China Economy Briefing August 6, 1999

General Economy and Fiscal Situation

S&P Reduces China's Rating
China's Rural Output Rises 16%
China's New Economic Stimulus Package
1H Tax Revenues Up Sharply in China

Consumption and Employment

China's Consumption Rate Drops to Historic Low
China To Focus On Worker Re-Training

Money, Price and Interest Rate and Exchange Rate

China's 1H Deposits Rise, M2 +17%, M1 +15%
China's Monetary Policies To Continue 2H99
China to tax bank interest to spur spending
Exchange Rate Adjustments Suggested in China

Industrial Policy

Increased competition vital: World Bank Deputy Chief Stiglitz

Foreign Trade

China Raises Export Tax Rebate Rates

Investment and Foreign Investment

China Eases Trade, Investment Restrictions
China's 1H Contracted FDI Falls
When Joint Ventures Go Sour: Experiences and Afterthoughts
Foreign Invested Firms' Taxes Eased in China
Fixed asset investment up 12.5% in first half
Incentives planned for Foreign developers

SOE’s Reform

China To Halve Local Government Rolls
Finance Ministry Increases Audits of Corporate Books
Government to Speed Up Privatisation of Non-Strategic Industries
State Owned Firm To SWAP Debt To Shares
Easier Loans For China's Struggling State Firms

Banking

China Construction Bank Reforms Auditing System
Macquarie eyes housing market
Consumer Credit: Still A Long Way To Go In China
Guarantee system proves popular

Insurance

China Releases New Medical Insurance System
China Limits Insurance Firms' Access To Bond Market
China Life and CMG Group To Form JV

Financial Market

China Updates Overseas Listing Rules
New Stock Issuing Rules in China
Two mutual funds worth 3b yuan each to be listed

General Economy and Fiscal Situation

S&P Reduces China's Rating

Standard & Poor’s reduced its credit ratings for China recently, two of its state banks and six financial institutions. The downgrade reflects the credit rating agency’s view that the Chinese economy has become riskier due to poorer growth prospects, the rising costs of economic reforms, higher unemployment and the country’s growing debt problem.

S&P lowered its senior unsecured rating for China to "BBB" from "BBB+". The credit rating agency downgraded the country’s long-term currency sovereign to "BBB" from "BBB+" and the short-term currency rating from "A-2" to "A-3." At the same time, S&P lowered its ratings for the China Development Bank and the Export-Import Bank of China from "BBB+" to "BBB." The credit rating agency also downgraded ratings for the following financial institutions: Industrial & Commercial Bank of China, China Construction Bank, Bank of Communications, China International Trust & Investment Corp., Shanghai International Trust & Investment Corp. and Fujian International Trust & Investment Corp.

A spokesman for China’s Ministry of Finance (MOF) responded Wednesday to S&P downgrade of China’s sovereign rating. He said he did not question S&P’s move, but urged investors to "make decisions based on their own views and judgement." He pointed out that different credit rating agencies produce different rankings, presumably referring to Moody and Fitch IBCA, whose assessments of China’s sovereign are relatively more bullish.

The MOF spokesman said that although China issues about US$1-2 bln in overseas bonds annually, the country does not plan to issue any more international debt until "the proper moment." S&P’s downgrade is expected to have limited impact on China’s economic reforms as the country should be able to finance most of its programs domestically, according to analysts.

July 22 Hexun Caijing (Homeway Financial News)

China's Rural Output Rises 16%

China’s village and township enterprises recorded a total added value output of US$144.58 billion (RMB 1195.7 billion) in the first half of 1999, a 16% increase year-on-year. According to the Ministry of Agriculture, rural industry accounted for US$100.16 (RMB 828.3 billion) of the total output, up 14% on-year.

Income for village and township enterprises reached US$560.47 billion (RMB 4635.1 billion), a 17% rise on-year. The export volume for the rural sector came to US$41.91 billion (RMB 346.6 billion), showing 7% growth. Total profits came to US$31.89 billion (RMB 263.7 billion), an increase of 15% on-year. The sales rate for industrial products of collectives at the village and township level remained at 93.6%, only 0.3 point higher than last year.

The private sector has become an important part of the economic development of villages and townships. Private companies continued to boost their output, with an added-value output of US$82.13 billion (RMB 679.2), an increase of 21% on-year.

July 20 Renmin RiBao (People’s Daily)

China's New Economic Stimulus Package

To counter sagging economic growth rates and give a lift to domestic demand, China has outlined a new economic stimulus package of 12 measures to be implemented by the end of the year.

