Jan/Feb 99

January/February 1999 Issue No. 99-1

Personal freedoms grow as Chinese people enter the
year of the Rabbit

The biggest change in the lives of Chinese people over the past 12 years has not been a political transition, but the growth of more personal and lifestyle freedom that has resulted from the opening of China for business. For some Chinese this means the ability to move out of the state sector into a better paid job with a joint venture firm. For others, it is an opportunity to improve their education or be exposed to Western business. For many, it is the beginnings of a consumer culture in which they can dress as they please and own a few consumer goods without being criticized.

Everywhere in the country the Chinese have abandoned their grey suits and adopted a more colourful and varied way of dressing. Smartly dressed men and women are now seen in city streets. Even women in the country are investigating the joys of Amway, Avon and Chinese-made cosmetics. People are more likely to eat in restaurants, more likely to own a telephone and a television than ever before. There is more choice of foodstuffs and household goods.
This improvement in lifestyle continues despite the slowdown in economic growth expected this year.
China's GDP growth rate slowed to 7.8% in 1998 compared to 8.8% in 1997. While Asia's recession has curtailed exports, China continues to expand domestic demand. The last time China celebrated the arrival of the Year of the Rabbit (1987), it was almost inconceivable that Chinese people would own a car or travel. Yet in this issue of Express China News we see that

many residents of Guangzhou, questioned in a poll about their spending plans, are considering buying a car in the coming year. General Motors is considering production of a small, affordable car at its Shanghai plant to meet anticipated demand. At this time of year, the Lunar New Year, many Chinese travel within their own country, either to see relatives or to sightsee in famous resorts and destinations. But increasingly Chinese have the opportunity of overseas travel for pleasure. Japan is preparing to become a tourist destination, opening a travel bureau in Beijing and organizing tours that will appeal to the Chinese.

But perhaps the most significant lifestyle change for the Chinese is only just beginning. Three years ago, banks in some cities were granted permission to write mortgages for the first time. This year a pilot project in which Chinese who owned their own apartments were given a rebate on their taxes is to spread nationwide. These two measures will make home ownership a reality for many Chinese. In the past, the government was responsible for housing its employees and most people had little choice of where they would live. Only the entrepreneurs, who had enough money to pay in full for a home, were homeowners. Now many people whose income is modest will be able to get a mortgage and pay for their own home for the first time.
With this rapid expansion of opportunity for ordinary people has come a growth in inequity as China tries to work out the problems of its state sector. City people with higher incomes choose to travel, either outside or within the country for the seven-day Lunar New Year vacation. Millions of migrant workers are returning to their rural homes, happily bringing with them various "city or foreign" consumer products to share with their families. These are the lucky ones who have found jobs in the cities. Many are not so lucky.
But, challenges for the Rabbit lie ahead. The country's pool of unemployed keeps growing. There are an estimated 150 million surplus rural laborers, 10-30 million state enterprises workers have been laid off and another 25 million young people enter the workforce each year. How to create enough jobs for these workers is the most immediate challenge for the Chinese government in the years ahead. The success of both the financial sector and state-owned enterprises reforms are critical elements to revitalize China's economy and bring jobs to those who need it. In the past, a job in the state sector was guarantee of access to the social safety net of housing and health care. As state jobs disappear, China must tread carefully to maintain social stability. A high jobless rate could threaten stability, especially as those with city jobs seem to be able to improve their lives so substantially. That is why China's slow, measured course toward reform of state enterprises, encouraging joint venture deals with foreign partners as uneconomic enterprises are slowly closed, has worked so much more effectively than Russia's wholesale rush to privatization. Let us hope that the Year of the Rabbit brings China the stability it needs to stay on this course.
China creates mechanisms for bankruptcy, bad loans
Home ownership will not only reduce the government's spending on housing, it also will lock in people's savings in the banking system. China's total savings amount to about US$1 trillion, including about US$80 billion worth of foreign currencies. Chinese people have a tradition of saving their money and China's savings rate is about 40% of income.
Western analysts estimated that China's bad loans may amount to about US$240 billion, or a quarter of total loans. China has already embarked on major reforms for its financial sector as reported in our earlier issues. But the slowing of China's economic growth is a concern.   Exports gained a mere 0.5% to US$183.76 billion in 1998, while imports fell 1.5% to US$140.17 billion. The decline in imports helped China post a trade surplus of US$43.59 billion, up 7.9% from 1997. Total foreign trade volume fell 0.4% in 1998 from 1997, to US$323.93 billion, the first year-on-year drop since 1983, according to Xinhua news agency. Declining imports helped ease pressure on the yuan, but China is well aware that its financial sector is under world scrutiny following the shakeout of banks among its Asian neighbours.
The following developments show that China continues to balance reform and stability:
On January 10, for the first time, China ordered a public bankruptcy. Guangdong International Trust & Investment Corp. (Gitic), the major investment arm of Guangdong province, was permitted to go bankrupt, showing the government's determination to let "non-viable" companies fail, no matter how good their "guanxi."

China has taken steps to tackle the country's swelling bad loan problems. China Construction Bank, one of China's four big state-owned commercial banks, has been chosen, under a pilot scheme, to set up a bad loan unit by June 30, 1999. The other three big banks will have their own bad loan units up and running by the end of this year, if CCB's unit is a success.

Trust companies owned by state-run banks will be closed. Five of the biggest state investment trust firms were recently given two months notice to close. These are Dongfang Trust and Investment, owned by Bank of China; Huarong Trust and Investment owned by Industrial and Commercial Bank of China; Changcheng Trust and Investment owned by Agricultural Bank of China ; China Construction Bank's Xinda Trust and Investment and the investment arm of People's Insurance Co. of China.

