China News - Autumn 2004

Beijing Olympics 2008

Work is proceeding on the stadia and British engineer, Martin Simpson of engineering firm Arup is involved. He led the team which computer simulated the design structure of the 100,000-seat stadium for the opening ceremony. The proposed structure resembles a bird's nest and will use 36km of twisting steel spars.

Arup is also working on the largest Olympic swimming centre ever built, which will be situated next door. It will be a 'water cube' positioned using Chinese Yin and Yang principles of the harmony of opposites. The structure was inspired by cells and soap bubbles and will be contained in a skin of 4,000 ETFE bubbles. (ETFE is ethyltetra fluoroethylene-the same material used for the Eden Project). The material will harness solar energy to heat the pools and the interior making it one of the world's greenest sports venues. The computer techniques are leading edge and were not available even a year ago. The 'water cube' has a design life of 100 years and likely to be a tourist attraction as well as a key recreational facility for the locals. (From The Sunday Times 4/7/2004).

Shanghai Catholic Cathedral

The Catholic cathedral of Xu Jia Hui in the south western part of the city is to get new stained glass windows to replace those destroyed during the Cultural Revolution. An interesting feature is that they will be in a modern contemporary style. Father Thomas Lucas, an associate professor of art at the University of San Francisco and consultant to the Shanghai diocese's five-year project to restore the stained glass of this-China's largest church says that it will integrate 5,000 years of Chinese tradition.

In 1949, Shanghai was home to about 100,000 Catholics but today, it is estimated that the figure exceeds 150,000. They worship in 121 churches; all except four have been built or restored since 1982 and guided by 73 priests and 98 nuns. (From Far Eastern Economic Review20/5/2004)

Shanghai goes up in the world

Some of the best property investment opportunities are now in the East-places such as Beijing and Shanghai. Dramatic house-price rises and large-scale economic development in main ports and industrial cities have created a climate too tempting for estate agents, developers and property brokers to resist.

Shanghai in particular has enjoyed 10% economic growth every year since 1992 and now provides over 5% of the entire gross domestic produce of the whole country. It has a population of 19 million living in 120 sq miles. The disposable income here is 172% that of the national average.

In 2003, despite the SARS outbreak, average house prices rose by 24% and demand grew from overseas buyers and renters working on new business projects. This autumn, a residential 26-storey tower will open with 50 apartments each 4,000 sq feet. Some prices may exceed £650,000.

City Trading Post, a British firm, is selling two bedroom flats in the city priced between £60,000 and £200,000 aimed at British buy-to-let investors. A £30,000 deposit is needed and a further 10% for costs of setting up a mandatory Chinese bank account and mortgage and consultancy fees. A managing agent will also need to be appointed. So far 60 units have been sold.

There are drawbacks however, annual yield may be as low as 5% and also risks to consider. Some Chinese developers have gone bust and the Chinese government will need detailed documentation and records before rental income can be withdrawn from China. However, the real attraction is the rising capital prices. Progress may be erratic but demand is likely to soar in the next few years. (From The Daily Telegraph 17/7/04)

New anti-malaria drug is based on traditional Chinese herb

The new anti-malaria drug promises the biggest breakthrough in a generation according to scientists. Safety tests in Britain have shown no significant side effects and clinical trials are to begin in Africa and Thailand next year. If these go well, the drug could be given to people with the disease within four years. The new drug is modelled on the action of the most effective anti-malerial, a Chinese herbal medicine called artemisinin which is extracted from the sweet wormwood plant, Artemisia annua. Plant based drugs are very expensive to produce-about 20 times more than standard drugs. However poor countries in Africa, South America and Asia, where malaria is endemic cannot afford expensive drugs, but the new drug, called OZ227 or simply OZ, is entirely synthetic. It can be produced in volume much more cheaply than extracting chemicals from plants. Malaria kills more people in the world than any other infectious disease apart from Aids. An estimated two billion people-a third of the total world population live in regions where it is endemic. (From The Times 19/8/04)

Formula One comes to Shanghai-September 2004

Shanghai's International Circuit was completed in eight months representing an investment of £320 million. It is shaped in the form of the Chinese character 'shang' meaning up or upon (Shanghai means 'upon the sea') and the first race is scheduled for 26 September. Amongst the sponsors are Sinopec, the largest oil company in China and HSBC.