The measures include:

July 26 Hua Sheng Bao (Hua Sheng Overseas Chinese Newspaper)

1H Tax Revenues Up Sharply in China

China’s tax revenues increased 19.6% in the first six months of 1999 compared with the same period last year. The amount collected was 52.2% of planned tax revenues for the year, marking the first time since China’s tax reforms in 1994 that more than half of planned revenues were collected in the first six months of the year, reported Jin Renqing, director of the State Administration of Taxation. Economists predict that if everything goes well, authorities may collect RMB 1 trillion (US$120.80 bln) in tax revenues by the end of the year. Jin released the latest figures at the National Conference on Taxation on July 13.

Import tariff collections experienced the fastest growth of all revenue streams, jumping 107.5% to RMB 49.3 bln (US$5.96 bln) in the first six months, compared to Jan-June of last year. The sharp increase is due to the government’s successful crackdown on smuggling. Value-added tax revenue totaled RMB 188.1 billion (US$22.72 billion), in the first six months, up 13.9% compared with the same period of last year. Consumption tax proceeds rose 10% to RMB 39.3 billion (US$4.75 billion). July 14 Zhongguo Xinwen She (China News Services)

Consumption and Employment

China's Consumption Rate Drops to Historic Low

China’s final consumption rate has fallen to its lowest level ever. The statistic, reported by China’s State Development Planning Commission, represents the percentage of a country’s gross domestic product devoted to final consumption. China’s final consumption rate has dropped at an annual rate of 0.6 percentage point since China’s first began to measure its consumption rate in 1981. China’s final consumption rate dropped from 67.5% in 1981 to 58.8% in 1997, much lower than the international average of 70%, the newspaper reported. Consumer consumption rate decreased from 53.1% to 47.5% during the same time period, compared with the international average of 60%.

China’s low domestic demand and high deposit rate could put the brakes on economic growth in the long run, the commission warned. Therefore, the commission is recommending that China adopt more policies to encourage consumption.

July 15 Qihuo Ribao (Futures Daily)

China To Focus On Worker Re-Training

In an effort to increase its pool of skilled labor, China will require all new workers seeking employment to receive one to three years of skilled training, and will implement tighter controls on who enters which jobs. The new program will first focus on junior and senior high school graduates in cities and towns who do not plan to study at the college or university level, announced Deputy Minister of Labor Lin Yongsan, the newspaper reported.

The program will begin this year in China’s coastal regions and other economically developed urban areas. Other regions in China will start the program next year. China’s colleges and universities have expanded their student enrolments in recent years, and the percentage of the senior high school graduates who continue their education is expected to increase substantially this year, the newspaper reported. Still, nearly 1.4 million junior and senior high school graduates will not have the opportunity to continue their education, the newspaper reported.

Among the 140 million employees in China’s cities and towns, skilled workers account for only half the total number of workers, and only 35% of technicians. Further complicating matters, among the rural labour force that has moved into the non-agricultural and industrial jobs in urban areas, over 70% have only a junior high school education. And over half of these workers have only a primary school level education.

July 27 Renmin Ribao (People's Daily) reported

Money, Price and Interest Rate and Exchange Rate

China's 1H Deposits Rise, M2 up 17%, M1 up 15%

China’s money supply continued to grow in the first six months.

The People’s Bank of China reports that China’s broad money supply (M2) was RMB 11.3635 trillion (US$1.35 trillion), up 17.7% on year. China’s narrow money supply (M1) reached RMB 3.88218 trillion (US$469.43 billion), up 14.9% on year. Cash in circulation (M0) was RMB 1.08805 trillion (US$131.57 billion), an increase of 11.9% year-on-year.

Deposits were up 18.3%, to RMB 10.27616 trillion (US$1.2 trillion). Corporate deposits rose 16.7% to RMB 3.34108 trillion (US$404 billion). At the end of June, urban and rural residents’ deposits rose to RMB 5.91735 trillion (US$715.52 bn), an increase of 18.5% on year. At the end of April, urban and rural residents’ deposits increased by 19.2%, and in May 18.6%.

Bank loans were up 15% year on year to RMB 9.06203 trillion (US$1.09 trillion). China's foreign exchange reserves increased US$2.09 billion to US$147.05 billion since the start of 1999. At the end of June, China’s renminbi exchange rate remained steady at US$1 per RMB 8.278, nearly even on year.