A new securities law will be implemented (see details under the Banking, Finance and Insurance column) to clean up market irregularities. Total personal savings is about 8 trillion yuan, but the public own stocks valued at only about 600 billion yuan, just 7% of the country's GDP. The stock market has great growth potential but it needs to establish a culture of compliance with market norms before new retail investors will be attracted. A well-developed stock market should effectively discipline the financial performance of companies. But both brokers and company managers lack experience. And China wants to draw the line clearly between government and business. Many firms have been run by government officials instead of experienced managers. Under new rules, top managers at domestic brokerages must be qualified as securities professionals and have at least three years relevant experience. They are barred from taking jobs in government, or at any organization that could lead to a conflict of interest. There are rules to introduce more professionalism to accounting and auditing of listed firms. By April 1, 1999, all CPAs engaged in securities work must be members of independent partnerships with unlimited personal civil liability. Chinese listed-companies have recently even started to issue profit warnings, to comply with the government's new requirements.

INTERESTING FACTS AND FIGURES

Pending the government's approval, Hong Kong's Mass Transit Railway Corp. plans to build the world's tallest office building near the Kowloon station in the Tsimshatsui area. Kowloon station has a link to the airport railway. The new building will stand 574 metres high, 122 metres higher than the Petronas Towers in Malaysia.

Eastman Kodak recently replaced Fuji Photo as the top seller of consumer photographic film in China. Kodak had 47.9% of market share in China last year while Fuji had 40.4%. In 1997, Fuji had 47.4%, compared with Kodak's 40.4%. Kodak is planning to invest more than US$1 billion in China in the next three to five years to win more business in the world's third largest photography market.

China's central bank has announced new credit card rules, effective March 1, 1999. The new rules will ease restrictions that had deterred consumers from applying for cards. The annual interest rate ceiling has been lowered from 165% to 18% and the security deposit requirement has been eliminated. Formerly, a 10,000-yuan (US$1=8.28 yuan) deposit was required to get a 5,000-yuan line of credit. There are about 27 million Visa cards in the Greater China region, a rise of 22% from 1997 to 1998. It is estimated that the total number of credit and debit cards in China will reach 180 million by the end of 1999 and 200 million by 2000.

In response to criticism from economists that some local officials were inflating figures to meet growth targets, China's State Statistical Bureau (SSB) has plans to establish direct links with Chinese companies. SSB will conduct sample surveys of small and private companies in the next few years to supplement current methods of data gathering and discourage local officials from tampering with figures. About 17,000 large industrial firms will have to report monthly figures directly to the SSB. Another 5,000 major companies ?expected to account for 49% of industrial output ?will establish direct computer links with the SSB. Those caught faking figures will face punishment.

China is source of much of the metal in the new Euro coins introduced on January 1 by the European Union. Luoyang Copper Processing plant in Henan province outbid 11 competitors from the U.S., Germany, Korea and elsewhere to supply 1,000 tons of alloy metal per month to the mint in Bremen, Germany. Meanwhile, the Royal Canadian Mint will design, produce and market Macau's commemorative coin program marking the return of Macau to China later this year. RCM will distribute the coin worldwide except in Portugal.

In 1998, China and its top ten trading partners exchanged trade valued at US$278 billion, representing 88.7% of the country's total imports and exports. Japan remained China's number one trading partner with trading valued at US$57.9 billion. The other top partners in order of importance were the U.S., EU, Hong Kong, Asean, South Korea, Taiwan, Russia, Australia and Canada.

?Retailers in Hong Kong are trying to encourage electronic commerce via television and mobile phone instead of via personal computers. The penetration of TV sets in Hong Kong households is nearly 100%, compared with 25-30% for PCs. Hong Kong-based supermarkets City Super Ltd. and Wellcome have set up "virtual stores" on iTV, a digital-television system rolled out in early 1998. Viewers can pick and order groceries using their remote control. The Bank of China group in HK has decided to skip the Internet and opted for iTV for its electronic-banking services. However, portable phones are more popular than both the Internet and iTV for mobile banking. HK has 2.7 million mobile-phone users and by end of 1999, half the population is expected to use cell phones. A new generation of mobile banking technologies offers features directly built into the menu of the cellular handset, so a user can scroll down the phone's menu bar to find out his credit card balance, bonus-point balance and even buy music CDs.
?A group of 12 Chinese judges from the People's Supreme Court of China are participating in the Canada-China Senior Judges Training Program in Quebec, where both civil and common law expertise is available. The Faculty of Law at the University of Montreal, in cooperation with McGill University and the Canadian Institute for the Administration of Justice, will provide ten months of training beginning in January. The training program is funded by the Canadian International Development Agency. The judges will act as instructors upon their return to China.
?A unit of China's Feilong Group is preparing to introduce an anti-impotence drug called "Weige Kaitai", in an effort to take advantage of Pfizer's popular drug Viagra. The Chinese-developed drug is not Viagra, but the sound of its Chinese name is similar. Viagra is now in clinical trials in China and not yet available in China's market. Weige Kaitai capsules are priced at about US$1.45 each, far less than the US$48 a pill that Viagra commands on the black market.
?KSAT Satellite Networks of Canada, an associate of Singapore's Keppel Group, is joining with Beijing Gaida Satellite Communications Network Co. and China's Water Resources Ministry to create a US$3-million satellite-based information gathering system in China to monitor rainfall and water levels, and to help prevent disastrous floods.
?Taiwan's first fully owned science satellite, the ROCSAT-1 was successfully launched into orbit on Jan. 26 to conduct scientific research for two years. It is the first of three satellites being developed by the Taiwan government and also the first one that Taiwan took part in manufacturing, testing and controlling.
?Two websites at www.counsel-china.com or www.counsel.com.cn have been opened to provide comprehensive legal services. The websites are maintained by the China Law Consultancy Network ,which is hosted by top Chinese jurists. According to the Xinhua news agency, the sites contain data on existing Chinese laws, administrative regulations, legal explanations by the Supreme Court and Supreme Procurator, and local legislation.
?The following are the top ten holders of gold among central banks and financial institutions at end of 1998, according to the World Gold Council.
                  _ EU / USA / IMF / Switz. / Japan / UK / Russia / Taiwan/ China / India
Gold Holdings 12,574 / 8,135 / 3,217 / 2,590 / 754 / 716 / 446 / 422 / 395 / 357
   (Tonnes)
% share of Gold 30.5 / 53.8 / NA / 38.3 / 3.2 / 17.3 / 33.5 / 4.5 / 2.4 / 10.9
Total Reserves
?According to China's Ministry of Information Technology Industry, China had 2.1 million Internet subscribers by the end of 1998, almost double the 1.2 million registered just six months before. The current official projections are for the growth of Internet usage to five million people by 2000. However, recent U.S./Hong Kong research studies suggested the figure will be closer to nine million. Researchers found sharing of a single internet account among several users was widespread. As computer and Internet use expand in China, so does high-tech crime. Recently, 51 people were arrested on charges of hacking into a Chinese railway's computer system. The scheme involved buying cheap tickets and reselling them at higher prices after breaking into the reservations system to upgrade the tickets to more expensive express trains.
?Mike McGee, a former NBA star and a teammate of Magic Johnson recently took over as coach of a professional basketball team, Beijing Aoshen. He is the first non-Chinese coach in the Chinese basketball league.

