remaking chinatex - Asia Today International
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In this Issue<br />
®<br />
Face-saving solution<br />
needed for Hong Kong<br />
SAFTA - services will<br />
be the big winner<br />
'Risky' to float yuan<br />
ASEAN revisits energy<br />
INTERNATIONAL<br />
Jonathan Story<br />
August/September 2003<br />
REMAKING<br />
CHINATEX:<br />
Brand names the<br />
key – and China<br />
is buying!<br />
Chinatex President<br />
and CEO Zhao Boya<br />
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ASIA TODAY INTERNATIONAL<br />
Volume 21, No. 4, August/September 2003<br />
Twentieth Year of Publication<br />
®<br />
Published in Australia since 1983 by East <strong>Asia</strong> News and Features (Australia) Pty. Limited (ABN 48 343 588 913). Office address: Level 29<br />
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INTERNATIONAL<br />
REMAKING CHINATEX: China's National Textile Imports and Exports Corporation is buying up offshore cotton<br />
plantations and will acquire interests in companies engaged in fashion design in Europe, the US and Japan. Chinatex<br />
President and Chief Executive Zhao Boya details his strategic plan in our exclusive report. 5-7<br />
MORE 'FREEDOM' FOR HONG KONG Hong Kong will be given more freedom in a solution to the current crisis<br />
which is fashioned to both reinforce China's emerging status on the international stage and to play for domestic<br />
consumption, according to China analyst Jonathan Story, Professor of <strong>International</strong> Political Economy at INSEAD. He<br />
says a face-saving operation is needed 7-9<br />
'RISKY' TO FLOAT THE YUAN: Morgan Stanley Chief Economist Stephen Roach is urging<br />
China to resist pressure for a revaluation - he says Japan has led the way in Chinabashing<br />
over the past year. ABN AMRO believes that when revaluation does come, it is<br />
likely to be a one-off move of 15-20 per cent 9<br />
Zhao Boya:<br />
A US$200 million shopping list.<br />
ASEAN REVISITS ENERGY GRIDS: ASEAN is again moving towards a cross-border<br />
gas and electricity grid. It has approved a Master Plan for power inter-connection, but<br />
emergence of common gas and power markets where energy is traded appears to be<br />
some way off 10-11<br />
Jonathan Story<br />
ADVISORIES 'SELF-DEFEATING': Issuing travel advisories against countries hit by terrorism plays into the hands of those who want to disrupt<br />
business, says Richard Gordon, Philippines Tourism Secretary and current Chairman of the Pacific Area Travel Association 13<br />
SERVICES THE BIG WINNER FROM SAFTA: Australia's new Free Trade Agreement with Singapore is expected to bring immediate benefits for<br />
those involved in the finance, business services and education sectors, says Simon Taskunas, a solicitor with Freehills in Perth 17<br />
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OPINION<br />
IN JANUARY 2001, then-<br />
President BJ Habibie undertook<br />
the Big Bang — the decentralisation of<br />
power to Indonesia's regions.<br />
It was a bold gamble by Habibie to quell<br />
growing political unrest in the provinces<br />
during the chaotic post-Soeharto days. But<br />
from the very beginning, it was obvious<br />
that Indonesia was far from ready for<br />
devolution. Most crucially, the laws that<br />
were to set the rules for the regions were<br />
not properly in place.<br />
Since then, Jakarta has bumbled along —<br />
resolving some problems while others<br />
remain. A key issue is the question of revenue<br />
raising and taxes. In the early days,<br />
inexperienced local level bureaucrats took<br />
advantage of the right to raise revenue to<br />
impose their own taxes, including wildcat<br />
taxes, especially in resource-rich regions.<br />
The targets were often foreign investors.<br />
They created an extremely unpredictable<br />
business environment.<br />
The World Bank undertook a review of<br />
Indonesia's Big Bang in a report published<br />
in July. In it, the Bank says that<br />
mending weaknesses in the various regulations<br />
will take time. Amendments are<br />
required in key sectors, namely laws and<br />
perhaps even the constitution.<br />