July 13 Zhengquan Shibao (Securities Times) reported

China's Monetary Policies To Continue 2H99

China’s central bank will continue to use monetary policy tools and adjust the currency supply as needed during the second half of 1999. This is according to the proceeds of the Monetary Policy Committee of the People's Bank of China 1999 summer meeting in Beijing.

The sentiment at the meeting was that the recent interest rates cuts were successful in reducing corporate expenses and government bond rates, boosting corporate investment and consumer spending, and contributing to the overall development of the capital market. Financial institutions also were urged to issue more loans for projects related to agriculture, infrastructure construction, environmental protection, foreign trade and especially technological upgrades. Loans for consumer goods and housing were also urged. It was recommended that the central bank boost its funding to urban commercial banks and urban and rural credit cooperatives, help reform small and medium-sized financial institutions, provide better service to small companies, and gradually open channels of financing for securities firms.

July 17, Zhongguo Zhengquan Bao (China Securities)

China to tax bank interest to spur spending

China will impose a 20% tax on interest served on bank deposits from 1 October in a bid to stimulate investment and consumption, taxation officials said last week. The measure, which originated at the Central Bank, was cleared by the State Council and tax authorities are working on its implementation. Other tax officials said the plan would be discussed by senior members of parliament next month, but it was unclear what scope for debate remained. China has been trying to boost its economy after 21 consecutive months of falling retail prices. Repeated interest cuts have failed to convince consumers to loosen their purse strings: deposits in bank savings accounts have surged by 580 billion yuan since the end of 1998 to a record RMB5.92trillion at the end of June. Economists supporting the move, said Beijing needed extra revenues to boost growth. In a recent report carried by the Securities Market Weekly magazine, prominent economist Hu Angang pointed out that a 5% tax on bank interest would add 10 billion yuan to revenues Economists backing a tax on interest said Beijing was also in need of revenue sources to spur growth : a quick computation shows the 20% tax would yield around RMB40bn a year in extra revenues.(Source : Reuters, Hong Kong Standard)

Exchange Rate Adjustments Suggested in China

Guo Jian, economist at the China Development Bank, agrees. An adjustment in the exchange rate by China would be a logical step after fiscal and monetary tools are exhausted, Guo wrote in a July 15 Zhongguo Zhengquan Bao (China Securities News) article.

Beijing ought "to consider using exchange rate policy at an appropriate time," Guo said. "Adjusting the exchange rate could increase the money supply and stimulate demand at the same time." China’s fixed exchange rate, however, is unlikely to be adjusted radically. The economists think that an incremental downward valuation of the renminbi, China’s currency, is the course Beijing is much more likely to take.

Indeed, a rebound in Asian economies would be a boon to Chinese exporters, and, after three long years of economic crisis, China’s neighboring economies seem to be coming back. South Korea’s economy is expected to expand by 7.5% this year. Japan, after a decade long recession, is on target to achieve its 0.5% goal.

 

Industrial Policy

Increased competition vital: Stiglitz

World Bank Senior Vice-President Joseph E. Stiglitz last week talked about how vital competition and regulatory policies are to a market economy at a seminar on promoting competition and regulatory policy in Beijing. "China is well on the way to creating a market economy, consistent with its values and historical experiences," he said at a seminar sponsored by the Research Centre for Regulation and Competition (RCRC) under the Chinese Academy of Social Sciences. China is lucky with its vast market, and a large number of enterprises are viable in most industries. Just as positive, the size of the market attracts a large number of competing firms, both in trade and investment. "While competition is viable, government-imposed and historical barriers have resulted in the fact that the competition is not as strong as it could be," Stiglitz noted. Stiglitz, the World Bank's chief economist, pointed out that enormous challenges remain ahead for China's economy, if it is to sustain growth over a long term, which can provide a foundation for an increase in living standards. He said among the issues that should be addressed by the government are the creation of efficient regulatory structures and the development and implementation of strong competition policies. (Source: China Daily)

Foreign Trade

China Raises Export Tax Rebate Rates

China has raised the average tax rebate rate for export-oriented products by 2.95 percentage points in a bid to expand exports. The new rebate rates took effect July 1, but were announced by the Chinese government on July 19.

China’s official value-added tax on exports is 17%. The latest hike in tax rebates brings more export goods near a full tax refund, which lowers the bar for export and allows Chinese exporters to lower the price on their goods sold in foreign markets.

The tax rebate rate for garments was raised to 17%, while those for textile raw materials and textile products were increased to 15%, it said. For machinery and electronic products, the rebate rate was increased to 15%, except for four categories of products (machinery and equipment, electric appliances and electronic products, transport vehicles, and instruments and meters), that already enjoy a full 17% rebate rate. The changes also cut the number of export tax rebate grades from five to four: 17%, 15%, 13%, and 5%, the newspaper reported.