GOVERNMENT

A new "Government on the Internet" project has been launched in China aiming to put government ministries onto the Web and encourage them to share information. According to Xinhua news agency, 60% of ministries are expected to create a home page on the Web.

China announced on Jan. 6 that it will lower import duties on 1,014 products by between 8% and 78%. China has gradually reduced tariff rates over the last few years in a bid to join the WTO. Beginning this year it will phase out preferential tax treatment to the country's 44 major "economic and technology development zones." Tax breaks for foreign-funded enterprises (FFEs) established before 1/1/94 also will end. Established ventures that would have been taxed at a higher rate under the new system previously enjoyed a refund equal to the difference between their old and new tax burdens. That benefit expired at the end of 1998 and won't be renewed. However, China is extending the tax break until the end of 2000 to FFEs, established before 1994, that export most of their products manufactured in China. At the end of 1998, those companies were to assume an 8% value-added tax (VAT) burden on local inputs, labor and profit margins. Items such as electronics and light machinery will receive a full rebate of 17%, compared with the 9% rebate they previously received. Textile fibres, porcelain, rolled steel, and cement will have 13% of VAT refunded while rebates for toys will be raised to 11% from 9%. (For further information, contact Joseph Tse in Shanghai at Tel: 86-21-6393-6292, Francis Bassolino in New York at Tel: 212-436-6584, Christopher Tso in Toronto at Tel: 416-512-3186 or Anthony Leung in Vancouver at Tel: 604-640-3209.)

The Ministry of Foreign Trade will soon issue new rules to ease the regulatory burden imposed by China's crackdown on foreign exchange and smuggling. China is attempting to address complaints by FFEs that the checks have slowed or even blocked legitimate trade. Companies engaged in processing trade, which accounted for 54% of China's foreign trade and 85% of exports by FFEs last year, will be allowed to use foreign exchange to buy or sell imported components. On a trial basis, sales companies set up by FFEs will also be given the right to sell directly in China, and export raw materials purchased in China. They also will be offered incentives to set up research and development centres and to acquire and merge with state-owned firms.

Electronic and machinery exporters in China will enjoy increased tax rebates and loans. They will be offered incentives to set up assembly plants overseas, using raw materials and equipment from China. The sector accounted for more than a third of China's total exports last year. In 1998, China's machinery and electronic exports jumped 12% to US$66.5 billion from 1997's while its total exports grew only 0.5% to US$183.76 billion. China also plans to import more products to help boost exports of reprocessed goods, or exports made out of imported materials.

China has granted 41 private companies the right to directly import and export their products. They join 20 private companies given the same right earlier this year, the first private companies in China allowed to engage directly in foreign trade. The 41 companies are in machinery and electronics, construction materials, handicrafts, food and beverages, medicine, metallurgy, textiles and garments, fireworks, farm produce and by-products and information technology.

Taiwanese authorities will lift partially a decades-old ban on indirect ship passenger services with the mainland. Beginning in May this year, foreign passenger vessels will be allowed to travel between Taiwan and the mainland's Meizhou island, located off Fujian province, via a third port. Each year about 100,000 pilgrims from Taiwan visit Meizhou, the birthplace of Taiwan's popular Taoist goddess Matsu. Previously, they have had to transit through Hong Kong before flying to Xiamen, from where they are taken to Meizhou. Since 1997, China and Taiwan have opened up direct routes from Taiwan's Kaohsiung port to Fujian for transshipment of cargo originating from or destined for other ports.

China's central bank and its Ministry of Finance recently issued a joint circular instructing banks and financial institutions to respond within 10 working days to letters of inquiry from certified accountants conducting audits. Meanwhile, China's domestic accounting industry is undergoing a series of mergers in the face of increasing competition from foreign accounting firms. Foreign accounting firms comprised 17.5% of China's total accounting industry in 1997, up from just 0.05% in 1992.

The Atlanta-based Jimmy Carter Center and China's Ministry of Civil Affairs will jointly set up a computer network to monitor village committee elections. The network will consist of county, provincial and national data centres. The national data centre will collect election results from villages, and will establish a nationwide database. County and provincial databases will also be collected at the national centre. The network features platforms in both Chinese and English. China began direct village elections last year. Recently, the first township election took place in China's southwestern Sichuan province. Citizens of Suining, located between the cities of Chengdu and Chongqing, selected their township head by secret ballot on Dec. 31. Previously, local representatives were appointed by the government. More than 6,200 of some 7,000 eligible voters cast ballots.

AGRICULTUR E, FOOD AND FORESTRY

?Fifteen major international agri-chemical companies have jointly founded the China Association of Crop Protection (CPAC) in Beijing to help raise China's standard of crop protection. With 22% of the world's population and only 7% of the world's arable land, China needs to raise its farm production using advanced technologies which members of CPAC could provide. The 15 companies are AgroEvo, American Cyanamid, BASF, Bayer, Dow, DuPont, Elf Atochem, FMC, Monsanto, Novartis, Rhone-Poulenc, Rhom and Haas , Sumitomo, Uniroyal and Zeneca. CPAC is member of the Asia-Pacific Crop Protection Association which is a subsidiary of the Global Crop Protection Federation.

