September/October 1998                                  Issue No. 98-4

Talks between China, Taiwan revive hopes for reunification

The highest level meeting in five years between Chinese and Taiwanese officials took place Oct. 14, paving the way for negotiations aimed at eventual reunification. Wang Daohan, 84, a former mayor of Shanghai and mentor of President Jiang Zemin, and Koo Chen-fu, 81, a business tycoon and senior figure in Taiwan's ruling Nationalist Party, last met in Singapore in 1993. Koo will also meet with President Jiang.

Pragmatism is driving this tentative renewal of relations. The thousands of Taiwanese businessmen who have invested US$35 billion into China in the past ten years would prefer to see smooth cross-straits relations. China wants to boost support for Taiwan's ruling Nationalist Party to prevent the pro-independent opposition party winning
the presidential election in 2000.
Parties in both countries would like to
see Taiwan agree to lift a decades-old
ban on direct air, trade and postal links.
Taiwanese doing business in China
now are required to route through a
third port. China would also like to
see the end of Taiwan's ban on any
investment in China exceeding US$50
million.

China's reunification is not impossible,
but there is a long road ahead. We
have seen the fall of the Berlin Wall
and Northern Ireland on the road to
peace; China has in mind a model that
would give Taiwan even greater
autonomy than Hong Kong, including
the ability to maintain its own military.
But Taiwan has demanded China
 

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		undergo major political reforms.   Chinese leaders are not ready for fundamental political change. China is a country where 145 million people over 15 years of age are still illiterate and there are many intractable economic and social problems. However, the Asian economic crisis, and particularly its effect on the Suharto regime, may have underlined for China the dangers of  pursuing economic liberalization without reforming the political system.  According to a report by the Far East Economic Review, President Jiang is showing an interest in alternative models of government through one of the think-tanks connected to the party secretariat.   It is said that the Chinese Academy of Social Sciences has assigned the academy's Institute of Politics to prepare a report on presidential systems around the world.  Does that mean the Chinese leaders have an interest in exploring, albeit in the long term, reform of the political system? Already the size of party and government bureaucracies is being reduced because of the effects of market reform. Bureaucrats are not needed to micro-manage the economy when market forces are at work. And China has started direct elections, beginning in the villages in 1987. It plans to expand direct election to the county level, planting the seed for an eventual political reform -- step-by-step -- Chinese style.   But for now, political reform is not on the agenda. China's talks with Taiwan will resume at a glacial pace. A reduction in restrictions on cross-straits travel and trade would be counted a huge step forward. Concrete negotiations on unification are unlikely to take place any time soon.   Devaluation fears ease, while state intervention stabilizes economy Eighteen months after the Asian crisis began, economic signals from China are mixed. A rise in exports to the U.S. and the European Union saved China from a steep slide in exports in the second quarter. Exports in the quarter were down 2.2% from same period in 1997 while imports were little changed. This compares with a 24% increase in exports for 1997. China's exports for the first nine months of this year totaled US$134.13 billion, up 3.9% from the same period last year.  Exports to the U.S. increased 16.5% while those to the European Union were up 21.7% in September alone.   Increased state spending on infrastructure projects has started to revive economic growth. Retail prices rose 1% from August to September, after several months of deflation.  Retail prices for the nine-month period were down 3.3%, compared with a year earlier. China's industrial output for the first nine months totaled 1.44 trillion yuan (US$175 billion), up 8% from the same period last year. In another sign that government spending has buoyed growth, September's output surged 7.9% on the month, the greatest since January. It was up 10.2% from a year earlier.   The danger of devaluation of the yuan is diminishing, in part because of the recovery of the Japanese yen. Continuing foreign investment has stimulated growth with third-quarter GDP up 7.6% compared with a year earlier. Chinese leaders now predict China can achieve 8% growth this year. China continues to absorb more than US$3 billion a month in direct foreign investment and has a trade surplus of US$35.3 billion so far this year.  It also appears to be aware of the danger that devaluation could pose to all other currencies in the region.   The Chinese government took regulatory measures earlier this year to try to halt the flow of capital from the country. It is estimated that more than US$30 billion may have flowed out of the country as investors and businesses prepared for a possible devaluation of the yuan.  The Chinese government, in response, cracked down on illegal foreign-exchange holdings and unauthorized foreign debt to stop hard currency outflow that could weaken the yuan . It has given companies until October 1st to repatriate illegal overseas holdings of foreign currency. China's foreign reserve at the end of September was US$141.5 billion, an increase of only US$1.2 billion from the end of 1997.   Gitic's fall signals need for financial reform Over-borrowing of foreign debt is part of the reason behind the recent fall of the Guangdong International Trust and Investment Corp. (Gitic). This case underlines the need for financial reform in China. The closure of Gitic indicates that China, even with an unconvertible currency, cannot avoid being affected by the Asian, now international, turmoil.   Gitic is one of China's five major, non-bank, international trust and investment corporations, allowed to take deposits, make loans, invest in stocks, futures, foreign exchange and funds and issue bonds.  Its major function was to raise funds from overseas for projects in Guangdong. Gitic invested poorly and borrowed heavily in US dollars, leaving it susceptible to the whims of international bankers now leery of Asia. Its income is mainly in renminbi.   Beijing stepped in to close Gitic and stop Guangdong from borrowing further to support its agency. Recent reforms, which allow the central government and mainland companies to directly raise money outside of China, may have hastened Gitic's demise. Mainland companies no longer have to rely on firms like Gitic for foreign currency loans.   China wants to prevent the country's bad debt problem from worsening and has accelerated efforts to clean up its financial sector. By closing Gitic, it raised the alarm for other state-owned financial institutions to be cautious. It will not hesitate to tighten credit conditions for China-linked companies even though China needs foreign funds to invest and reform its inefficient state-owned enterprises (SOEs).   Coming soon, an M&A market in China A mergers and acquisitions market in China is gradually developing as a result of China's SOE reform.  Baker & McKenzie, an international law firm, has recently set up a "China Desk," headquartered in California, to service Bay Area companies wishing to invest in China. B&M is particularly optimistic about China's M&A market as the country continues to reform its SOEs and foreign investors are eyeing the vast Chinese market.  B&M picked the Bay Area of operations because they expect that technology companies located in Silicon Valley and along the West Coast will naturally migrate to China over the next decade.  Merrill Lynch has set up a new unit based in Hong Kong to service North American-based leveraged buyout firms catering for government privatizations and M&A activities as the region reforms itself from the current financial turmoil.