Promising young Chinese drivers are being trained in Formula One driving techniques in Italy. (From Chinatown the Magazine Jul-Aug 2004)

National appeal to help stop Aids

The Chinese premier, Wen Jiabao, at the International Aids conference in Bangkok, made an appeal to his fellow Chinese to help stop the spread of the disease. His public statement was on the front pages of Chinese newspapers. It was greeted with all the more enthusiasm because the leaders of other, mainly Asian countries did not even accept the invitation of the Thai's government to attend. In his statement, Mr Wen said that, 'all levels of government and the entire society must attach great importance to preventing and controlling Aids'. He said that HIV would spread into the general population from the worst affected group in China, intravenous drug users, if more was not done. The government reports that 840,000 people are infected with the virus and 80,000 have Aids which requires immediate treatment. Mr Wen said that prevention of the disease would be a 'long-term, arduous task' and there 'would be more investment in programmes to improve the country's capability in Aids prevention and control'. He called on Chinese scientists to work hard to develop new drugs and to optimise therapies. UNAid believe the numbers are probably higher and 10 million Chinese could be infected by 2010. (From The Guardian, 12/7/04)

Poverty in China

Since the start of market-oriented reform in 1978 millions of people have been lifted out of poverty each year. Over the last 25 years, the figure has totalled 400 million and during the 1990s, six million people a year were lifted out of poverty. China hosted a global poverty alleviation conference about two months ago and the host nation won plaudits from the World Bank and governments of the world.

However last year, 800,000 people actually fell into poverty despite the 9% economic growth rate. This is the first time a fall has occurred. The poverty alleviation office (the Chinese Government's poverty task force), records that about 85 million people live on less than 637 yuan (£41) per year.

The government officials regard this as being extremely serious but acknowledge that it is becoming more difficult to spread the benefits of economic growth to the countryside. There is a rising gap between the top and the bottom income groups. Both the Chinese president, Hu Jintao and the prime minister, Wen Jiabao have called for 'balanced development', which focuses on wealth distribution and social justice rather than the growth-at-all-costs policy previously pursued. (From the Guardian 20/704).

Encouragement to produce girl babies

Last year in China, 117 boys were born for every 100 girls, compared to a global average of 105 to 100. China has set the target of lowering the ratio to normal levels by the year 2010. The prohibition on selective abortions are to be tightened and there are pilot schemes are underway to encourage the birth of girls. In some areas, couples with two daughters and no sons, have been promised an annual payment of 600 yuan (£38) when they reach 60 years of age. In other areas, housing grants of more than £1,000 have been given to couples with two girls. The state is also pushing a 'caring for girls' propaganda campaign to counter the preference for boys.

Traditional families, especially those in rural areas, place greater value on boys, who are best suited to continue the family line, generate income and ensure that parents are cared for in old age. As a result, especially with the 'one child policy', a disproportionate number of female foetuses are aborted and girls are at greater risk of being abandoned or sold. In addition, rural couples are allowed greater freedom to have a second child if the first-born is a girl.

Population planners fear that the shortage of potential brides will create social tensions as men migrate and compete more fiercely for mates. Also wife selling, baby trafficking and prostitution are all expected to increase as the first generation of those born under the one-child policy reach marriageable age.

Despite such problems, the government insist that the one child policy is necessary. Since 1980, the restrictions are believed to have prevented 300 million births, which would have been additional to the 1.3 billion in an already overcrowded nation. (From The Guardian 16/7/04)

Tesco buys into China

Tesco is putting up £140 million to acquire a 50% stake in the Chinese company Hymall which operates 25 hypermarkets mainly on the east coast. This company is a subsidiary of Ting Hsin, a large Chinese company that began life as an instant noodle manufacturer. Hymall's goal is a fivefold expansion before the year 2008, but even if this is achieved, it will still only just break into China's top seven retailers. Tesco hopes to benefit from an economic growth of 9% and also the relaxation of retail regulations which the Chinese government has promised later this year as part of its obligations to the World Trade Organisation. (All restrictions on foreign retailers will be removed by 2007, opening the floodgates for others) This is Tesco's first time in China-Wal-Mart and Carrefour, their global competitors have been in China for years and already have about 40 stores each.