July 21 Zhongguo Xinwen She (Chinese Overseas News Agency)

Investment and Foreign Investment

China Eases Trade, Investment Restrictions

China’s government has recently relaxed trade restrictions to boost exports and attract foreign capital. Lu Nanping, deputy director of the State Administration of Foreign Exchange, summed up the measures at a foreign exchange trade cooperation symposium held in Beijing on July 15. The measures include:

July 16 Zhongguo Xinwen She (China News Services)

China's 1H Contracted FDI Falls

Foreign direct investment (FDI) in China decreased substantially during the first six months of 1999. Contracted FDI dropped 19.9% from January to June to US$19.4 billion, while utilised FDI fell 9.2% to US$18.6 billion, according to statistics released by China’s State Statistics Bureau. Investment levels in western China increased 23.3%, which were over 11 percentage points higher than in eastern China, and 6.7 percentage points higher than in central China.

China’s response to its declining investment levels, more fixed assets investment, continued during the first half of the year. Investment in state-owned and other economic enterprises increased 15.1% on year. Investment continued to tilt toward basic industries and infrastructure construction, the bureau reported.

July 16 Zhongguo Xinwen She (China News Services)

When Joint Ventures Go Sour: Experiences and Afterthoughts

Some joint ventures (JVs) in China work fine from the beginning and continue to do so for years. Some plug along in fits and starts. And some just don’t work the way they were intended.

An Australian experience; who makes the decisions? In this case a joint venture between an Australian firm and a Chinese producer got off to a fine start. The Chinese side appointed the Chairman of the Board and the Australian side the general manager. Profits were good and harmony reigned. Within two months the Australians had sunk in their US$2mn in total investment.

It took six months for the problems to start. When the Australian general manager made decisions, his Chinese employees told him that they still had to seek the approval of the Chinese chairman before implementing them. On one occasion the enterprise transferred 1 million RMB (US$121,000) without consulting the foreign general manager. He learned about it only after the fact.

Complaints began to surface from the Chinese side about the manager’s way of doing things. Finally, the Australians demanded the dissolution of the contract but the Chinese side balked. After a year’s delay and intervention by government officials, the Australian side paid some money to someone and the matter was resolved.

An Italian experience; how much power does the Chinese chairman have?

Here is a case of another promising start. China had thousands of years of experience in the natural silk industry. The Italians had advanced technology and equipment and fine pattern designs. The two seemed a perfect match. And indeed things went on fine for a while. The Chinese side appointed a chairman and he Italians a short-term manager who was needed to impart the new technology. The Chinese side had a parent factory, which by agreement could use the design patterns six months after the joint venture did.

The Italian side injected their cash swiftly and the Italian-made equipment was purchased jointly. The Chinese sent technicians to Italy to learn the system. The Italian company was pleased with the initial products of print-dyed silk.

Then the problems began. The Chinese chairman intervened everywhere, in production, supply, and sales. He replaced bank loans that were made to the joint venture into the account of the Chinese parent company. Furious, the Italian manager returned to Italy and production was halted. Then the Chinese chairman issued a statement in the name of the Chinese parent company firing the Italian manager. The Italian side refused to work with the Italian chairman.

The German experience: secret loan guarantees, seized assets, and sale of the Chinese interests.

This joint venture had been in operation since 1984 and was doing well. The German party wanted to expand production. All of a sudden a court ordered the freezing of the joint venture’s assets. The Chinese side, totally unbeknownst to the German side, had used the joint venture’s assets to guarantee the Chinese parent company’s debt and that debt had got out of control.

A year later the court ordered part of the joint venture’s funds confiscated because of the debts of the Chinese parent company guaranteed by the Chinese partner. The Chinese side was finally forced to sell its part of the assets to the German partner.

An American experience: did it constitute fraud? There was a joint venture with a major American corporation that had invested US$4mn. Total investment was to be US$10mn. The Chinese partner, again without informing the foreign side, borrowed over 20 million RMB (US$2.4mn) on behalf of its parent factory, using the joint venture’s name and pledging its capital as security.

The Chinese side paid the interest on its loan but when the U. S. side discovered the facts they withdrew their equity, declaring the actions of the Chinese side to constitute fraud.

Of the four projects, two were cancelled, one ceased production, and the other reverted to full foreign ownership. In each case both sides had big losses. In addition the reputation of the individual Chinese firms, and indeed of the whole concept of joint ventures in China, has been damaged. Why do these things happen?