INTERESTING FACTS AND FIGURES		n According to the latest statistics from the World Bank , China's total GNP in 1997 was US$1,055.4 billion and GNP per capita was US$860, elevating China to the "middle-income" nation from "low-income." China is now the seventh largest economy in the world and is expected to nudge Italy out of sixth place soon.   n Bertelsmann AG, the German media giant which has recently acquired an interest in Barnes & Noble, has found a low-cost way to sell books in China through a book club with 420 employees, including a crew of 70 bicycle-riding delivery-men. Since 1996, 640,000 members have signed up and five million books have been sold. Bertelsmann also opened its own retail stores, including three in Shanghai.   n The Business Aviation Centre, a specially designed, purpose-built facility for corporate jets and their passengers, is scheduled to open later this year in Hong Kong's Chek Lap Kok airport. The centre, functioning as an airport within an airport, will have its own customs, immigration and jet servicing areas. Space restrictions at Hong Kong's old airport prevented anyone in Hong Kong from owning a jet. Currently, the only locally owned private jet is operated by the Macau casino magnate Stanley Ho. But there will be plenty of landing slots for both locally owned jets and corporate aircraft flying in from Europe, the U.S. or other parts of Asia when Chek Lap Kok's second runway opens. Corporate jet manufacturers such as Gulfstream, Bombardier and Dassault say the centre will help boost aircraft sales in the region.   n Shanghai Energy and Chemicals Corp. (SECC) of China is preparing for an air taxi operation in China. It recently received an option to buy 300 additional planes for about US$220 million from Groen Brothers Aviation Inc. of the U.S. SECC already has a US$50 million order for 200 Hawk III gyroplanes. This option gives them the right to add 100 more Hawk IIIs (three-passenger), 100 Hawk Vs (five-passenger), and 100 Hawk VIII (eight-passenger) gyroplanes.   n Euromoney magazine has named China's Shenyin-Wanguo Securities Co., the country's largest brokerage, as the best securities firm in China in 1997. The firm, created in 1996 by a merger between Shenyin Securities and International Securities, reported earnings of 876 million yuan (US$105.5 million) in 1997 from a total share trading volume of 548.3 billion and has arranged 10.55 billion yuan of initial share offerings in China. In July this year, China ordered the merger of J&A Securities and China Guotai Securities after discovering financial irregularities at the army-backed J&A. US$120 million was reported missing. President Jiang Zemin has announced China plans to close down businesses operated by the People's Liberation Army.   n The number of  Internet users  in China has doubled in just six months. According to the China National Network Information Centre, registered Internet users totaled 1.2 million at end of June 1998, almost twice as many as the end of 1997, when 620,000 were recorded. Among these users, 82.2% utilize the Worldwide Web, 9.1% have e-mail, 7.2% FTP and 0.8% Telnet. Meanwhile China Telecom took only 13 months to double the number of mobile phone users in China, now totaling 20 million. China Telecom is the world's largest GSM mobile phone operator, with 25,000 more Chinese becoming subscribers and 33,000 buying a new handset every day.   n While many regions are experiencing slowing PC consumption this year, China's PC market keeps growing, according to a recent survey by Advanced-Forecast-HuiCong. Over 1.5 million PCs were sold in China in the first half of 1998, an increase of 27% over the same period last year. PII266 type PCs were the most popular during the first six months of  this year. However, sales in notebooks and servers has shown signs of slowing. Local vendor Legend continues to lead sales, followed by three U.S. brands: Compaq, IBM and Hewlett Packard. Meanwhile, Dell, the world's No. 1 direct seller of PCs, expected higher sales from China to offset any slowdown in the rest of Asia. Dell has recently begun its direct-sales of PCs in China.   n The number of employees of state-owned and collective enterprises was reduced by four million in the first half of 1998, while the number of employees of  firms owned privately or by other agencies increased, according to the China's State Statistical Bureau. At end of June, 1998, state-owned enterprises (SOEs) had 105.76 million employees, 2.73 million less than in the same period last year; collective units in urban areas had 27.15 million employees, a reduction of 1.62 million. Private and other economic sectors had 10.94 million employees, an increase of 1.49 million. The number of private enterprises was up 8.94% from the end of 1997 at 1,046,700, exceeding one million for the first time. The total registered capital of these private firms has risen to 65.5 million yuan, an increase of 27.5%. Chinese SOEs registered a total loss of 59.2 billion yuan for the first half of 1998.   n In order to boost sales, China plans to allow its four state commercial banks to provide car loans to private buyers, ending a two-year ban. The banks will provide up to 80% of the value of a car, truck or bus, which must be manufactured by China First Automobile Group Corp., Dongfeng Motor Corp. or Shanghai Automotive Corp.  