China plans to spend about US$2 billion to build new grain warehouses and expand existing ones to store an additional 28 million metric tonnes of grain by the end of this summer. The current shortage of grain storage has left about 14% of China's 1998 output of 490 million tonnes of grain in the open, subjecting it to damage by fire, rain and rats. China is expected to produce a total of 495 million tonnes of grain this year.

Campbell Soup is negotiating to buy a stake of between 20% and 50% of Tingyi, a Hong Kong-listed company with US$526 million sales in 1997, and China's largest noodle maker with a very extensive network.

Two of Taiwan's largest food manufacturers have announced expansion recently in anticipation of strong competition upon Taiwan's entry into the WTO. President Enterprises will invest NT$500 million (US$15.5 million) to establish a new production line of fancy dairy snacks at its existing factory located in Hsinshi, southern Taiwan. Wei Chuan Foods Corp. will spend NT$200 million to add a new yogurt production line at its Touliu City factory.

Two Hong Kong companies, LifeTech Enterprises and New World Industrial Holdings (NWIH), have recently formed a 20/80 joint venture, New World LifeTech Limited (NWLT) to develop healthcare food and agricultural products in China, Hong Kong, Taiwan and Macau. NWIH is a wholly owned subsidiary of Hong Kong's New World Development with net worth of more than US$8 billion. The two companies have injected US$9 million in capital to NWIH and have agreed to fund up to US$11 million of capital as needed.

Van Melle NV, a Dutch confectionery company, has announced that it will close its factory in the Philippines but will reopen its factory in China because of "favourable market development" there. The Chinese factory has been idle since early last year.

BANKING, FINANCE AND INSURANCE

After six years of preparation, China has announced new laws governing the security industry to take effect July 1, 1999. The new laws cover new share issues, trading and supervision of markets and securities companies, and impose minimum capital requirements for brokerage firms. After July 1, securities businesses must be separated from banking, trust and insurance operations. Securities firms are required to separate their own accounts from those of their clients. Banks and state-owned firms are banned from stock speculation. Foreign access to China's A-share, or domestic market, will remain restricted. The China Securities Regulatory Commission (CSRC) will streamline its listing policy and discard the quota system which previously allowed only powerful state companies to list. Instead, CSRC will make quality and profitability the key measures for qualifying. CSRC recently announced that it will give listing priority to high-tech firms this year.

Dai Xianglong, the governor of China's central bank, announced the easing of geographical restrictions on foreign financial institutions. The number of areas where foreign banks were allowed to set up branches would be increased from the current 23 cities and southern Hainan province to all major cities nationwide. China also plans to implement a more flexible interest rate structure to defend the yuan, Dai says. Further efforts will be made to improve opportunities for foreign banks to conduct business in local currency. Since most foreign banks can only do foreign currency business, many are finding it hard to operate in China because of the Asian financial crisis and heavy tax burden. Japan's Daiwa Bank will downgrade its Shanghai banking license and close its Beijing office by September 1999. Hanil Bank and Commercial Bank of Korea will merge their Shanghai branches soon, following the merger of the parent banks into Hanvit Bank on Jan. 4.

While some foreign banks are downgrading their operations in China, many are expanding. KBC Bank NV, the first Belgian bank to open in Shanghai in mid-1997, has opened another branch in Shenzhen. Hongkong Bank has added a representative office in Chongqing. Dresdner Bank plans to set up an asset management joint venture with China's Guotai Securities pending the Chinese government's approval.

Citibank N.A. signed an agreement late last year with the Shanghai Bank Card Network to join the city's ATM network. Citibank is the first foreign bank to link up with any Chinese ATM network. Hongkong Bank is next in line to join Shanghai network which operates 1,500 ATMs around the city.

Standard Chartered PLC became the first foreign bank to lead manage a yuan-denominated syndicated loan in China late last year. It led five other banks participating in the 80-million-yuan (US$9.8-million) syndicated loan to a Shanghai tire maker. Foreign banks have been allowed to participate in syndicated loans in China since last August.

According to a senior Chinese economist, one third of the reserves held by China's central bank will be in Euros within three years, up from 19% of reserves held at present. US$ reserves will drop to 50% of the total, compared with 62% now, while the yen reserves will fall to 8% from 15% now. Meanwhile about one quarter of the US$88 billion in foreign reserves held by Taiwan's central bank is in Euros.

Total insurance premiums paid in China in 1998 reached 126 billion yuan (US$15 billion), up 14% from 1997. Premiums for property insurance were 50 billion yuan, up 3% from 1997, while health and accidental injuries insurance increased 18% to 6.5 billion yuan. The People's Insurance Co., China's largest insurer, has reported revenue of 40 billion yuan, up 5.1% from 1997. China Pacific Insurance Co., another large insurer, posted sales of 12.5 billion for 1998. CP said its profit reached 380 million yuan, a 60% rise over 1997.

Germany's Alliance AG and Shanghai's Dazhong Insurance Co. have recently launched a joint venture, Alliance Dazhong Life Insurance Co., to sell endowment insurance in the Shanghai region.

Cathay Life Insurance remains the top life insurer in Taiwan with an estimated annual premium income of over NT$170 billion (US$5.3 billion) in 1998, a 10% rise from 1997. Shin Kong Life Insurance came in a distant second with NT$85 billion in premiums, up 4% from 1997. Nan Shan Life Insurance followed closely with NT$81 billion, a robust increase of 19%. Meanwhile, Fubon Life Insurance, a relative newcomer to the industry, enjoyed whopping annual growth of 66%, with premium income reaching over NT$7 billion.

A recent offer of Class A shares for China World Trade Center Co., a Beijing-based joint venture firm, was more than 100 times oversubscribed. The Shanghai Stock Exchange said 16.64 billion subscriptions were made for the company's 160 million A shares, priced at 5.46 yuan each. The firm raised 854 million yuan (US$103 million). It abandoned its original listing plan in Hong Kong and decided to raise funds at home due to the recent negative sentiment on Chinese firms in the wake of Guangdong International Trust and Investment Corp.'s collapse.

