998 and other indicators of economic growth are also expected to worsen. This pre-diction is already starting to look optimistic. In the first three months of this year, industrial output climbed 8.0 per cent year-on-year ?in line with national trends but way down on the 14.6 per cent recorded by the city for all of last year. "Accelerated capital construction is essential to maintaining Shanghai's development momentum," says Mayor Xu.
First to feel the impact of the region's financial crisis are export firms. Shanghai exporters expect orders to shrink at least 15 per cent this year, industry sources say. In Pudong exports grew by 18.9 per cent in the first two months of 1998 but this was 11 percentage points down on the same period last year. They have found competition tougher as battered Southeast Asian economies are exporting more and cheaper products. Mayor Xu said the growth of Shanghai's exports will slow to 10.7 per cent this year, down from 11.2 per cent in 1997.
Foreign investment is likely to decline,recently. Those who do stay are cutting back on expenditure. "Golf club membership has gone down and some South Korean and Japanese are even taking their children out of international schools into local ones," he adds.
Another Shanghai-based Japanese banker believes some Japanese companies will be pulling out of China soon, because of the much-changed regional business climate. When they came to China a few years ago the Japanese yen was strong, at Yn1(O to the US dollar. Now the rate has come doyen to around Ynl 30, making it less urgent to invest in China as a way to cut costs, he says.
At home, Shanghai is caught in the national deflationary spiral. Like other big cities in China, Shanghai is suffering from shrinking demand and surplus production capacity.
Growth of retail sales, a barometer of consumer confidence, has been sliding since 1995, from 25.9 per cent to an anticipated 11 per cent this year. Working class families have tightened their belts in preparation for the lean times ahead. Manufacturers were hoping that consumers might be tempted to part with their cash for newly released products such as wide-screen digital television sets, computers and home exercise equipment. But a recent survey in Shanghai showed that 80 per cent of those interviewed did not plan to purchase items which manufacturers had hoped would stimulate a new round of mass consumption. Few of the remaining 20 per cent expressed a firm future commitment to buy such products.
Investment, another engine of growth, is slowing down after years of break-neck expansion. The construction sector registered a year-on-year output rise of just 0.1 per cent in 1997. Some developers are shelving projects this year, as the property glut is expected to worsen. Even the massive volume of public works is tapering off, following the completion of most big projects. Fixed-asset investment, the aggregate of all kinds of investments, is expected to record zero growth this year, a great contrast to the high double-digit increase in earlier years.
Despite the downturn, Shanghai is pushing ahead with the reform of its state sector. The city hopes mergers, acquisitions and bankruptcies will revitalise big and efficient state firms, but phase out the weak and the small ones. In 1995-96, 58 state enterprises went bankrupt, 59 were merged and another 200 small state firms were bought out. Mr Zhang )in, deputy manager at Shanghai Asia Business Consulting, expects more state companies to change hands this year, although the number of bankruptcies will be kept small to ensure social stability His firm has helped some listed state firms to find cash-rich investors. Industries in which Shanghai can no longer boast any advantage, such as textiles and other labour-intensive operations, will be phased out to low-cost areas in inland China, he says.
Private sector potential
One result of such a radical restructuring of industry is rising unemployment. At end-1997 there were 205,000 unemployed state workers, or a jobless rate of three per cent. The government has vowed to control the number of unemployed to under 200,000 this year and to help them find new jobs. This tar-get is ambitious given the economic down-turn but in any case the figure does not reflect the full picture since it excludes those not registered with the government as unemployed or only partly employed. Officials are to restrict the number of non-Shanghai workers from working in the city heavily penalising those employers who defy the restriction.
Under a programme called Re-employment Project, the city has opened seven job centres capable of handling applications from some 250,001) potential employees. There are also 300 retraining centres, where dismissed workers can learn new skills for fn v. Street committees, quasi-government agencies which handle grass-roots issues, are assigned to help families unable to cope financially and emotionally with the loss of a job.
Analysts believe that Shanghai is well placed to absorb the redundant workers because of its expanding service sector. The share of the tertiary sector in the city's GDP rose to 46 per cent last year, up from 31 per cent in 1990, at the expense of manufacturing. The number of people employed in tourism, retail, finance and other service industries has increased from 30 per cent to 40 per cent of the workforce. Redundant blue-collar workers now find themselves working as taxi drivers, sales persons, cleaners shop assistants.
One sector that is under-developed but with lots of potential is private business. The state sector still dominates Shanghai in terms of GDP, accounting for 57 per cent. The collective sector, which covers other quasi-public companies, accounts for another 20.2 percent. There is no comparative figure for the private sector. As an employer, however, the private sector is becoming increasingly important. At end-19% private enterprises employed 579,000 workers, while an additional 210,000 were self-employed workers. The state sector, which is still the biggest employer, hired 3.12 million.
"Private business has not been able to prosper in Shanghai because for too long, we were one big planned economy;" notes Professor Wang Xinhui, head of the Shanghai Institute of Foreign Trade. Private business-es have been lobbying the Chinese government to give them the same status and legal protection as those in the state sector. Currently they claim discrimination in gettingbank loans, listing shares and undertaking mergers and acquisitions. "There are few high-profile big private companies of the likes of the feedgrain giant Hope Group in Sichuan, because the Shanghai government has not backed their growth with cheap loans and favourable policies. Shanghainese also prefer to get a highly-paid secure job, rather than to take the plunge and start their own business," saes Professor Wang.
So, even in the current downturn, Shanghai's emphasis is still on helping big state companies to become more competitive. Eventually, the city hopes to have two or three state-run conglomerates, each with an annual turnover of Yn lOOhn or more, to join the world's top 500 companies.
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