Repayment periods are three to five years. The move should help expand private car ownership. China's auto industry has scaled back its production forecast to 1.61 million vehicles from an earlier estimate of 1.66 million because of  the dwindling number of state-owned companies or government departments that are buying cars. China produced a total of 1.625 million vehicles last year.   n The Chinese style of serving poses some challenges for people who are conscious of wine at the table. Chinese meals traditionally serve several contrasting dishes with different tastes at once. One approach is to deal with the flavours of one dish at a time, according to Wine Spectator, which suggests asking the restaurant to serve an appropriate wine with each dish. Sweet dishes go with soft, fruity wines. Meaty Chinese dishes can be served with hearty reds as are Western meat dishes. Vinegary Chinese dishes are best with crisp, delicate wines in the same way the vinegary dishes of Burgundy go well with their high-acid wines. Ginger, garlic and Chinese parsley will not affect the compatibility of the wine, but stronger tastes, such as soy sauce and other fermented bean products may clash with some wines, especially tannic young reds. Gewurztraminer is often recommended because it has little tannin, but it is possible to be more adventurous in matching a wine to Chinese food, says Wine Spectator.   n During the period from July 1997 to June 1998, Hong Kong's stock and property markets have lost a total of HK$4,300 billion (US$551 billion) in asset value. This loss is three times Hong Kong's total GDP value in 1997 and represents a loss of HK$2 million (US$256,000) for every household.   n China's Ministry of Finance has recently closed more than 1,000 unqualified accounting firms in China during its third stage of a clean-up. The clean-up process was started in August 1997, with 374 inspection teams sent to check 4,071 of the 6,683 accounting firms operating in China. Among all the 49,000 certified accountants employed by these firms, 19,000 are over age 60 and 723 are more than 70 years old. About 5,000 accountants were found to be moonlighting part-timers. Most of the firms affected were small.   n China ProDiligence Inc., an Ottawa-based company, has recently been established to provide business information on Chinese enterprises and investment projects to North American companies. It will work through its Chinese affiliate, which is one the largest commercial credit reporting agencies in China.   n China's northwestern region has recently experienced the worst locust infestation in a decade, and the talented chickens there have emerged as heroes. A program to use 100,000 chickens to control the pests worked so well that counties around the regional capital of Urumqi have decided to train 200,000 chickens next year to hunt locusts at the sound of a whistle.
GOVERNMENT		n A foreign company selling goods in or to China faces a complex web of regulations. A growing number of foreign companies are now using the Shanghai Waigaoqiao Bonded Free Trade Zone, formed by the Shanghai government to get around these restrictions. Waigaoqiao, one of China's 15 bonded zones, is designed to increase exports and alleviate regulatory pressure on foreign businesses by offering a variety of incentives, including duty and value-added tax (VAT) exemptions for imports of capital equipment, raw materials, and spare parts; and possible reductions in, or exemptions from, withholding tax on technology transfers. Waigaoqiao offers opportunities in export processing, bonded warehousing, and trading. For further information contact Francis Bassolino of Deloitte & Touche at tel: (212) 436-6584, e-mail: fbassolino@dttus.com.   n Avon Products (Guangzhou) Ltd., the Chinese subsidiary of Avon Products of New York, has been ordered by the Supreme Court of Guangdong to pay US$12 million for copyright infringement. The award goes to Pacific Unidata, a Hong Kong-based software company and its affiliate in China, Beijing Jingyan. Avon was found to be illegally using and copying software originally supplied by Ardent Software Co. (formerly, Unidata Inc., Colorado). The Chinese court said companies conducting business in China should respect intellectual property rights as they do in the U.S.   n Five months after China banned direct-sales marketing in the country, a resolution has been made allowing Amway, Mary Kay and Avon to resume business in China. Mary Kay's products will now be sold from retail centres as well as through door-to-door sales. In June, Avon said it would resume sales in China through retail stores only. Amway said it would resume sales in August.
AGRICULTURE, FOOD AND FORESTRY		n Vancouver-based Rocky Mountain Ginseng Inc. (RMG) has recently acquired China's Fuzhou Fujiang Drugs Co. (FFD). With this acquisition, RMG has secured additional manufacturing facilities in Fuzhou, Fujian province, to produce North American developed ginseng products in China. RMG will market its products through FFD's 130 outlets in 12 Chinese cities.   n According to the International Grains Council, China's wheat production may decrease 4.6% this year because of flooding. The country must increase imports by 50% to three million tons this year, compared with two million tons in 1997. China is the world's second-largest corn producer. Its corn exports, mostly used as animal feed, may drop 57% to three million tons from seven million tons last year. The projected decline in corn exports may help stabilize world corn prices, which have dropped 21.5% this year. Production of other grains such as rice and wheat is likely to decrease by 10% and 4.6% respectively. The increase in China's wheat imports is unlikely to affect world wheat prices as global supply still exceeds demand. China may still be a rice exporter because of its large rice stockpile from bumper grain harvests for the past two years   n Consumption of paper products in China climbed to 27 million tons in 1997 from 4.4 million tons in 1978, an annual average growth rate of 10.4%. Demand for 1998 is expected to reach 29 million tons. China is the world's third largest paper producing and consuming country. But most of China's paper mills have technology dating from the 1960s or 1970s. Only 10% of the lines use modern production methods. Out of the country's 6,000 paper mills, only 100 can produce 10,000 tons a year and only 30 have annual production capacity of over 30,000 tons. Most of China's paper-making uses non-timber fibre as China is deficient in forest resources. Paper mills nationwide discharge over three billion tons of waste water, accounting for 12.5% of the total industrial waste water.