The concept of law is important here. Each of the foreign partners had a clear concept of what rights and responsibilities existed in the contract. None of the Chinese partners did. Once a Chinese partner proposed that an existing joint venture be changed to a form of cooperation with specifics to be subject to negotiation. The foreign partner is said to have compared that to a marriage in which the wife suddenly reveals she’s already married. No amount of repentance could save the marriage when he element of trust has disappeared.

1999 April issue of Zhongguo Waizi (Foreign Investment Monthly)

Foreign Invested Firms' Taxes Eased in China

China’s State Council has proposed to expand the preferential income tax rate for foreign-invested firms engaged in energy and transportation infrastructure projects. The proposal is pending the approval of the State Administration of Taxation.

The plan would eliminate geographical restrictions for the 15% tax rate. Foreign-invested companies eligible for the preferential 15% income tax have had to be located in special economic zones, economic and technological development zones, open coastal cities and economic zones, provincial capitals, and in certain cities along the Yangtze. Companies in all other areas have had to pay income tax of either 24% or 30%.

July 24 Zhongguo Huagong Bao (China Chemical Industry News)

Fixed asset investment up 12.5% in first half

China's overall fixed asset investment was up 12.5% on a year earlier in first half at RMB897.7bn, the China Information News reported last week. Fixed asset investment by "mainly state-owned entities" was up 15.1% at RMB668.7bn, fixed asset investment by collectives rose 3.2% to RMB96.2bn while investment by private firms grew 7.5% to RMB132.9bn yuan, the newspaper cited data of the State Statistical Bureau as saying. Investment in primary industry and communications infrastructure was very strong with spending in agriculture, forestry, fishery and water conservancy surging 76.8% to RMB29.6bn, and spending on postal, telecommunications and transportation facilities reaching 147.3 billion yuan, up 27%. Investment in technical upgrading inched up 1.1% to RMB114.9bn, reflecting weak demand and tight credit, the newspaper said. Beijing has set a 12% growth target for fixed asset investment this year. State-sector fixed asset investment slowed in the second quarter with first half growth reaching 12.1% after a 22.7% surge in Q1. Chinese officials have said they see a diminishing impact from last year's state spending plan. (Source: Hong Kong Standard)

Incentives planned for Foreign developers

Faced with a domestic shortage of liquidity and strong demand for more housing construction, Beijing is planning new tax and financial incentives to encourage foreign developers to invest in the housing sector, the official Baokan Wenzhai reported last week. The measures drafted by the construction ministry would include exempting foreign developers from investment-direction taxes now used to steer capital toward projects favoured by planners, giving foreign investors access to domestic loans at the lowest available interest rate, and allowing them to transfer all after-tax profits overseas. One foreign developer told the Hong Kong Standard that the new policies could provide relief from red tape by simplifying the existing procedures to get tax breaks and access to the foreign exchange market. However, the move does not address the main complaints of foreign developers: a lack of transparency that makes it tricky to evaluate land and infrastructure costs and the lack of a land registry to make transaction prices a matter of public record, which they lament put them on an uneven playing field with their domestic competitors. Some also objected to the restriction of foreign investment to Sino-foreign joint ventures. (Source : Hong Kong Standard)

SOE’s Reform

China To Halve Local Government Rolls

Half of China’s local government workers will be laid off in an effort to further streamline government rolls and cut costs. The layoffs are slated for administrative departments at the provincial, autonomous region, and municipal levels. The same ambitious cut has already been planned for workers at the Central government level. Specifically, the government plans to reduce the number of administrative departments of the provinces and autonomous regions from the current 53 to 40, and to 30 in provinces or autonomous regions that are relatively underdeveloped. Meanwhile, administrative departments of China’s four municipalities, Beijing, Shanghai, Tianjin, and Chongqing, will be reduced from the current 61 to about 45.

July 19 Zhongguo Xinwen She (Chinese Overseas News Agency)

Finance Ministry Increases Audits of Corporate Books
To combat the serious problem of false accounting data among Chinese firms, the Ministry of Finance intends to conduct two to three nationwide audits every year to ensure data quality and fair practice in corporate accounting, the China Daily reported. During a current inspection campaign targeting major state-owned enterprises, the ministry found that 102 out of 110 state distilleries had falsified data, a ministry official said. Many companies exaggerated profits in their books. Some others understated profits in order to lessen their obligation to the government. [CND, 07/22/99]

Government to Speed Up Privatisation of Non-Strategic Industries
For the first time since China established its stock market nearly a decade ago, the government outlined an agenda that would give up state control in most of the 900-odd companies listed on the Shanghai and Shenzhen stock exchanges, the South China Morning Post (SCMP) reported recently. Listed companies in non-strategic sectors, including textiles, light industry, electronic and electrical manufacturers are subject to the new move.