Quite simply, the present system<br />
is not working, says the<br />
Bank. The current legislation<br />
allows local governments to<br />
issue regional taxes as long as<br />
they comply with the principle<br />
stated in the decentralisation<br />
law. The regions have strong<br />
incentives to impose improper<br />
taxes and levies and Jakarta<br />
does not have the capacity to<br />
supervise, nor the willingness<br />
to cancel, illegal taxes, says the<br />
report.<br />
The way forward, it suggests, is to<br />
restrict regional taxes and levies to a limited<br />
closed list. At the same time the<br />
regions should be granted additional taxing<br />
powers more suited to a local administration.<br />
The report says land and building<br />
tax, considered a local tax in most<br />
countries around the world, is one such<br />
potential tax. In Indonesia, Jakarta<br />
shares revenue from this tax with the<br />
regions.<br />
A further option is to strengthen the<br />
regions’ own revenue base by increasing<br />
the maximum rate allowed on existing<br />
BJ HABIBE’S ‘BIG BANG’<br />
Revisiting Indonesia’s regional tax laws<br />
FLORENCE<br />
CHONG<br />
REMAKING CHINATEX<br />
CHINA'S National Textile<br />
Imports and Exports<br />
Corporation is buying up<br />
offshore cotton plantations<br />
and will be seeking<br />
to acquire interests in<br />
companies engaged in<br />
fashion design in Europe,<br />
the US and Japan . . .<br />
By FLORENCE CHONG<br />
Editor ASIA TODAY INTERNATIONAL<br />
THE TASK BEFORE Zhao Boya is<br />
considerable. He is charged with<br />
transforming a traditional foreign trade company<br />
into a diversified group involved in the<br />
manufacture of branded garments and in the<br />
production and export of fabrics.<br />
As President and Chief Executive of China<br />
National Textile Imports and Exports<br />
Corporation, known as Chinatex, Zhao sees<br />
China owning companies engaged in design in<br />
Europe, the United States and Japan.<br />
Over the next five years, Chinatex will<br />
increase investment onshore and offshore. This<br />
will include acquisition of cotton plantations<br />
overseas (including Australia) to feed its<br />
expanding manufacturing operations at home.<br />
Central to the plan is restructuring of the<br />
Zhao Boya:<br />
China will expand into the branded goods business.<br />
State-owned enterprise from a monolithic,<br />
anachronistic body into a dynamic 21st century<br />
company. Since taking over the helm in 1998,<br />
taxes. Rate for regional taxes<br />
such as car, hotel and restaurant<br />
surcharges are limited by<br />
Jakarta, and almost all regional<br />
governments charge the maximum<br />
rate allowed.<br />
While the central government<br />
should probably continue<br />
setting a ceiling on local taxes,<br />
the report also says that new<br />
local taxes could be considered.<br />
It is being debated in Indonesia<br />
today whether the regions<br />
should be entitled to a<br />
surcharge on personal income tax and<br />
local business taxes or payroll tax.<br />
Understandably a poor country like<br />
Indonesia, especially the resource-poor<br />
regions, need all the revenue possible to<br />
cover public expenditure. But local<br />
governments must learn from the bigger<br />
regions that to be seen to be rapacious is<br />
the surest way to remain poor.<br />
Without business confidence, there<br />
will be no investment, and no investment<br />
means no tax revenue.<br />
■ Bank Mandiri IPO may set trend for<br />
investors, page 11.<br />
BRAND NAMES<br />
THE KEY -<br />
AND CHINA<br />
IS BUYING . . .<br />
Zhao has overseen a gradual<br />
shift away from trading to an<br />
expanded range of activities.<br />
The <strong>remaking</strong> of Chinatex<br />
underlines the urgent change<br />
facing China's many Stateowned<br />
foreign trading corporations,<br />
set up to trade<br />
in commodities.<br />
Like all foreign trade companies,<br />
when created in 1951<br />
Chinatex became a window to<br />
the world. In the intervening<br />
years, Chinatex has grown to<br />
be a billion-dollar company.<br />
Zhao says Chinatex has an<br />