BANKING, FINANCE AND INSURANCE		n Sweden's SKANDIA, one of the largest Scandinavian insurance groups with total assets of about US$37 billion, recently announced that it has named China's Huaxia Securities Co. as an investment advisor for its new "Mainland China Investment Fund." This is  SKANDIA's first move into China's capital markets. The partnership is regarded as a model for Chinese securities companies to shoulder the responsibility of managing assets and advising investment outside China. SKANDIA expects the fund will reach US$13 million during the first year of operation.   n Lincoln National Corp., the 10th largest U.S. life insurer, has reached a preliminary joint venture agreement with China's Ping An Insurance Co., paving the way for Lincoln to become the third U.S. insurer doing business in China. China's life insurance premiums totaled US$3 per capita in 1996, compared with US$1,079 in the U.S., according to Swiss Re.   n China is planning to reshuffle its insurance monopoly, the People's Insurance Co. of China (Group) and allow its three units -- China Life Insurance, China Re-insurance and China General Insurance -- to be more independent. The central government will also form a new regulatory body to oversee insurance companies operating in China in a bid to speed up the opening of the nation's insurance market to foreign competition.   n Manulife International of Canada is beefing up its Hong Kong presence for the launch of Hong Kong's Mandatory Provident Fund (MPF) which is expected to generate HK$30-$40 billion a year for the investment industry, beginning in early 2000. Manulife, which has been in the Hong Kong pension market since 1936, has already built up its sales force to cope with the personal service called for by the scheme. It aims to capture a 20% share of the MPF trustee market.   n Sakura Bank, Japan's fifth largest bank, recently established a supervisory office in Beijing. The office will oversee all Sakura's units in China.   n China is embarking on the largest smart bank card project in the world and faces an enormous challenge in orchestrating a smooth transition of the nation's financial transactions to electronic chip-cards. The People's Bank of China (PBoC) has picked Schlumberger of the U.S. to provide training and equipment to establish the Certification Centre for this project. The new centre will ensure interoperability and speed the rollout of the smart card program. Four international smart card companies, including Bull Smart Cards & Terminals of France and several Chinese suppliers, are already involved. Bull holds 70% of the Chinese bank card market and recently introduced the "Neng" smart card in response to PBoC's quest for a nationwide chip-card interoperability standard for the entire banking system.   n The New York-listed Hypercom Corp. has introducing its ICE (Interactive Customer Equipment) to the Chinese market. ICE replaces the traditional PIN Pad, and employs an interactive touch-screen to meet the need for easy-to-operate customer-activated card acceptance devices.   n Fitch IBCA , the international rating agency, has formed a joint venture named China Chengxin International Rating Co. with China Chengxin Securities Rating Co., one of only two agencies authorized to carry out credit ratings nationally in China. The new venture is the first of its kind involving an international partner. International Finance Corp. (IFC), an affiliate of the World Bank, is a major shareholder of the new firm, which will be based in Beijing and produce analysis and credit ratings to an international standard for domestic securities, financial institutions and enterprises across mainland China.   n Following the near collapse of many of its neighbour's banking systems, China has begun addressing its own financial sector with greater urgency. China's central bank is planning to merge up to 90% of its 300-plus trust and investment companies. Almost a third of those companies are reported to be losing money due to poor investments in real estate and other ventures. The aim is to merge the small institutions into companies with more than 10 billion yuan (US$1.2 billion) of assets.   n To combat widespread price manipulation, China plans to slash the number of official commodities exchanges to three from 14 and eliminate all but 12 of the 35 commodities now traded. If the plan is approved, the Shanghai Metals Exchange and the Shanghai Grain & Oil Exchange would be folded into the Shanghai Commodities Exchange. The Dalian and Zhengzhou commodities futures exchanges would also remain in operation. They would trade the following 12 products: aluminum, copper, rubber and plywood in Shanghai; soybeans, soyoil and hops in Dalian; and green beans, red beans, wheat, peanuts and corn in Zhengzhou.   n Expanding a pilot scheme begun in Shanghai more than a year ago, China plans to let foreign banks in Shenzhen make loans in the Chinese currency, doubling the number of foreign banks allowed to conduct business in yuan. The banks given the permission are Sakura Bank, ABN-AMRO Bank, Dresdner Bank AG, Bank of East Asia, Credit Suisse First Boston, Credit Lyonnais, Development Bank of Singapore and Overseas-Chinese Banking Corp. Those already in the business are Citibank, Bank of Tokyo Mitsubishi, Industrial Bank of Japan, Hongkong Bank, Standard Chartered Bank PLC, Daichi Kangyo Bank and Sanwa Bank, Shanghai-Paris International Bank (a joint venture between Banque Nationale de Paris and Bank of China) and Banque Indosuez. These banks also may take the lead in arranging syndicated loans denominated in yuan for infrastructure projects.   n The Hong Kong Monetary Authority will require all overseas-registered financial institutions in the city to disclose their financial information twice a year, beginning the end of 1998.