Both Intel Corp and Motorola are planning to acquire an unspecified stake in Shenzhen Prosperity Systems Co., China's largest online trading system. Prosperity Systems was established in late 1996 and currently has 10,000 subscribers in China.

CONSUMER / RETAIL MARKETS

LVMH Moet Hennessy Louis Vuitton SA of France has bought a 39% stake in Glenmorangie PLC's Chinese joint venture for US$1.2 million. LVMH's participation will allow Glenmorangie to develop its brands in China with an improved worldwide distribution network. Glenmorangie is Scotland's largest independent whisky maker. The Chinese venture distributes brands such as Highland Queen and Jin Man Ying.

Coca-Cola was the most favored soft drink in China in 1998, according to two recent nationwide surveys. Sprite, another Coca-Cola Co.-produced soft drink, came in second.

The following products are predicted to be big sellers in China in the coming years, according to the Jianzhu Bao: home improvement building materials, frozen foods, medium-priced dresses, hi-tech radio communications products, beauty products, consumer electronics (i.e. DVD players and digital TVs), cellular phones and pagers.

Large U.S.-style malls and superstores are predicted to be the fastest growing retail sector in Taiwan as increasingly hectic lifestyles lure shoppers into one-stop retail outlets. Last year, Carrefour SA of France opened four new hypermarkets in Taiwan, in addition to the 17 chain stores it already operates. It will open two more stores this year. Another French retailer, Casino S.A.'s supermarket chain, Geant, opened its first store in Taoyuan county last December in a 50/50 joint venture with Hong Kong-based retailer Dairy Farm International. Geant also plans to open two additional stores this year. Carrefour's 21 outlets and Dutch Makro NV's seven stores now command more than 50% of sales at all hypermarkets. Convenience store chains, such as U.S.-based 7-Eleven and Japan's Family Mart, now have 80% share of the local convenience store market. Local companies trying to catch up include: Taiwan Pulp & Paper, Far Eastern Textile, Hualon Group, Tay Feng Tire, Tong Yang Industry, Top Construction and Development and Kolin Co. They are lining up for government approval to build large shopping centres all over Taiwan in anticipation of brisk growth in the sector.

Unilever NV has agreed to buy the Mountain Cream (MC) ice cream business in China for an undisclosed sum. MC, a unit of Hutchison Whampoa Ltd.'s A.S. Watson retailing group in Hong Kong, is the biggest selling brand in Shanghai and number two in Hong Kong and in the southern region of China. Included in the acquisition is a factory in Guangzhou and ownership of the Dreyer's brand in China and Hong Kong. Unilever first entered the Chinese ice cream business in 1994 with its Wall's brand.

HEALTH CARE

Biochem Pharma Inc. of Canada announced that its licensee, Glaxo Wellcome, has received regulatory approval in China for lamivudine (Heptodin), the world's first oral antiviral treatment for chronic hepatitis B. Heptodin has been granted a Class 1 drug certificate in China which will provide manufacturing exclusivity for the product for a period of eight years. The launch of Heptodin is contingent on gaining a Import Drug Permit and pricing approval from the Chinese authorities, both of which are anticipated in 1999. Glaxo has started building manufacturing facilities in Jiangsu province to be operational by 2001. Under the agreement, Biochem Pharma will receive royalties from Glaxo on sales of lamivudine; Glaxo has the right to develop, manufacture and sell lamivudine worldwide, except in Canada.

Hoechst Roussel Vet GmbH. of Germany will form a US$7 million joint venture named Jilin Hoechst Roussel Vet Animal Health Co. with China's Bioproducts Factory Jilin to produce veterinary vaccines for the Chinese market. Bioproducts contributes an existing plant in Jilin while Hoechst will provide the technology to produce viral and bacterial vaccines for poultry and livestock.

The 1999 China National Medical Apparatus and Instruments Spring Fair will be held from May 10 to 14, 1999, at the International Convention and Exhibition Centre in Fuzhou, Fujian province. More than 1,600 enterprises are expected to attend.

Cui Yueli Traditional Medicine Research Centre of Beijing plans to translate a selection of 50 ancient academic books into various languages in order to make them accessible for foreigners wanting to study traditional Chinese medicine.

Bioanalytical Systems, Inc. (BAS) of the U.S. and the Shanghai Institute of Materia Medica (SIMM) have entered into a strategic partnership to develop joint research projects in neuroscience and bioanalytical chemistry and to apply for joint grants with funding agencies worldwide. SIMM will assist BAS in developing a market in China for BAS instruments and contract services. BAS will help SIMM build alliances with major U.S. pharmaceutical companies. This alliance results from a change in emphasis in the Chinese healthcare system, BAS says. Recent industry discussions show a shift in policy towards greater efficiency, new drugs, new technologies and improving healthcare among the Chinese people.

MANUFACTUR ING

Standard Commercial Corp., the world's third largest leaf tobacco dealer, will participate in a new tobacco leaf processing facility in Guiyang city, Guizhou province, China's second largest tobacco growing province. Partners in this venture included the Nanming Redrying Factory, the Guizhou Tobacco Leaf Purchasing and Selling Corp., and four of the main tobacco producing counties with Guizhou province. Trans-Continental Leaf Tobacco Corp., a wholly owned subsidiary of Standard Commercial, has provided imported tobacco processing machinery to the factory which has started operations. The factory has an output capacity of 12,000 kilos per hour and intends to sell to both the domestic and export markets.