annual turnover of US$1<br />
billion and assets valued at<br />
US$1 billion. About 70 per<br />
cent of revenue comes from<br />
trade and 30 per cent from<br />
other businesses.<br />
But such anachronistic foreign<br />
trade companies belong<br />
to an era when China was a<br />
closed economy. They are a<br />
contradiction in a China that is moving<br />
quickly to integrate with the global economy.<br />
Continued page 6<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 5
ISSN 1445-4300<br />
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Florence Chong<br />
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From page 5<br />
THE CHINATEX PLAN<br />
Chinatex's role was – and is – to import wool<br />
and cotton to feed the Chinese textile industry<br />
which, in turn, produces the raw materials<br />
needed to run its large garment-making sector.<br />
Chinatex then exports garments to China's markets<br />
around the world.<br />
But Chinatex has already moved a long way<br />
from its original role. <strong>Today</strong>, it has more than<br />
30 subsidiaries and overseas enterprises, and<br />
40 manufacturing plants. The businesses cover<br />
production and sale of all textiles, ranging from<br />
raw materials, yarns and fabric to readymade<br />
garments.<br />
Zhao has no illusion that the long-term<br />
future of Chinatex lies in its ability to adapt<br />
to changes in both the global and<br />
Chinese economies.<br />
Chinatex has hired strategy consultants<br />
Roland Berger from Germany to map out a<br />
strategic plan for the next five years. The<br />
review emphasises that garments will remain<br />
the core strategic business, but the plan calls<br />
for increased trading activities which will be<br />
complemented by investment – especially to<br />
build up brand names.<br />
❝Chinatex has already<br />
moved a long way<br />
from its original role. It<br />
has more than 30 subsidiaries<br />
and overseas<br />
enterprises, and 40<br />
manufacturing plants.❞<br />
"China is not known for international brand<br />
names. We are seen as a processor rather than<br />
a maker of branded goods," Zhao says. He is<br />
seeking design capability through investment<br />
in well-established design companies in<br />
Europe, the US and Japan.<br />
As an example, the Chinatex subsidiary in<br />
Germany, Mode Contor Hamburg Chinatex,<br />
will engage fashion designers from Germany<br />
and Denmark to help launch Chinatex into the<br />
world of high fashion. Last year, Chinatex<br />
signed an agency agreement with Tom Tailor<br />
of Germany, a company known for its casual<br />
wear, and said to be the "latest brand for the<br />
young in Europe and the US". Under the agreement,<br />
Chinatex will be responsible for production,<br />
allocation, promotion and sales of Tom<br />
Tailor products in China.<br />
"We think it will be difficult to parade<br />
internationally-known brands in China<br />
because fashion comes from Europe and the<br />
United States," says Zhao. Chinatex will<br />
expand into the branded goods business both<br />
through training of its own staff and by<br />
acquiring mid-sized brand names in Europe<br />
and Japan. Chinatex has interests in two companies<br />
in the US – one based in Los Angeles,<br />
the other in New York. It is continuing to look<br />
for acquisitions.<br />
Over the next five years, Zhao expects the<br />
Group to spend up to US$200 million investing<br />
to broaden its business base. "This is only a<br />
rough plan," he explains. "But we hope to<br />
invest in two kinds of operations within five<br />
years or more. One is to buy some mature<br />
Continued page 7<br />
6<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003
BUSINESS OUTLOOK: CHINA<br />
SQUARING UP TO HK PROBLEMS<br />
From page 6<br />
businesses in China to enlarge our capability in<br />
producing, retailing garments and finishing<br />
fabrics. The second is to buy mature businesses<br />
in overseas countries, especially in<br />
Europe, the US and Hong Kong. (This will<br />
enable us) to build up our international<br />
name brand garments, retailing networks<br />