CONSUMER / RETAIL MARKETS		n Hong Kong giftware exporter PMS Far East entered the world of showbiz when its products were chosen as props on the popular U.S. TV comedy Friends.  PMS's hat was seen worn by Friends star Matt Le Blanc, standing next to the Duchess of York in an episode shot in London. PMS products, which include toys, clothing and textile goods, are sold throughout the US and Europe. In total, more than HK$55 billion worth of Hong Kong merchandise was sold in Britain last year.   n Giorgio Armani opened his first boutique in China on September 12, 1998. The shop occupies 350 square metres and is spread over two floors of the prestigious Palace Hotel in Beijing.   n Vancouver-listed AQUA 1 Beverage Co. Inc. has recently granted exclusive rights to Rica Industrial Canada Ltd., a trading company with offices in China and Taiwan, to sell AQUA 1's entire line of beverage products in China. AQUA 1 produces a line of beverages called SuperCharge, a natural fruit-flavoured drink fortified with vitamins and herbs designed to benefit the mind and the body.   n Seattle-based Starbucks Corp., through Borderless Investment Group, signed a joint venture agreement with Beijing General Corp. of Agriculture, Industry and Commerce, to start operations in China. The first of Starbuck's multiple outlets is expected to open in Beijing next January. The new outlets would carry teas as well as coffee to reflect China's traditional preference for tea. It is estimated that coffee demand in China could grow by more than 30% a year in the next decade. In 1997, 300,000 60-kilogram bags of coffee were consumed in China; an equivalent of one cup a year a person for the entire 1.2 billion population. The International Coffee Organization (ICO), representing the world's biggest coffee-growing countries and coffee-selling companies, plans to launch a marketing campaign plan in China next year to promote the drink. The ICO will participate in the China Coffee and Tea Exhibition to be held in Beijing in March 1999.   n Royal Ahold NV, the world's sixth largest supermarket operator, has recently applied to the Chinese government to run supermarkets throughout the country. The Dutch food retailer has about 40 supermarkets under the Tops name operating in Shanghai through a joint venture with China's Zhonghui Supermarket Co.   n According to Dominion newspaper, Lion Nathan (LN), New Zealand's largest brewer, is planning to spend about US$4.9 million on promoting Steinlager beer. It began selling the beer in China in mid-September this year. LN produces beer in the Yangtze River region. Promoting Steinlager as a premium beer in China is a necessary for LN to survive in the swamped Chinese beer market, the paper reported.   n Shiseido, the Japanese cosmetics giant, will set up a 50-50 joint venture with Hong Kong's Dah Chong Hong to handle cosmetic sales. The new venture, based in Hong Kong, plans to purchase Dah Chong Hong's cosmetics business and could take over marketing in southern China from Shiseido's Beijing production and sales subsidiary. It will open for business Nov. 1, 1998 and is expected to have sales of US$33.5 million in fiscal 2000. Shiseido also plans to increase production at its Beijing plant to 20 million units of cosmetics by 1999, from its earlier projection of nine million units by 2000. It will install more equipment at the plant for producing toilet water, liquid cosmetics, foundation and powder.
HEALTH CARE		n Covance Inc. of the U.S. has opened a new office in Beijing to participate in testing traditional Chinese medicines for Western use. In collaboration with the China Innovation Centre for Life Sciences (CICLS), an office of the Chinese Ministry of Science and Technology (MOST) and leading Chinese pharmaceutical companies, Covance will test traditional Chinese medicines for approval by the U.S . Food and Drug Administration. The new office will offer clinical services to both multinational and Chinese clients interested in developing registered drugs in China, or using the data for global NDA and regulatory submissions. Since entering the agreement with MOST and CICLS in July last year, Covance has given four Good Clinical Practice training sessions to 200 physicians in 150 hospitals in Beijing, Shanghai, Guangzhou and Chengdu. Covance also established a database of  physicians trained in international standards for a variety of therapeutic areas and working at hospitals throughout China.
MANUFACTURING		n The Colorado-based DII Group Inc., a custom-electronics company, has recently bought Greatsino Electronic Technology, a printed circuit board maker with operations in China, from Hong Kong's Universal Appliances Ltd. for an initial price of US$44 million. DII Group is also negotiating to buy a building under construction for about US$10 million and plans to move its Asia-Pacific base to Hong Kong from Singapore. DII's customers include Hewlett-Packard and 3Com Corp.   n Following a successful 1996 establishment of a piston ring joint venture, ATG, New York-listed Federal-Mongul Corp. has formed another joint venture  to produce pistons for automotive and off-road applications. The new venture, named Federal-Mogul Qingdao Piston Co., is an alliance with Qingdao Aodis Piston Union Co. in China's Shandong province. The two partners will invest US$13 million over the next two to three years. When the new venture is operating, Federal-Mongul will be able to supply piston systems, a first for an international group in China.   n Integrated Carbonics Corp. of Canada and its Chinese partner, Yichang Hengda Graphite Group of Yichang recently agreed to speed up the company's project development schedule. It plans investment in existing and newly constructed graphite processing plants in China. The first project is a Graphite Mine and Flotation Plant with capacity for 8,000 tons annually to be sold to domestic and export clients. The second project is a 300-ton capacity Graphite Sheet (Foil) Plant located at the Yichang site. China is the world's top producer of graphite.   n Volkswagen AG has ordered US$16.7 million of transport and assembly equipment for its Shanghai plant in China from Germany's AFT Automatisierungs und Foerdertechnik GmbH. The equipment, AFT's largest ever order, will be used to begin assembly in China of VW's new Passat, which was introduced in Europe in early 1997. AFT's clients include BMW, Daimler-Benz and General Motors.   n The New York-based paper products maker, Westvaco Corp., has announced plans recently to acquire a 45% stake in a packaging plant in Guangzhou. Westvaco paid US$25 million to Shorewood Packaging Corp., a folding carton maker also based in New York. Shorewood remains as 55% owner of the 125,000 sq. ft. plant which will provide packaging for cosmetics, confections and tobacco, etc. to meet demand in China's growing consumer markets. n Chevron Chemical Co., a unit of Chevron Corp. of the U.S., has recently started building a general purpose and high impact polystyrene plant in Zhangjiagang free trade zone, Jiangsu Province. The plant, with production capacity of  100,000 tons a year, will employ 100 workers when completed in two years. Polystyrene is primarily used in packaging for food, beverage, CDs and cassettes and in insulation. Chevron plans to train its Chinese staff in emergency response, pollution prevention, process safety, distribution, employee health and safety, and product stewardship practices aligned with the Chemical Manufacturers Association's Responsible Care code of management practices.