After rolling out its first China-built mid-size Buick sedans late last year, General Motors Corp. said it may consider also making smaller vehicles at its US$1.57 billion joint venture in Shanghai. GM wants to tap a bigger market as luxury cars are beyond the range of ordinary consumers. The China Buick, available in three models -- GL, GLX and the top-of-the line, fully equipped Xin Shi Ji -- will be on sale in June 1999. Shanghai GM drew on GM resources in North America, Germany and Australia to produce the first sedans. Selected Chinese employees were sent to the U.S., Canada, Germany and Australia for weeks or months of specialized training. Many of the processes at the Shanghai GM plant are based on GM operations at the Oshawa Plant in Ontario, Canada, where the Buick Century and Regal are assembled. Over a five-year period, the Shanghai venture is expected to import US$1.5 billion in materials from North America. Late last year, GM also said it will form a joint venture with Taiwan's Chinese Automobile Co. to operate 54 car dealerships in Taiwan.

Japan's Toyota Motor Co. is planning to set up a joint venture with Tianjin Automotive Industry Co. to produce a car in China, perhaps Toyota's Corolla model. Toyota also plans to start producing mid-size vans with its 50/50 joint venture partner, Sichuan Van Manufacturing Factory by 2002. It will invest US$99 million in the van manufacturing venture.

Auto sales in China are expected to total 1.72 million this year, according to Xinhua news agency. Passenger car sales are expected to grow 3.9% to 477,000 this year, while sales of cargo vehicles will increase 1.5% to 672,000. A recent survey conducted in Guangzhou, the capital city of Guangdong province, found that 7.7% of high-income families intend to buy their own cars this year, while 4.24% of middle-income households and 3.75% of lower-middle income families plan to buy a car. More than half of all potential car buyers would only opt for cars priced under 150,000 yuan (US$18,500), while 14.43% said they would buy sedans costing more than 250,000 yuan. There are currently 1.6 cars for every 100 households in Guangzhou. Guangzhou is considered an affluent city by Chinese standards as individual savings amounted to 184 billion yuan, or 27,000 yuan per person, according to the People's Bank of China.

BAT International of the U.S. has recently formed a US$4-million joint venture with China's Suzhou Machinery Holding to make a line of electric bicycles and scooters using advanced technology provided by BAT and its subsidiary Electrobike. BAT owns 25% of the new venture in Suzhou, to be called SABAT, and has exclusive worldwide marketing rights for all its production outside of China.

Alberta-listed Intercap Enterprises Group has concluded acquiring 50% of the shares of Shanghai AL Windows Co. Ltd., an aluminum window and door manufacturer in Shanghai. Shanghai AL Windows will be operated with Canadian equipment and technology.

Several European companies have recently announced new ventures in China: Ems-Chemie Holding AG, a Swiss chemicals and engineering company has won a US$19 million order from Kaiping Zhong Hui Filament Co to build a polyester-filament plant in Kaiping, Guangdong province.; Finland-based Elcoteq has recently form a 70/30 joint venture with Nanxin Industrial Development Corp. to manufacture mobile phone accessories and subassemblies for Nokia in Dongguan, Guangdong province; Siemen AG of Germany will form a train-making joint venture in China with two local partners, Zhuzhou Electrical Locomotive Works and Zhuzhou Electric Locomotive Research in Zhuzhou city, Hunan province.

Lithium Technology Corp. of the U.S. is planning to form a joint venture with China's Hengdian Group to produce rechargeable lithium-ion polymer batteries in China using LTC's patented and proprietary technology. The plant will begin operation in 2000 in Zhejiang province.

MEDIA AND COMMUNICAT IONS

With support from China's Ministry of Electronic Technology Information Research Institute, Penton Media Inc. of the U.S. is partnering with Hong Kong-based CCI Asia-Pacific to launch two magazines. The first issue of EE Product News China will be published in February 1999 with a circulation of 20,000. It will provide China's design engineers and engineering managers with essential information on the latest products, components, materials and services available. The first issue of W ireless Systems Design China will be published in March 1999 with a circulation of 15,000. It will provide practical applications of new and emerging wireless and portable technologies to China's wireless systems level engineers seeking ways to apply the latest products and technologies in solving design problems. Both magazines are to be published quarterly and are written in simplified Chinese.

South Africa-based AngloGold Ltd. (AGL), the world's largest gold producer and about 40% owned by Anglo American Corp., will double the amount it spends on marketing this year to US$20 million. The majority of this money will be spent to promote sales of gold jewelry in Asia, particularly China. For the first time, AGL will be involved in the direct marketing of gold jewelry in Asia, in addition to sponsoring marketing by the World Gold Council. AGL is negotiating with Chinese authorities about opening the market. China's demand for gold, used mainly by the jewelry industry, could triple to 700 tons a year, according to the chief executive of AGL.

MINING AND RESOURCES

China's largest oil company, China National Petroleum Corp. (CNPC), will spend about US$1.25 billion in 1999 on oil and gas exploration in China and overseas. CNPC may add new reserves of about 360.5 million tons (2.7 billion barrels) of crude oil and 94 billion cubic metres of natural gas from its projects in western China. China, a net importer of crude oil, is expected to buy 35 million tons of oil abroad to meet estimated demand of 168 million tons.

Canada's Minco Mining & Metals Corporation has recently signed a co-operation agreement with the Exploration Institute of Land and Resources (EILR) of Inner Mongolia relating to the Gobi gold project, located about 900 km west of Beijing. Pending receipt of final Chinese government approvals, the project outlined under this agreement has excellent potential for the discovery of bulk-tonnage low-grade epithermal gold deposits.

Chevron Corp. of the U.S. recently inaugurated a new regional centre in Beijing for its Asian business. Chevron plans to invest about US$60 million in China to drill nine wildcat exploration wells. Since 1979, Chevron has invested some US$400 million in China.

Canada's Global-Pacific Minerals Inc. has agreed to jointly develop the Qian Chang Iron/Copper/Gold Project in Anhui Province, China with Novelle Enterprises Ltd. Novelle is currently carrying out underground development and has shipped a 5,000 tonne ore sample to a mill for testing. Results of this test work are expected in February 1999.