Chinese government figures for the urban retail market was worth 2.9 trillion yuan (£205 billion) last year-an increase of 10% over 2002. This growth is expected to continue rapidly over the next five years. The Chinese government predict a total of 100,000 chain-store outlets by the end of next year. (From The Guardian 15/7/04)

British army kit to be made in China

The British soldier's standard issue combat dress (Combat Soldier 95) will be made in China, according to MOD sources. From The Sunday Independent 1/8/04).

China's largest airport opens to rival Hong Kong

Yesterday Baiyun International Airport at Guangzhou opened. It cost £1.3 billion and will have an eventual capacity of 80 million passengers each year. It is at the heart of the Pearl River Delta, the 'workshop of the world' with a string of manufacturing cities in the region which have grown up there in recent years. Until now this growth has powered Hong Kong's rise to become East Asia's biggest port and services centre. However the former British territory is at risk of losing trade as the Chinese Mainland develops its infrastructure. Hong Kong Airport handles 35 million passengers a year, but the new Guangzhou airport already has a capacity of 27 million people and is expected to begin an aggressive expansion of international flights. (Form The Telegraph, 6/8/04)

China's Millionaires

Investment bank Merrill Lynch's latest wealth report showed that the number of high-net worth individuals (with assets, excluding their home, of more than $1 million) last year grew fastest in certain Asian countries. Hong Kong's number of millionaires increased over the previous year by 30% to 45,000; India's by 22% to 61,000, South Korea's by 18% to 65,000, whilst China's total grew by just 12% to 236,000. By comparison, the number of millionaires in Britain, in the same period was 383,000 (about 8% growth) and in the USA, 2,272,000 (about 14% growth). (From Far Eastern Economic Review 1/7/2004).

From the Chinese Press

China to build a national museum on the history of the Overseas Chinese

Construction of a national museum on the history of the Overseas Chinese is expected to start in Beijing at the end of the year. It is expected to cover an area of 10,000 sq m and to display more than 200,000 exhibits. The museum will record the history of the overseas Chinese pioneering work, their sentiment for China and their tremendous contribution to the national development. Li Mingjiang, vice chairman of the All-China Federation of Returned Overseas Chinese called for support and assistance from overseas Chinese and the general public to the establishment of the museum and urged them to contribute relics, literature and other materials. Currently there are more than 30 million Chinese residing outside of China. (From Xinhua, People's Daily 30/3/2004).

Chinese WWII victims demand compensation from Japan

Hundreds of elderly Chinese who survived the Japanese air raids over Chongqing have teamed up with a group of lawyers and are demanding compensation. Most of the evidence will be oral histories from people old enough to remember the war when over 200 Japanese air raids killed about 11,900 residents of Chongqing, the Chinese wartime capital. In addition, 14,700 were injured and 17,000 buildings destroyed. Several Chinese have won lawsuits in the past. Some were labourers, sent to Japan to work as slaves and the new compensation claims could be costly for Japan, because 50,000 Chongqing air raid victims are still alive. China was the main victim of Japanese aggression; an estimated 35 million Chinese were killed or injured before and after World War II, which in the case of China ran from 1937 to 1945. From South China Morning Post, Agence France-Presse, Beijing, 19/7/04)

Democracy from within

The western media seems to have failed to notice the term 'political civilisation', which has entered the official Chinese lexicon this year. Jiang Zemin first introduced the term in 2002 and in March when China's constitution was amended for the fourth time. The national People's Congress enshrined 'political civilisation' alongside 'material civilisation' and 'spiritual civilisation'.

The new term lacks a clear definition, but this may be good in the Chinese context because it can evolve in several directions and is open to interpretation. At this stage it includes 'legal civilisation' as a subcategory. Legal regulations are necessary in a market economy which must function according to fair rules and not leader's whims. 'Political civilisation' can also be read to include democratic participation and system reform, albeit within the party.