MEDIA AND COMMUNICATIONS		n Nasdaq-listed CMP Media Inc. has signed an agreement with China's leading high-tech publisher, State Publications Ltd., to represent China Telecommunications Construction (CTC) in Canada and the U.S. CTC is an independent monthly journal established in Beijing in 1988 with a circulation of 22,000 IS (information system), communications and network managers. In September and October, the magazine was a supporting publication of the 1998 Global Telecommunications summit at the 7th World Economic Congress held in Washington, DC.   n Hong Kong-based South China Morning Post and the privately owned British publisher, Haymarket Group, have agreed to form a joint venture named SCMP Haymarket Publishing to publish new Chinese magazines and to expand existing Chinese publication markets in Hong Kong and China.   n Procter & Gamble has started running television advertisements in China to promote its corporate image, taking advantage of the belief among many Chinese consumers that foreign brands are superior to domestic brands. Chinese consumers care about who makes products and will trust a company's products if it has a good image.   n Time Warner Inc. has established an internship program that allows students at Shanghai's Fudan University the opportunity to spend three months with the company in the U.S. The program, started in September, enables Chinese students to gain first-hand experience in American media and entertainment as well as insights into North American culture and contemporary society. Time Warner, in turn, will gain insights from the Chinese students' perceptions. Following an orientation program in New York City, Boston, Williamsburg, Va., and Washington, DC that will focus on American history, culture and society, each intern will be assigned to work in one of three Time Warner divisions, Warner Bros. in Burbank, Ca., CNN in Atlanta or Time Inc. in New York.
MINING AND RESOURCES		n Aluminum Co. of America (Alcoa), the world's largest aluminum producer, plans to invest billions of dollars in China. Subject to Chinese government approval, Alcoa has offered to pay about US$1.2 billion to buy China's second-largest aluminum producer, Qinghai Aluminium Industry which produces about 200,000 tons of aluminum a year. Alcoa is negotiating to operate its own power supply, as power costs usually account for two-thirds of an aluminum smelter's total operating costs. Alcoa is discussing possible partnership with Pingguo Aluminum Co. in Guangxi province. Pingguo produces about 105,000 tons of aluminum a year and is regarded as China's most efficient aluminum producer.   n China United Coalbed Methane Co.(CUCMC) said China has recently discovered a 1,200-km coalbed methane gas field in northern Shanxi province. The reserve is estimated at 200 billion cubic metres of coal gas, a form of natural gas. CUCMC, formed by the Chinese government in 1996 to develop the country's coal gas industry, has signed joint venture developments with Texaco, Atlantic Richfield and Phillips Petroleum. Development of the gas field would help supply a cleaner source of energy to Shanxi province, which has been reliant on coal. Shanxi's annual coal output of 300 million tons accounts for 25% of China's total coal production. China, which has a total reserve of 35 trillion cubic metres of coal gas, plans to shut 22,000 coal mines to reduce the oversupply of raw coal.   n Naneco Minerals Ltd. of Canada said the exploration drilling on its Jiawula zinc-silver-lead-copper deposit in Nei Mongolia, China, has verified the presence of massive to semi-massive sulfides within a strongly mineralized zone 1.8 km in length. Core drilling samples are regularly shipped to Vancouver for sample preparation and analyses.   n Bermuda-registered and Canadian-traded Griffin Mining Ltd . has recently announced the commencement of its 1998 work program on the Caijiaying zinc-gold deposit in China. Griffin plans a program of up to 7500 metres of diamond core drilling and approximately 50,000 metres of zinc and gold assaying and re-assaying prior to the end of the spring drilling season.   n China imported 55 million metric tons of iron ore in 1997, about 5.7% of world iron ore production. China is likely to import more iron ore, as much as 60 million tons this year, according to China Iron & Steel Industry & Trade Group Corp. China's own resources are of low quality and the country is embarking on major infrastructure projects that require more iron ore. Australia is the world's biggest producer of iron ore and iron is the country's third biggest export earner.  Australia is counting on demand from China for iron ore as demand from Asia wanes.
POWER / UTILITY / INFRASTRUCTURE PROJECTS		n Alstom SA, the world's second largest trainmaker, will invest US$10 million to  build rail cars and traction equipment  in a joint venture with Shanghai Electric Corp. (SEC). Alstom also plans to bid for mass transit projects in China with SEC, an electrical equipment maker that builds power generators and rail cars. Alstom now employs 3,000 people in China and plans to expand its presence. China and Hong Kong together accounted for 9% of Alstom's 1997 sales. It sold 1,100 subway cars to Hong Kong and nearly a third of China's imported locomotives. Alstom is currently competing to supply subway equipment to the cities of Shanghai, Guangzhou and Shenzhen. It is also seeking to build Taiwan's US$11.6 billion high-speed train project.     n The Hong Kong government is prepared to construct a US$8.3 billion railway link between Kowloon and the New Territories, beginning at the end of 1998. The West Rail project with a 30.5 km electric, double-track railway, will create about 13,000 jobs during its estimated five-year construction.   n Taiwan's state-run Chunghwa Telecom Co. will build a US$14-million base station on the eastern part of the island as part of its agreement to join Globalstar Telecommunications Ltd.'s satellite communications system. The Globalstar system will place 48 low-orbit satellites and base stations around the world, offering services ranging from voice communication to digital data transmission.   n HEI Power Corp., a unit of Honolulu-based Hawaiian Electric Industries Inc., has spent US$100 million to acquire a 60% stake in a 206-MW, coal-fired power plant under construction in China. The plant is being built for the Baotou Iron and Steel (Group) Co. in the province of Nei Mongolia. The plant will begin operation by 2000, and will generate enough power to light 206,000 homes. Baotou, China's fifth largest steelmaker, owns 25% of the plant and will purchase all of the plant's output. United Power Pacific Co. of Hong Kong owns the remaining 15%. Total ownership of the plant will be transferred to Baotou in 20 years.