Benton Oil and Gas Company of the U.S. and Shell Exploration China Limited (SECL) have begun drilling a deep well in the Qingshui Block in the Lioahe Basin, Liaoning province. On Aug. 6, 1996, SECL signed a production sharing contract (PSC) with the China National Petroleum Corp. (CNPC) for the deep rights (below 10,000 and 10,600 feet) in the 139,000-acre Qinshui Block. In October 1997 Benton Oil obtained half of Shell's interest in the block. Upon successful exploration, the companies may elect to enter into a 15- year production period with CNPC, through the Liaohe Petroleum Exploration Bureau, a partner with the rights to hold up to 51%.

POWER / UTILITY / INFRASTRUCT URE PROJECTS

Hoping Power Co. of Taiwan has signed a NT$24.6 billion (US$766 million) turnkey power contract with Alstom SA of France. Hoping, one of the 11 private companies granted rights by the Taiwan government to build independent power plants, is 70% owned by Taiwan Cement Corp. and 30% owned by Hong Kong's China Light & Power Co. Construction of the coal-fired power station will begin in March this year.

Recently, ten multinational groups submitted documents to China in a bid to operate the Laibin A Power Plant in the Guangxi Zhuang Autonomous Region. Amongst the bidders for the 15-year contract were Electricit?de France, Sithe China Holdings; AES Corp. of the U.S.; GE Capital ; Nissho Iwai with Electric Power Development; Singapore Power; PowerGen International; Imatran Voima Oy of Finland; Power Facilities, a subsidiary of Austa Energy of Australia; and Hong Kong listed China Light and Power Holdings Ltd., now CLP Holdings Ltd. In February this year, a shortlist will be issued, based on candidates' technical and financial capabilities. Qualifying candidates will then be given four and a half months to submit detailed proposals. The successful company will pay local authorities about US$100 million for the handover of the project.

Canadian-based Delcan International Corp. and two Chinese companies, VATE Science & Technology Development Co. and Shanghai Tunnel Engineering Co. have jointly been awarded the tolling, communications and traffic surveillance systems contract for the Foshan to Kaiping Expressway in Guangdong province. Delcan is acting as the system integrator for the whole system. The project, financed by the World Bank, is scheduled to be completed in March 2000. Delcan has also been appointed as the consultant to United Fiber Optic Communication Inc . (UFOC) on a traffic control system for the Taipei-Ilan Expressway between Nankang System interchange and Pinglin Interchange in Taiwan. The project is expected to be completed in May 2001.

REAL ESTATE/
CONSTRUCTI ON

A government tax policy piloted in Shanghai which gives a write-off for homeowners buying their apartments is to be implemented nationwide this year. The policy, intended to encourage home ownership, exempts home-buyers from paying taxes on the portion of their incomes spent on buying an apartment.

Rents in top quality Hong Kong downtown office buildings will fall by a further 22% this year. Only about 63% of the six million square feet of new Grade A office space on Hong Kong island is leased, and four million square feet more is expected to be completed in 1999. The vacancy rate will rise to 18% from the current 13%. Although office rents fell by about half since their peak in early 1997, Hong Kong rents are still more expensive than Singapore.

Switzerland-based Holderbank Financi?e Glarus AG, the world's top cement maker, has paid US$20 million to acquire 23.4% of China's Huaxin Cement Co., one of China's three largest cement makers, as a step to expand outside Europe. Huaxin hopes to double its current capacity of 1.7 million tons to 3.5 million tons this year to meet increased demand in China's Hubei province.

As agent for Canadian-based Concord Pacific Group (CPG), Cheung Kong (Holdings) Ltd. has recently sold 50 apartments of the MarinaSide project in Vancouver to Hong Kong buyers. The project is the first of the C$3-billion, six-phase development of Concord Pacific Place in central Vancouver. CPG, the developer of MarinaSide, sold about 150 units in the last quarter of 1998 and intends to sell the remaining 162 units in Canada by March. CPG estimates C$105 million in revenue from the project with units ready for occupancy in December 2000.

Rauma Corp.'s Nordberg Group of Finland, a manufacturer of rock crushing equipment, began operations at its rock crusher factory in Tianjin's Economic and Technological Development Area (TEDA) recently. The US$10-million factory is the first foreign-funded crushing equipment manufacturing operation in China and also the first in China to make portable crushing units.

The LONMARK Interoperability Association (Lonmark) of the U.S. has formed a co-operative association to promote the application of LONWORKS networks and Lonmark products in China's construction industry. A nation-wide network of businesses engaged in design, construction, scientific research, educational work and manufacturing of products for smart buildings has been formed in a collaboration with the Centre for the Development and Promotion of Smart Building Technology (CDPSBT) of the Ministry of Construction, Echelon China and Lonmark. The purpose of the group is to create a forum for the acceleration of research, development, production, and application of LONWORKs networks in China, resulting in improvement of the level of China's smart buildings. CDPSBT has already overseen several smart building projects which display the potential of the new technology. These projects helped advance the development of construction technology and train workers in construction design, installation and management. Still, the gap between China and other countries is still quite large and is caused by issues ranging from pricing to a lack of nationalization of production standards. The new co-operative association is designed to combat these problems.

TECHNOLOGY AND TELECOMMUN ICATIONS

China is drafting a plan to lower Internet, long-distance and other telecommunications fees later this year, fearing that high rates may reduce demand and innovation in this tightly controlled sector. Surfing the Web in China is 30 times more expensive than in North America. A phone call to New York from Beijing costs 18.4 yuan (US$2.20) a minute, about three times the rate from New York to Beijing.

Vancouver-listed Alternative Fuel System Inc. (AFS) announced recently that it is planning to sign a C$1.7 million contract with China's Sichuan Shutong CNGV Co. Ltd. and CMC Prospects Import and Export Co. Under the contract, AFS will supply major fuel system components, technical support and training to Sichuan Shutong which specializes in compressed natural gas systems for automobiles.

Bell Canada International affiliate, KG Telecom, a PCS operator in the northern region of Taiwan, has agreed to purchase a 45% interest in Tuntex Telecommunications for about US$153 million. Tuntex is also a PCS operator, but its businesses are in the central and southern regions of Taiwan. KG is currently 10%-owned by BCI and will become the largest single shareholder of Tuntex following this acquisition.