and design capability – for both our domestic<br />
and global markets."<br />
As China's standard of living rises, Zhao sees<br />
a growing market at home. Chinatex intends to<br />
meet China's growing demand for quality garments,<br />
which will be driven by the middle<br />
class. Chinatex will also give priority to fabrics.<br />
Its corporate aim is to become one of China's<br />
"most influential" fabric suppliers, working<br />
closely with dealers in key markets. It also<br />
seeks a higher share of the domestic market.<br />
"We want to produce combed wool for the<br />
production of woollen fabrics and garments,"<br />
he says. Chinatex will also invest in factories,<br />
and already has a target acquisition in South<br />
China. He says Chinatex will become a producer<br />
of woollen fabrics.<br />
Chinatex is a key player today in the import<br />
of raw wool to China. Zhao says the company<br />
is responsible for one quarter of all wool<br />
purchased from Australia, worth a total of<br />
AUD1.5 billion last year. Australia has onethird<br />
of the Chinese wool market. China also<br />
imports wool from New Zealand, South<br />
America and South Africa.<br />
As part of its internal restructuring, Zhao says<br />
Chinatex wool-buying operations will be<br />
streamlined. Since 1982, the company has<br />
operated Chinatex (Aus) Wool Co Pty Ltd,<br />
based in Sydney, to bid for Australian wool.<br />
This company secures half of Chinatex's total<br />
imports from Australia. The other half is handled<br />
by another Chinatex company, based in<br />
Beijing. From next year, says Zhao, there will<br />
be just one company, headed by Gong Zheng-<br />
Yi, who is currently Managing Director of the<br />
Sydney-based firm.<br />
At around US$200 million a year, Zhao says<br />
Chinatex's wool business is smaller than its<br />
US$250-million-a-year cotton business. "We<br />
export cotton, but not woollen products," he<br />
says. Cotton products range from fabrics to garments<br />
to raw yarns and manchester.<br />
Currently, Zhao says, Chinatex owns three<br />
cotton spinning and weaving factories which<br />
have 200,000 spindles and about 2,000 weaving<br />
looms. "We have capacity to produce<br />
around 15 million pieces of garments now.<br />
This makes us one of the largest manufacturers,<br />
he says. Chinatex also buys from other Chinese<br />
manufacturers, giving it a total annual volume<br />
of 30 million pieces.<br />
Since 1996, Chinatex has been investing in<br />
cotton farms in Australia. With its latest acquisitions,<br />
says Zhao, Chinatex will have a total of<br />
four farms, covering 50 sq km, located in<br />
Moree, northern NSW.<br />
Of China's accession to WTO, Zhao says:<br />
"If we didn't join the WTO, we would not<br />
enjoy the benefits of global agreements<br />
shared by WTO members – especially after<br />
the quota system for the textile trade is<br />
abandoned." Under the Agreement on<br />
Textiles and Clothing (ATC), negotiated during<br />
the Uruguay Round, WTO members are<br />
to abandon a quota system, which has dominated<br />
the global textile trade since the early<br />
1960s, by 2004. By 2005, importing<br />
countries will no longer be able to<br />
discriminate between exporters.<br />
In fact, the ATC itself will no<br />
longer exist.<br />
As a developing economy, China<br />
was a beneficiary of the quota system,<br />
although increasingly it has lost<br />
preferential treatment under that system.<br />
However, under plans initiated<br />
by the European Union, least developed<br />
countries continue to have<br />
preferential access to developed<br />
markets. Other developed countries,<br />
including the United States and Australia, also<br />
offer special access to their markets for leastdeveloped<br />
countries.<br />
In terms of scale of economy and availability<br />
of labour, China ranks as the most competitive<br />
player in the garments and textiles sector.<br />
According to the World Trade Organisation,<br />
China held 11.4 per cent of global exports trade<br />
in textiles in 2001, compared with 6.9 per cent<br />
in 1990. In value, China's export trade<br />
Zhao Boya:<br />
