Strategic assessment of the China market:
> -----Original Message-----
> From: alert@stratfor.com <alert@stratfor.com>
> To: redalert@stratfor.com <redalert@stratfor.com>
> Date: Tuesday, June 29, 1999 11:08 PM
> Subject: China
>
>
> >
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> >STRATFOR's
> >Global Intelligence Update
> >June 30, 1999
> >
> >Evidence of Continued Weakness in Chinese Economy
> >
> >Summary:
> >
> >The Chinese economy continues on a downward trend reflected and
> >amplified by falling foreign direct investment. Beijing's latest
> >strategy to remedy this situation and restore foreign confidence
> >in the Chinese economy is by encouraging domestic consumption and
> >investment. The problem is, Chinese citizens are not going along
> >with the plan, preferring to deposit their savings in the
> >perceived safety of banks, despite recently slashed interest
> >rates. Far from riding out the Asian economic collapse and
> >preparing for brighter days, China has merely delayed the full
> >impact of that collapse into which it is now being dragged by
> >declining foreign and domestic confidence.
> >
> >Analysis:
> >
> >According to the June 29 issue of Asia Pulse, China's State
> >Statistics Bureau reported that exports in April fell 7.3 percent
> >versus the same period the previous year. Fixed asset investment
> >by the public and other sectors of the economy fell by 7.7
> >percent, month on month, in April. And while the consumer price
> >index fell by 2.2 percent and the retail price index fell by 3.5
> >percent in April from the previous month, retail sales were
> >relatively unchanged from March. According to a June 25 report by
> >China's Xinhua news agency, citing State Administration of
> >Internal Trade figures, retail sales fell 1.7 percent in May from
> >the 7 percent growth of the preceding four months. Where money
> >in China is going is clear from the Statistics Bureau report that
> >bank savings by individuals stood at 5.84 trillion yuan, up 0.4
> >percent from March and 19.2 percent versus the previous April.
> >
> >China's official International Business Daily, citing trade
> >ministry figures, reported June 28 that paid-in foreign direct
> >investment in China fell 6.6 percent and pledged foreign
> >investment fell 17 percent in the first five months of this year
> >from the same period in 1998. The daily attempted to put a
> >positive spin on the figures, noting that paid-in foreign
> >investment in May was up 15.6 percent from May 1998, the first
> >monthly increase this year. However, paid-in investment in
> >January through April of 1999 was down 12.6 percent year on year.
> >Approvals of new foreign-funded enterprises in China were down
> >13.6 percent during the first five months of 1999 from the same
> >period the previous year. The Economist Intelligence Unit
> >expects paid-in foreign direct investment in China to drop to
> >around $30 to $35 billion in 1999 -- the lowest yearly amount
> >since 1993 -- from $45.5 billion in 1998. Beijing reportedly
> >cited the Asian economic crisis, a global slowdown in investment,
> >turbulence in the international financial markets, and slow
> >growth in the Chinese economy as the culprits behind the downturn
> >in foreign direct investment in China.
> >
> >Prime Minister Zhu Rongji's strategy to lift China out of this
> >slump is to attempt to stimulate domestic investment and
> >consumption. Chinese media have touted the recent increases in
> >China's stock markets, expressing the hope that the bull market
> >will attract domestic investment and the ensuing returns from
> >those investments will launch a consumer spending surge. A front
> >page commentary in China's official People's Daily on June 15
> >called the rally that saw China's stock markets skyrocket 80
> >percent in six weeks "sustainable," and urged Chinese to invest
> >still more. Beijing sparked the rally by cutting transaction
> >taxes on some shares and by creating two new mutual funds. China
> >is also apparently turning a blind eye to domestic companies
> >illegally routing money through Hong Kong and back into the
> >Chinese stock markets.
> >
> >To encourage both consumption and investment, China slashed
> >interest rates for the sixth time in three years. Effective June
> >1, the Peoples Bank of China slashed the average interest rate
> >for bank deposits by one percent and the average interest rate
> >for loans by three quarters of a percentage point. The benchmark
> >lending rate now stands at 2.25 percent. In a report to the
> >National People's Congress on June 26, Finance Minister Xiang
> >Huaicheng announced plans to increase China's economic growth by
> >raising salaries, adjusting taxes, encouraging exports and
> >domestic consumption, and attracting foreign investment. Xiang
> >warned that revenue growth could slow in the second half of 1999
> >unless weak domestic demand and capital spending and declining
> >exports were effectively addressed.
> >
> >The trouble is, the strategy is not working. According to a
> >survey by the Beijing-based Investigation Institute on the
> >Chinese Economy, released June 29 by China Daily, about 56
> >percent of urban Chinese are choosing to maintain or expand their
> >bank savings, while only 8.2 percent have put money into China's
> >stock markets. Only 36 percent of the respondents said they
> >intended to withdraw any money from their bank accounts. Most
> >cited upcoming education, housing, and medical expenses as the
> >reason for their reluctance to invest or spend. Additionally,
> >some 30 percent of those surveyed expected their income would
> >grow slower over the coming year. Left unspoken was the fear of
> >unemployment and mistrust of China's stock markets, and the
> >survey did not address the spending habits of China's rural
> >population, which does not have much disposable income anyway.
> >The fear of ongoing labor cutbacks and slow growth has also made
> >Chinese banks reluctant to lend, thereby contributing to stagnant
> >consumption.
> >
> >Beijing has blamed slow growth in the Chinese economy for turning
> >away investors. To address this, Beijing is attempting to spur
> >domestic investment in stocks, thereby pumping up the equity of
> >Chinese companies and making it easier for them to borrow on the
> >international market and to lure foreign investors. Beijing is
> >also hoping that a surge in consumer spending will make
> >investment in China more attractive. But, China's fundamentals
> >weigh against dramatic increases in foreign investment, and its
> >barefaced attempt to improve the national balance sheet by
> >inflating equity values -- reminiscent of similar attempts by
> >other Asian countries to artificially inflate real estate values
> >-- is unlikely to inspire foreign investment. That is even
> >assuming that Beijing is able to drum up more domestic interest
> >in the markets, something not altogether apparent at this time.
> >And as its stock market rally runs out of steam in the face of
> >lackluster foreign and domestic interest, China may see a major
> >reversal in the markets, only amplifying its problems.
> >
> >China's difficulty attracting foreign investment illustrates the
> >fact that what Asia is currently experiencing is a cyclical
> >upturn in a secular downturn. While some Asian economies may
> >truly have bottomed, either because they did not have far to fall
> >or because they underwent some degree of painful but necessary
> >reform, many have far more room to fall. Those countries that
> >have dealt less ruthlessly with their financial problems, which
> >have not imposed stringent reforms, are merely experiencing a
> >temporary respite from their downward trend. We think
> >particularly of China -- struggling to bolster its balance sheets
> >with domestic investment and consumption, Japan -- addressing a
> >banking crisis by nationalizing the problem and using all means
> >including make-work programs to lower the rate of unemployment,
> >and Malaysia -- whose resort to restrictions on capital flows
> >expires in September.
> >
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