REAL ESTATE/ CONSTRUCTION		n Chancellor Corp. of the U.S., along with joint venture partners, has signed a construction contract to build the Beijing Dadu International Jockey Club to be opened in early 1999 in Dongxing village, Haidian District. The club will be a "world class" facility offering commercial horse-racing operations, along with China Social Welfare Lottery sales. A spa and recreational activities, such as golf, swimming and tennis, will also be offered. Membership fees will range from US$25,000 to US$100,000. China Jingye Construction Engineering Corp. will be the prime contractor.   n Starting from August 1, 1998, public bidding and auction will be held for every sale of lands within the planned areas of Guangdong province and all county-level cities. Guangdong province is the first in China to implement such a system to improve the fairness of competition for newly approved real estate projects.   n Lafarge SA of France, one of the world's largest building-material producers, will build a US$150-million cement plant near Chengdu, Sichuan province. The company is considering building as many as seven more plants in China in coming years. It has already invested US$100 million.   n The 20th triennial meeting of the Unique International Organization of Architects (UIA) will be held in Beijing on June 23, 1999.  UIA was founded in 1948 and has more than a hundred state members and over a million architect members. This meeting is not only the first held in China, but the first in Asia.  More than 7,000 people from architecture circles around the world will attend.   n The Construction Bank of China issued a total of 35 billion yuan (US$4.3 billion) in loans for housing development in the first six months of 1998, a 163% increase over the same period last year. Individual home-owner buyers borrowed 5.5 billion yuan, a 275% increase over the same period last year.   n According to China Economic News, sales of Beijing's commercial-residential space doubled in the first half of this year, due mainly to the country's housing reform plan. Almost 80% of the sales were in residential homes, which increased 2.4 times to 4.84 billion yuan, because of new rules that allow residential mortgages. Office building sales amounted to 1.24 billion yuan, three times as great as sales in the first six months of last year. The average price for a residential house is 4,635 yuan per sq.m., an increase of 19.7% in the year.
TECHNOLOGY AND TELECOMMUNICATIO NS		n The software market in China is expected to grow at over 30% annually and total sales will reach US$3.5 billion by 2000, according to a director of Beijing University of Posts and Telecom R&D Centre. Total software sales reached US$1.35 billion in 1997, an increase of 22% over 1996.  About 30% of the market is held by Chinese firms making applications software. Foreign companies supplying operating systems have 70% of the market.  Presently, 60% of Chinese software firms are collectively owned or operated as a joint stock company. These include Yongyou Corp. (financial management software), Kelihua Corp. (education administration management software) and Jindie Co. Due to increasing market demand for software applications, some profitable hardware suppliers in China have entered into the software business.   n The Nasdaq-and-Amsterdam-listed Baan Co. and China's Neu-Alpine Software Co. (Neu) have recently formed a joint venture named Neu-Baan in Shengyang, Liaoning province.  The venture combines Baan's expertise in the enterprise resource planning market with Neu's software engineering experience and extensive distribution channels for Baan's products throughout China. Neu was founded in 1991 by a group of professors from North Eastern University in China and a Japanese company, Alpine.  Neu is one of the first Chinese software companies to qualify for the ISO 9001 certification. It now employs 820 people in 21 offices and 50 reseller agencies nationwide. Neu will also set up a training facility for Baan's enterprise applications through the North Eastern University.   n New York-listed Cypress Semiconductor Corp. and Taiwan Semiconductor Manufacturing Co. (TSMC) have agreed that TSMC will manufacture Cypress's next-generation CPLD (Cypress Programmable Logic Division) family, starting in 1999. The new family will be based on a six-layer metal, 0.18-micron (drawn) technology, the smallest feature size for any programmable logic device on the market.   n A Hong Kong mobile phone unit which is 70% owned by Hong Kong's Hutchison Whampoa and 30% owned by Motorola will invest US$452 million by the end of 2000 to develop Hong Kong's first dual-band mobile network.  Subscribers of the new network can have access to both the Global Systems for Mobile Communication (GSM) and the Personal Communication System (PCS) networks with a single handset.  Hutchison had 716,000 mobile customers at June 30, 1998, representing 30% of the city's total.   n Cisco Systems of the U.S. has announced that the China Education and Research Network (CERNET) will deploy Cisco routers, access servers and LAN switches in its national backbone network. The new equipment will enhance overall network performance and provide new services such as Layer 3 switching and voice-over IP to CERNET users nationwide. The network will be installed into CERNET's two main network nodes and eight regional network centres in China's most prestigious universities including Tsinghua University, Beijing University, Beijing University of Posts and Telecommunications, North East University, Shanghai Jiaotong University, South East University, Central China Institute of Technology, South China Institute of Technology, Xian Jiaotong University and the University of Electronic Technology.  Currently, more than 300 universities, middle schools and education research entities, comprising a nationwide community of over 300,000 users, are connected to CERNET.   n China plans to group the country's paging services companies into a single holding company for listing either in China or overseas.  The new company will have 40 million paging customers.  China said it would allow foreign firms to offer paging services as soon as it joins the World Trade Organization and open mobile phone service to foreign competition five years later.   n Japan's NTT has recently established a 49/51 joint venture named Beijing Denshin NTT Engineering with China's Beijing Denshin Kyoku to provide network maintenance and support to Japanese companies located in China. The start-up capital for the new company is US$3 million.   n Nasdaq-listed Orckit Communications Ltd., has launched a sales and marketing office in Beijing and has engaged U.D.I. Ltd., a unit of the Eisenberg Group, as its representative in China to market Orckit's Digital Subscriber Line solutions products.  UDI has been active in China since 1979 and maintains 11 offices throughout China.