Some western political theorists may not accept the idea of direct voting within the Communist Party as a workable form of Chinese democracy. They believe there must be two competing parties, even if their platforms hardly differ. Arguably this is more democratic than a one-party system, but a system of choices, nominations and direct voting within a party framework, where competing interest representing different platforms may not be bad either.

Experiments with direct voting for local village heads and more recently, township leaders are under way. Similar to China's economic reform, political reform will go through a period of trial and observation and depending on results, may be extended. If eventually National People's Congress delegates are directly elected, it will function as a real parliament.

'Political civilisation' does not represent the 'quick-fry' formulas to which American political think tanks subscribe. In a Chinese context, it opens up the possibilities by barring nothing. China's political evolution is expected to follow its proven formula for economic transition; progressive but careful experimentation. Washington think tanks once dismissed China's economic transition model. They may be proved wrong again.(From Laurence Brahm in The South China Morning Post 13/7/04)

More foreign employees in Shanghai

In the first quarter of 2004, employment certificates were issued to 2,954 foreign employees-an increase of 25% over the same period last year. At present there are 27,000 foreign employees working in Shanghai from 136 countries and the number of employmet certificates has reached 50,000. (From China Today July, 2004)

Wider rural poverty gap causes alarm-growing divide between poor and poorest

The media has focussed on the cities/countryside wealth gap, but alarm bells are ringing about a new economic imbalance-that between the poor and the poorest. In 1992, farmers earned about two and a half times more than a poor rural person. Last year, this figure was a factor of four and is widening. Rural poor is defined by the authorities as having an annual income less than 637 yuan (about £43). However, farmer's incomes may be boosted because they go to the cities as migrant workers, earn more, but are still classed as farmers until they actually register a change of residency. It is believed that those who stay in the villages usually have fewer skills and make up the large proportion of the poor population. Last year, the number of poor people increased for the first time since reforms were launched in the late 1970s. The ranks of the rural poor swelled by 800,000 to 29 million. Economist Du Runsheng, said that the mainland should fight poverty by enforcing compulsory education and by improving infrastructure and medical care. (From Jane Cai in The South China Morning Post 19/7/04)

Deng Xiaoping boosts China's international status (100th Anniversary of his birth)

David Lampton, dean of the China Research Department, John Hopkins University gave an interview with a People's Daily reporter on the 100th Anniversary of Deng's birth. 'His manner and glamour, especially his straightforwardness, enjoyed the trust of the American people. He changed the traditional views the American people had for the Chinese leaders and China. He succeeded in the strategy of Chinese diplomatic relations. Lampton said Deng was very pragmatic, changed China's closed door situation and advocated economic co-operation instead of political antagonism. China's relations with the west, especially the US have improved and enhanced and both countries have benefited from this. Lampton went on to say that Deng's foreign policy has continued to exert an important influence on China's present foreign policy. The world situation is still the two subjects of 'peace and development' put forward by Deng. (From People's Daily Online 5/8/04)

Sino File was compiled by Walter Fung. From the Chinese Press includes in put from Theresa Ray

Business File

Is china a market economy yet?

Following an in-depth enquiry, the European Union will still not recognise China as a true 'market economy' because of too much state interference, a weak rule of law and poor corporate governance. The EU remains committed to granting China MES (market economy status) but only after certain criteria are met. In addition to the commercial value for Chinese manufacturers, Beijing has also pursued market economy status for its political symbolism.

Acceptance by Brussels and Washington would, European officials say, be read as yet another sign that the mainland is now on an equal footing with the big industrialised powers of the west. But the perceived lack of transparent laws, weak, inconsistent and arbitrary enforcement, problems with contracts and a weak judicial system are seen as stumbling blocks at present. Accounting standards are not 'standard', and in some cases companies don't follow basic accounting principles, or even produce accounts at all. But China is starting to win the battle. So far New Zealand, Singapore, Malaysia, Thailand and Kyrgyzstan have granted China MES, but the EU and the US have yet to be won over. The prize is important to China.

The granting of MES, expected to happen as China joins the World Trade Organisation, would, in theory at least, make it more difficult for Europe and the US to impose the sort of anti-dumping measures, which have been introduced in the past. But so far the only one of the five criteria met by China - 'absence of State-induced distortions in the operations of enterprises linked to privatisation' and the 'absence of barter trade' - is seen by the West to be the least important one.