China's Ministry of Information Technology Industry confirmed on Feb. 4 that it plans to break up China Telecom's (CT) monopoly by splitting the giant into three companies. CT will be divided into independent companies specializing in fixed-line phone service, mobile communications and paging services. While the change will bring greater competition to China's information technology industry, the government will maintain strict control over industry development. The ban on new "Chinese-Chinese-Foreign" or CCF, telecommunications joint ventures will remain. However, existing CCF projects will be handled by the ministry in a "reasonable" manner, the ministry says. There is no indication when CDMA mobile phone systems would be expanded beyond the four cities of Shanghai, Beijing, Xian and Guangzhou where pilots are now in operation. The number of mobile-phone subscribers in China is expected to grow 60% to 39.68 million in 1999 from 24.98 million in 1998. China plans to lower phone-installation fees and internet-access fees this year and increase national phone-usage density to 13 lines per 100 people this year from 10.6 lines last year.

U.S.-based GIC Global Entertainment Corp., an entertainment and marketing firm, recently opened a Chinese version of the Cyberbetz on-line sports book and casino. GIC has already set up an infrastructure of Cyberbetz representatives in Beijing, Shanghai, Guangzhou, Hong Kong, Taiwan, Korea, Japan and Australia to help increase awareness. It also will create a number of elite gambling clubs throughout Asia, targeting "high roller gamblers."

Daxian Group, an electronic product manufacturer, Dalian CATV, Dalian's sole cable operator, and Cisco Systems of the U.S. have signed a technology transfer agreement to allow the Daxian Group to develop, manufacture and distribute cable modems based on Cisco NetWorks IP technology. Cisco will license the initial reference design for the modem and the Cisco NetWorks software to Daxian. Cisco has similar agreements in place with Sony Corp. and Samsung Corp. Daxian is Cisco's first such technology transfer partner in China.

Unisys Corp. of the U.S. has inked a US$2-million contract to implement the Unisys Airport Passenger Processing System (APPS) at the domestic terminal of Shanghai Pudong International Airport. It is to be completed in October 1999. APPS is a user-friendly series of software tools that automates passenger and baggage processing for airports. With APPS, agents at the airport will be able to improve departure control procedures, increasing efficiency and productivity.

TRANSPORTA TION, Travel, tourism and leisure

With reports that the Chinese government has decided to add Japan to a list of foreign countries that Chinese citizens will be able to visit on sightseeing tours, Japan National Tourist Organization will open an office in Beijing in February 1999 to promote tours of Japan. Nippon Travel Agency has established a five-member "China Desk" at its headquarters in Tokyo to handle the expected increase in Chinese visitors. Some Japanese amusement-park and resort operators are making plans to cultivate the Chinese-tourist market. The number of Chinese visitors to Japan has increased steadily in recent years, though technically none of them visited Japan for sightseeing. In 1997, there were 260,627 visits by Chinese to Japan, up 7.9% from a year earlier.

China will open its tourism sector to foreign investment this year by allowing the formation of joint venture travel agencies. Initially, only one joint venture per province will be allowed. So far five foreign travel agencies from the U.S, Germany, Japan and Hong Kong have applied.

United Parcel Service of America Inc. (UPS) and China National Foreign Trade Transportation Corp. (Sinotrans), have agreed to expand UPS-branded operations to 21 cities in China this year. Sinotrans has been UPS's agent in China for 10 years and this agreement will allow UPS to set up direct operations in more cities. Initially, UPS will set up services in nine cities, including Shanghai, Guangzhou, Tianjin, Qingdao and Dalian, and then expand to another 12 cities by September. UPS has about 15% of the carrier and delivery market in Chinese cities where it operates under its own brand name, if national postal services are excluded. It has ranked closely behind competitor, DHL Corp, which has the largest share of the market. UPS's revenue from China has been growing 30% annually.

Delta Airlines and China Southern Airlines have signed a code-sharing agreement on flights between the U.S. and China. Qantas Airways is negotiating with China Eastern Airlines to share passengers on flights between Australia and China. Last October, Lufthansa moved its North Asia headquarters to Shanghai and now it plans to increase its direct cargo flights between Frankfurt and Shanghai to two per week beginning in March to meet the demands of growing economic and trade exchanges between China and Germany.

Hong Kong plans to cut the transportation costs of container cargo by 10% by improving the computer system and road network at its port. It is increasing handling capacity and plans to cut the per-container unit transportation costs. Hongkong will be about 10% to 20% more expensive than Shenzhen ports following the cut. This is considered a reasonable difference because of the better services available in Hong Kong.

Mandarin Oriental International, the hotel arm of Hong Kong-based Jardine Group, is seeking projects in the U.S. as tourism in its Asian home base falters. Mandarin is building a 325-room hotel on Miami's waterfront and is discussing a plan to build a hotel in Columbus Circle in Manhattan.

deloitte & touche in china related activities / projects

China Business Review's January 1999 issue published an article entitled "Leveraging Technology in the PRC", detailing how contributing technology to a joint venture in China can offer strategic and monetary benefits if the deal is properly leveraged. The article was written jointly by Joseph Tse, a partner with Deloitte Touche Tohmatsu in Shanghai and Francis Bassolino, a senior consultant with Deloitte & Touche in New York.

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This publication is issued regularly by the Canada-China Business Group in Toronto with information extracted from the following sources: China Economic News; China Economic Review; Hong Kong Economic Journal; Wall Street Journal; Asian Wall Street Journal; The Financial Post; Globe & Mail; Toronto Star; Far Eastern Economic Review; South China Morning Post; Ming Pao Daily News of Toronto; Sing Tao Daily; World Journal; Canadian Business; The China Daily; Canada-China Business Forum; Hong Kong Trader; Inside Beijing; AP Business; Dow Jones News and Bloomberg News. We believe the sources of information to be reliable, but we cannot represent that they are complete or accurate and we accept no responsibility for any errors this publication may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.
1999 Deloitte & Touche.
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