TRANSPORTATION, Travel, tourism and leisure		n Canada's Imax Corp., a giant-screen theatre company, is planning to build theatres in China with two partners, Bona Corp. of the U.S., which specializes in international high-tech risk investment, and Lujiazui Development Corp. of China.  The first Chinese theatre with Imax's spectacular visual effects will be built in Shanghai's Pudong area.  Most Imax films are educational and the sound track narrative is easily translated, making them an easy fit for the Chinese market. Already a dozen of Imax's films have been translated into Mandarin.  Imax estimates around 300 million of China's 1.2 billion people can afford the CAD$6 admission to a film.   n Walt Disney Co. is considering two sites for its second Asian Disneyworld: an island off Hong Kong or Zhuhai city in southern China.  Total investment for the project will be US$500-700 million, and eight to twelve million visitors a year are expected.   n Air France SA is planning to become the largest European carrier in China, surpassing Deutsche Lufthansa AG. Air France recently added a third weekly flight between Paris and Shanghai, and expects to offer a daily flight between the two cities by 2000. Air France's Asian revenue posted double-digit growth in the first half of 1998.   n On Sept. 15, 1998, a Chinese carrier placed its code on the flights of a U.S. airline for the first time. China Eastern Airlines has put its code on selected American Airlines flights between Los Angeles and New York JFK, Chicago, Dallas/Fort Worth and Washington Dulles, and between San Francisco and Chicago. In October, American will place its code on China Eastern flights between Los Angeles and San Francisco and both Shanghai and Beijing. The alliance will strengthen both airlines' cooperation in reservation, departure control, customer and aircraft cabin services.   n Hainan Airlines, a Chinese regional airline 21.3%-owned by U.S. financier George Soros, will invest US$24 million for a 25% stake in the new Haikou Meilan airport on Hainan Island. The new 1.83 billion-yuan airport will be opened early next year.   n Subject to Chinese government approval, Korea's Jindo Corp., one of the world's largest maker of freight containers, is planning to sell all the container manufacturing assets of Qingdao Jindo Reefer Container Co. in Shandong province to Denmark's Maersk Container Industri SA.
deloitte & touche in china related activities / projects		n Deloitte Touche Tohmatsu has been selected by the Ministry of Finance (MOF) to work on the modernization of China's tax system. The two-year project is part of the World Bank's Financial Sector Technical Assistance Project, and has been hailed by MOF officials as one of the important projects for fiscal and taxation reform in China. Under the terms of the contract, DTT will assign a team of experts to conduct feasibility studies for new categories of taxes and present a theoretical framework for a new Chinese tax system drawing upon international experience. The project will be led by Mr. Randal Weiss, from DTT's National Tax Group in Washington DC, and by professionals from the firm's National Tax Group in Beijing, Shanghai, Hong Kong and other offices.   n Deloitte & Touche's International Business and Tax Guide Book on the People's Republic of China is bringing MBAs in London, Ontario, and in Hong Kong up to speed on China's business and tax regime. It was used as teaching material for the MBA program in the University of Western Ontario's Richard Ivey School of Business (Ivey) early this year. Now Dr. Chen Xiaoyue, Associate Dean, the School of Economics and Management of Tsinghua University, and a guest professor for Ivey, has picked the same book as a text for Ivey's first MBA program in Asia. This fall Ivey is offering its highly regarded program at a campus located within the Hong Kong Convention and Exhibition Centre. The School has also established the Asian Management Institute, devoted exclusively to Asian-related research, case-writing, teaching and exchanges. It is already the largest producer of current Asian business cases in the world.

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Joseph Tse Brent Wyatt   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.    1998 Deloitte & Touche. Deloitte and Touche refers to Deloitte & Touche LLP and related entities. Printed in Canada. 9804 All rights reserved.		Vancouver, British Columbia V7X 1P4 Tel. (604) 669-4466 Fax (604) 669-4434 Gary Nott International Offices China/Hong Kong Deloitte Touche Tohmatsu China Head Office Wing On Centre, 22nd Floor 111 Connaught Road Central Hong Kong Tel. (852) 2852-6318 Fax (852) 2542-4225 Patrick Cheng/Ted Lee Deloitte Touche Tohmatsu Shanghai CPA 16th Floor, Shanghai Bund International Tower 99 Huangpu Road Shanghai 200080 People's Republic of China Tel. 86 (21) 6393-6292 Fax 86 (21) 6393-6290 / 6393-6291 Arthur Tse/Chris Lu/Joseph Tse   Deloitte Touche Tohmatsu Beijing Representative Office 6th Floor, Tower A COFCO Plaza 8 Jianguomennei Dajie Beijing 100005 People's Republic of China Tel. 86 (10) 6526-3899 Fax 86 (10) 6526-3898 Clarence Kwan/Arthur Wong		Fax (212) 436-5000 Jack Ribeiro Chicago Deloitte & Touche LLP 1 Tower Lane, Suite 1800 Oakbrook Terrace, Illinois 60181 Tel. (630) 645-8229 Fax (630) 645-8203 Robert Rohleder/Patrick McKenna San Francisco Deloitte & Touche LLP 50 Fremont Street San Francisco, California 94105 Tel. (415) 247-4000 Fax (415) 247-4329 Dennis Wu/Anna Mok/Lili Zheng Los Angeles Deloitte & Touche LLP 1000 Wilshire Boulevard Los Angeles, California 90017 Tel. (213) 688-0800 Fax (213) 688-0100 David Tong/Tom Iino/Kelvin Lee   Seattle Deloitte & Touche LLP 700 5th Ave., Suite 4500 Seattle, Washington 98104 Tel. (206) 292-1800 Fax (206) 343-7809 Bob Gerth/David Cordova
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