Overseas investment in Chinese companies suffers a hiccup

International investors are increasingly judging Chinese companies on their true merits and performance, rather than just being blinded by the growth opportunities. This year China-related international initial public offerings (IPOs) will probably fall well short of the more than US$20 billion originally forecast for the year. Bad news, mostly related to alleged accounting or ethics violations, has hit five major Chinese companies in the last few months.

Most significant is China Life, which is the subject of a class-action shareholder lawsuit and an informal Securities and Exchange Commission investigation. This stems from reports in February that China's state audit agency found accounting irregularities to the tune of 5.4 billion yuan in China Life's unlisted state-owned parent, China Life Insurance Corp. Subsequently, the state auditor confirmed that the parent company had violated various insurance regulations and would have to pay US$8 million in back taxes and fines. The auditor exempted the listed China Life from liability. But the shareholder lawsuit is still pending.

Secondly, the US$1 billion Hong Kong IPO of China's only privately held bank, China Minsheng Banking Corporation, was indefinitely delayed following the company's admission that it falsified documents and faked a shareholder meeting ahead of its 2000 IPO on China's domestic A-share market.

Thirdly, on April 20, the Hong Kong Stock Exchange announced it was investigating charges that CNOOC, China's third-biggest oil company, violated listing rules by failing to report huge deposits that it made with a related company, CNOOC Finance.

Fourthly, the first IPO of a major state-owned Chinese bank, China Construction Bank, originally set for late this year, has been indefinitely delayed, apparently because management and regulators have determined it is impossible to clean up the bank's books for at least another year.

Finally, shares in Shanghai-based Semiconductor Manufacturing International Corp (SMIC) have fallen by about 20 per cent since their March debut, when it raised US$1.8 billion in the biggest China-related IPO of the year so far.

The investor sentiment is understandable. In the past investors bought into the China growth story believing in guarantees that the big state owned companies in heavily regulated industries would not be allowed to fail. Yet, growth and the guarantee have failed to generate shareholder returns. The obvious lesson here is that economic growth in China does not necessarily translate into profits for its companies, and is even less likely to result in dividends for investors. The less obvious lesson, underscored by the recent scandals, is that investors should probably start paying more attention to the fundamentals of the companies they are buying. They should also be clear-headed about Beijing's motivation for listing state firms, which is generating cash for the state, not giving long-term rewards to foreign shareholders.

Ex-pat cost of living in China

Whilst China continues to attract outside investment from the West, companies are finding the cost of placing ex-pats in the major cities of Beijing and Shanghai much higher than they thought. Although still a developing economy, it has, for ex-pats, some of the highest living costs in the world. A study conducted by an American human resource consulting group found that the costs of accommodation and schooling to be higher even than New York. A 2,152 square foot furnished house at a prime locations for expats working in Shanghai, for example, rents typically at £5,200 a month. By comparison, in New York such an apartment would cost around £4,200. Beijing was at the top of the chart as the most costly Chinese city to live in for expatriates, followed by Shanghai and Shenzhen.

Education for children at expatriate schools in China is also extremely expensive. At kindergarten, annual fees are typically around £9,500, whilst for primary and secondary schools it can cost £10,000 to £11,000. These fees are higher than in Hong Kong or Tokyo.

Multi-national corporations use such surveys to determine living cost supplements for overseas staff. The typical survey will look at the costs of around 200 items including housing, food, clothing and household goods as well as transportation and entertainment. Although China stands out for expensive housing and education, Tokyo remains overall the most expensive city for ex-pats. Amongst the most costly cities there are four in Asia, Osaka (4th), Hong Kong (5th) and Seoul (7th). But whilst Chinese cities rank high on costs, they don't yet perform so well on quality of life. Even the costliest Chinese cities still ranked far below their counterparts in other countries, the survey found.

Following its entry into the World Trade Organisation in 2001, there has been an influx of businesses into China from all over the world. China drew $53.5 billion in foreign direct investments in 2003, outpacing foreign investments in the United States for the first time. Although many companies set up factories in smaller, cheaper cities, major firms still prefer to have their China headquarters in one of the expensive key cities for prestige reasons.