The Chinese government currently holds 60 to 70 percent of shares of the mainland's listed companies directly or indirectly, through various holding companies. This makes it extremely difficult for minority shareholders to change ineffective management or enforce strict corporate governance. The new move would allow shareholders to have more incentive to bolster the companies and pressure the management to perform better.

Experts say that the move would be the most substantial progress so far in state sector restructuring. As part of the campaign to boost the stock markets and speed state-sector reforms, the government, for the first time, made it clear that state firms may invest in stocks and shares and hold them for at least 20 days. (Bo Xiong, WU Yiyi)
[CND, 07/22/99]

State Owned Firm To SWAP Debt To Shares

China will allow its troubled state-owned enterprises (SOEs) to convert their debt into shares. Under the new rules, SOEs will be able to transfer a portion of their bank loans into stock, which then will be held by the creditor banks. The impetus for the new measures is part of a plan to reverse the bad financial condition of China’s SOEs within three years. The government announced its bold new initiative in earlier 1998, and now that half of the three year time period has passed, the government wants to act to push the reform program forward, the newspaper reported.

The main benefit for the SOEs will be a reduction in interest payments. Under the debt conversion plan, SOEs are expect to save several hundred billion renminbi alone in interest payments, the newspaper reported. However, debt conversion will not be a huge benefit for the creditor banks. Theoretically, the banks can transfer the SOE shares to others, but in reality this will be limited since it will still not be possible to inquire about the financial details of shares, the newspaper reported.

China’s four major commercial banks are owned by the government, and therefore the liability burden of the SOEs is actually a liability on the government, the newspaper said. The government had planned to write off RMB 50 billion (US$6.05 bln) in these banks’ bad loans, and begin the process of merging SOEs to turn around these companies. However, the upper limit of the debt bailout fund was eliminated over the past three years, and so far the government has spent RMB 90 billion (US$10.88 bn) on the SOE bailout package.

July 27 Hua Sheng Bao (Hua Sheng Overseas Chinese Newspaper)

Easier Loans For China's Struggling State Firms

China has issued new rules to facilitate a special kind of bank loan for struggling state-owned companies. The "Temporary Rules for Issuing Closed-End Loans" aim to facilitate closed-end loans to loss-making state-owned enterprises that would otherwise not be eligible for bank loans.

Companies eligible for the loans must already have some marketable and profitable products, and must promise that the loans be used only for purchases, production, inventory, and sales, and not to pay off old debts. The companies must put the loans in a special bank account with withdrawals requiring the approval of the creditor banks, according to the Hong Kong Standard. Moreover, the loans are issued at banks' own discretion and are not "policy loans," the article said.

August 2 Renmin Ribao (People’s Daily)

Banking

China Construction Bank Reforms Auditing System

The Chinese Construction Bank has implemented a major reform to its internal auditing system. In the current auditing system of Chinese banks, auditors are employees of the bank and rely on the banks for their paycheck, which seriously diminishes the independence and credibility of the internal auditing system.

The new internal auditing system of the China Construction Bank has the following features:

(1) The establishment of eight auditing branches, in Beijing, Shanghai, Nanjing, Dalian, Wuhan, Guangzhou, Chengdu and Xi’an, to enhance the direct auditing of the bank’s head office. All the branches answer to the auditing department of the head office and carry out on-the-spot auditing in first-level branch banks in accordance with the requirements of the head office.

(2) The appointment of a head auditor and the establishment of a general auditing office to take care of the auditing work in the first-level branch banks.

(3) The implementation of vertical management within the system of the first-level branch banks. Branch banks at the second level and below must hand over their auditing power, and auditing organs attached to the county-level branch banks have been cancelled.

July 22 Zhongguo Xinwen She (China News Services) reported

Macquarie eyes housing market

Macquarie Bank, Australia's only listed investment bank, is exploring an initiative to become the first western bank to set up a mortgage securitisation business in China. The bank said this was one of a number of options it was working on with former prime minister Paul Keating to assist China in developing its housing market. Feedback on the prospects for mortgage securitisation in China had been "extremely positive," he said. Gill said high personal saving rates and government reforms of the banking, mortgage and housing markets in China had led to increasing demand for private-sector housing. Macquarie has already set up several businesses in China, including a joint initiative, announced last week, with AMP Asset Management to launch the AMP China Housing Programme. (Source: China Daily)

Consumer Credit: Still A Long Way To Go In China

China is still far away from an established consumer credit system. Neither consumers nor lending institutions have a clear grasp of what a consumer credit system is designed to do or how the system should operate. For the largest volume, longest-term personal mortgage and business loans the overdue rate for the China Commercial Bank, for instance, is limited to less than 3%. Such a low rate should attract many customers. Why doesn’t it?