Death of the Mag-Lev

The world's fastest train is under death threat for economic reasons. The magnetically levitated train to Shanghai airport is likely to be scrapped following a decision to extend the subway line. On the mag-lev, the 30km ride takes just 8 minutes. But it costs 50 Yuan, and delivers passengers to a metro station where they switch to the subway, bus or taxi -and pay up to another 50 yuan to get to the city centre. Because of the high price and inconvenience, the mag-lev trains are running at 30 per cent capacity, with many passengers taking the ride just once for the thrill of being on the world's fastest train, which reaches 430km/h, for about a minute. Many people believe that the Shanghai government never wanted the mag-lev in the first place. It is rumoured that the central government heard that Germany was about to sell submarines to Taiwan and decided to take pre-emptive action. It offered Shanghai as a site for the first commercial use of the mag-lev on condition that Germany refused the sale. Germany agreed. The deal was done over the heads of the Shanghai government. China then spent nearly US$1 billion to build the track, and the first train ran on December 31, 2002. Now the decision to extend the existing subway line 29km to Pudong airport sounds the death knell for mag-lev. On the sub-way the fare will be around 10 Yuan making the thrill of 430km for one minute an expensive luxury. Capacity utilisation will fall well below the current 30%, and the mag-lev will become unviable. Maybe Alton Towers might be interested!

Power shortages to be avoided by price increases

The threat of power shortages in China will be tackled by price increases, but mainly for non-domestic users. The Government has confirmed that prices will rise by an average 2.2 fen per kilowatt hour. The news came as China may be facing its worst power shortages since the 1980s. It was estimated there could a shortfall of 30 million kW this summer. Prices are being raised as part of the central governments macro-economic policies to slow down sectors of the economy that are overheating.

The policy will apply mainly to industrial and commercial users with most households unaffected. Some analysts have suggested authorities fear a possible social backlash for raising residential power prices at a time when inflation is rising. Some companies in designated industries will pay more than others. The central government will classify companies in six industries into four categories, setting different price levels. It listed the six industries as aluminium, ferro-alloy, cement and iron and steel as well as chemicals such as calcium carbide and caustic soda. Companies designated in the so-called 'limited' category will pay an additional 2 fen on top of the base price, while those determined to be 'eliminated' will pay an extra 5 fen. The central government will classify other companies as 'permitted' or 'encouraged'. Agricultural companies and smaller fertiliser firms will escape higher prices for electricity, as part of a policy to help raise the incomes of farmers. The government will even cut electricity prices for some agriculture sectors. At the same time, about 12 provinces and cities including Shanghai will charge different prices for peak and low-use periods. Shanghai has already announced firms will pay 4.5 times the normal price of power during peak periods this summer. Despite the rise in prices, Shanghai's power company feels the benefits will be offset by other policies such as rationing and lower tariffs during off-peak hours.

Tough credit controls to curb borrowing

The China State Council has announced that strict controls will continue to be imposed on credit despite the initial victory in curbing excessive investment growth. The announcement followed a State Council meeting to review the country's economy. Measures taken by the central government were seen as being 'timely, correct and effective' and the Council called for 'continuous efforts to curb the fast growth of bank loans'. The meeting concluded that the economy was in 'general good shape' but there were unresolved problems such as runaway growth of investment in some areas and bottlenecks in raw materials and energy supplies.

Although the economy topped the meeting's agenda, it was not the only issue discussed. Seven work priorities were laid down for local governments and ministries to follow this year. Four of the seven priorities directly address economic problems facing the country - further control over bank loans and the land market, better regulation of electricity supply, boosting summer crops, and increasing stimulus to create jobs. The other three priorities deal with summer floods, investment in irrigation and environmental facilities, and stepped-up supervision of food safety and industrial production. Such a balanced emphasis indicates that while the central government wants to cool the sizzling economy, it is worried that a sharp across-the-board shutdown would kill momentum and increase unemployment.

Sino File is compiled by Walter Fung with some input for From the Chinese Press by Teresa Ray.

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