There are barriers on both sides. For consumers there are three types. First, people’s incomes, officially at least, are low. A Chinese urban family is said to have an average official income of 1500 RMB a month (US$181.38). Major purchases like houses, autos, or large durable goods, priced in the tens or hundreds of thousands of RMB are just beyond the reach of most people.

The other two factors are psychological. People are looking over their shoulders and wondering how they will support themselves when they retire. The social security system is inadequate and the traditional idea that children will support elderly parents is undergoing change. The, too, what if hard times come? Chinese people have certainly faced many such examples this century. Desire for consumption must yield to the demands of practicality.

Even if these three obstacles could be overcome on the part of consumers, there is another set of hurdles that could be even tougher to overcome. These stem from the lending institutions themselves and the economic structure in which they operate. For one thing there is an attitude ingrained for decades on the part of lending institutions that banks just follow orders from higher-ups. There is no apparent reward for innovation or a willingness to try a different approach. The bankers themselves are wary of giving the power to borrow to large numbers of people. For example, while the People’s Bank published a management guide for credit cards introducing an overdraft protection feature, most banks rejected it and few still have it today.

A second problem, related to the first, is the fact that China does not have any nationwide credit report system or data bank indicating a person’s credit history as a basis to judge the likelihood of repayment of a loan. Nor is there a clear bankruptcy system in place. Small wonder banks worry about deliberate overdrafts, overdue payments, and bad debts. Reflecting the basic notion on the part of lenders that maybe consumer credit is a dangerous, or at least risky affair, circumstances have combined to make procedures for securing a consumer loan exceptionally complicated.

Another problem is that the terms of the loans may be very unfavourable. Loans are granted on the basis of a floating interest rate that can go 5% higher than the initial rate. In fact, most lenders raise the rate almost immediately to the highest allowed limit. Other extraneous charges like insurance, legal fees, handling charges, along with the interest itself, add up to a great deal, making the loan even less attractive.

Finally, there is a rigidity about the whole system that discourages potential buyers. For example, in other countries, clients have various repayment options, each with a varying interest charge. Repayment can be tailored to the income and needs of the customer. In China most major banks have only one preprinted contract and no repayment choices.

the July 25 Zhengjuan Shibao (Securities Times)

Guarantee system proves popular

A credit-guarantee system is picking up steam in the mainland, aiming to help small and medium-sized enterprises (SMEs) solve their financial difficulties. By May, about 18 provinces and regions had tried the experiment and another 34 cities had set up specialised units for that purpose, the China Daily quoted the State Economic and Trade Commission (SETC) as saying. The provinces and regions involved have allocated three billion yuan in guaranteed funds to provide each SME loans of up to 40 billion yuan in circulation funds, the paper said. The development of the system was accelerated last month when SETC issued a guideline on the establishment of a national SME credit-guarantee scheme. There are more than 10 million SMEs. They contribute 60 per cent of the country's industry output value, and 40 per cent of all taxes and profits. (Source: South China Morning Post)

Insurance

China Releases New Medical Insurance System

By the end of this year, China is to launch a new medical insurance system funded by joint contribution from employees and employers to replace the existing one that is funded by the government, the China Daily reported Friday.

Under the new scheme, urban employees will contribute two percent of their incomes to the insurance fund, while employers pay six percent of the total payroll. About 30 percent of the fund is allocated to cover outpatient expenses of individual accounts. Medical expenses above that level will then be covered by the remaining 70 percent of the insurance fund. The new system will also allow employees to have a choice of three and five hospitals, an move designed to encourage hospitals to compete and better their services.

The central government released three circulars as guides for local labour and social security bureau in designing the new medical insurance packages. The existing system, designed in the 1980s, is becoming obsolete. In this system, government largely foot the medical bills and employers reimburses employees for medical expenses. Nevertheless, bankruptcy of many businesses effectively rendered the scheme impractical. [CND, 07/25/99]

China Limits Insurance Firms' Access To Bond Market

China has placed more caps on its insurance companies’ ability to tap the corporate bond market. The China Insurance Regulatory Commission (CIRC) announced on July 26 that China’s domestic insurance companies cannot buy corporate bonds valued at more than 2% of their total assets, or purchase more than 10% of a total bond offering. Previously, the CIRC limited insurance companies’ bond purchases to 10% of a firm’s assets.

The new regulations are aimed to limit investment risk in the industry, a CIRC official told the newspaper. China’s domestic insurance companies currently are only allowed to buy the bonds of three state-owned corporations: the Ministry of Railway, the State Power Corp. and the Three Gorges Project Development Corp.

The CIRC is still considering expanding the investment channels for insurance companies, which have narrowed due to China’s repeated interest rate cuts, the official said. However, the official could not specify which possible new investment channels would be opened. The official did say that it is unlikely that insurance companies would be allowed to enter the stock market directly, but left open the possibility that firms may be allowed to enter the market via investment funds or under capital caps. He also said the government is planning to levy a new tax on insurance companies’ earned interest, but it will not put undue pressure on the insurance companies because the interest income of insurance companies is already regarded as profits, which is already taxed.

July 26 Hexun Caijing (Homeway Financial News)

China Life and CMG Group To Form JV

China Life Insurance Company and CMG Group (Australia) are in talks to form a joint venture life insurance company. The two companies have received approval last week from China’s State Council and the China Insurance Regulatory Commission to proceed will plans to set up the new company in Shanghai, the newspaper said. The registered capital of the new insurance firm is RMB 200 million (US$24.18 million), and under the terms of the deal, China Life Insurance will contribute 51% of the capital, and CMG Group will invest the remaining 49%, the newspaper said.

the July 31 Jinrong Shibao (Financial News) reported

Financial Market

China Updates Overseas Listing Rules

The China Securities Regulatory Commission (CSRC), the agency that regulates the country’s financial markets, recently issued new requirements and procedures for Chinese enterprises applying for an overseas stock market listing. The new regulations call for any Chinese enterprise wishing to list overseas to reorganise into a limited-liability company and meet several conditions.

The first condition is that the company’s net assets must be RMB 400 million (US$48.32 million) or greater. Also, the company’s after-tax profits from the previous year should be no less than RMB 60 million (US$7.25 million). Calculated according to a reasonably expected price-to-earning ratio, the financing should be no less than US$50 million, the CSRC said. The enterprise must also have a regular corporate structure that includes solid internal management with a relatively high level of expertise.

The company must have reliable foreign exchange sources for dividends and interest payments. Its business operations must also correlate with state foreign exchange management regulations, as well as all other CSRC requirements. The last condition a company must meet to list shares overseas is to ensure that the purpose of the listing conforms to China’s industrial policies, its policies for the utilisation of foreign capital, and state regulations concerning fixed asset investment.

the July 19 Renmin Ribao (People’s Daily)

New Stock Issuing Rules in China

The China Securities Regulatory Commission (CSRC) has issued a new "rationed distribution" policy for companies offering to sell shares on China’s financial markets. The new policies are an attempt to promote more standardisation in China’s stock markets. Companies offering more than RMB 400 mln (US$48.32 mln) in stock will be required to offer between 25%-75% of the issuance to institutional buyers. The new regulations also say that a portion of stocks cannot be traded on the market within an undisclosed period of time, the newspaper said.

The new regulations will also bar institutional buyers that have any relationship with the issuing company from buying shares. These restrictions also apply to institutional buyers that are in the same enterprise group with the issuing company. State-owned enterprises, state holding companies, listed companies and other institutional buyers will be allowed to participate in stock offerings, but "the source of their purchasing capital must conform to relevant state regulations," according to the CSRC. The issuing company and the major underwriter will jointly determine the issuing price through promotional activities, and apply to the CSRC for verification and approval, the newspaper reported.

July 29 Jinrong Shibao (Financial News)

Two mutual funds worth 3b yuan each to be listed

China mainland has listed its first two index-weighted mutual funds, each valued at 3 billion yuan, the official Shanghai Securities News said. The Xinghe fund would be listed on the Shanghai stock exchange and the Pufeng fund would trade in Shenzhen, the newspaper reported. The funds were offered to domestic individual investors at 1.01 yuan per unit earlier this month to invest in stocks listed on the two bourses in line with their index weightings. The Xinghe fund was issued by Beijing-based Huaxia Fund Management and the Pufeng fund by Shenzhen-based Penghua Fund Management. Both are closed-end funds with 15-year terms. (Source: Hong Kong Standard)

 

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