Buying one quarter of all<br />
wool purchased from<br />
Australia.<br />
amounted to almost US$17 billion.<br />
China imported food worth<br />
US$15.43 billion, or 10.9 per cent of<br />
the global import share.<br />
"Until 2004, (we will not be able)<br />
to have a scientific idea about the<br />
competitiveness of different countries<br />
– because of the quota system,"<br />
says Zhou. "But once the quota system<br />
is gone, we will have a better<br />
idea of which countries are the most<br />
competitive producers." Zhao says<br />
China has the advantage of having a<br />
competent and skilled workforce.<br />
He says the Chinese Government would like<br />
to see China keep its position as a major player<br />
in the global market. Certainly, he says, over the<br />
next 10 to 20 years the sector will continue to<br />
be an important employer of Chinese workers.<br />
COPYRIGHT ©: All material in ASIA TODAY INTERNATIONAL is<br />
copyright and remains the property of the publisher, East <strong>Asia</strong><br />
New and Features (Australia) Pty. Limited. Reproduction in<br />
whole or in part is not permitted without written permission of<br />
the publisher.<br />
More 'freedom' for HK<br />
HONG KONG will be given<br />
more freedom in a solution<br />
to the current crisis which<br />
is fashioned to both reinforce<br />
China's emerging<br />
status on the international<br />
stage and to play for<br />
domestic consumption,<br />
according to a leading student<br />
of Chinese affairs . . .<br />
BEIJING IS EXPECTED to use a<br />
variation of the dramatic exit formula<br />
it employed after bungling the SARS outbreak<br />
to hopefully restore the confidence of<br />
Hong Kong people in China’s leadership,<br />
according to China analyst Jonathan Story.<br />
Since the Tung Administration<br />
pushed to pass a National Security<br />
Bill, known locally as Article 23,<br />
Hong Kong has been gripped by distrust<br />
of and anger towards its<br />
Government. The controversy has<br />
become the most serious challenge<br />
to the leadership of Chief Executive<br />
Tung Chee-hwa.<br />
Story says Beijing realises that if<br />
the Hong Kong situation is not<br />
resolved, it has the potential to<br />
become a major problem — with<br />
implications for the Mainland itself. "The population<br />
(in Hong Kong) is disturbed, and, unless<br />
managed properly, this will become a major<br />
political problem," Story told ASIA TODAY<br />
INTERNATIONAL. If the past is a guide, some<br />
face-saving operation will be needed."<br />
Story, whose latest book, China: The Race<br />
to Market, has just been released, has specialised<br />
in observing the transformation of<br />
command to market economies over three<br />
Jonathan Story:<br />
China learned the hard<br />
way in the SARS crisis.<br />
decades. He believes Beijing is involved in<br />
behind-closed-door negotiations with Tung<br />
and Hong Kong opposition leaders to seek a<br />
solution to the imbroglio.<br />
"Over the next four weeks, I expect China to<br />
find a face-saving way out of the crisis in Hong<br />
Kong," says Story, who is Professor of<br />
<strong>International</strong> Political Economy at INSEAD, the<br />
leading French academic institution. Beijing<br />
will resolve the political controversy in Hong<br />
Kong, he says, because it is confronted by the<br />
reality of China's inclusion in the global village.<br />
China learned the hard way in the handling<br />
of the SARS crisis. Its initial denial led to global<br />
condemnation of government inaction.<br />
Stung by the criticism, Beijing took drastic<br />
action, including the sacking of Health<br />
Minister Zhang Wenkang and Beijing's mayor,<br />
Meng Xeunong. Story expects Beijing to seek<br />
an "exit" from the Hong Kong imbroglio in<br />
similar dramatic fashion.<br />
Asked whether Tung will be<br />
replaced, Story says the most likely<br />
outcome will be to elevate Tung to a<br />
more "honorable" position, and to<br />
install a Secretary who will be, in<br />
effect, the Chief Executive. He says<br />
the manner in which China resolves<br />
the Hong Kong problem will be<br />
fashioned partly to reinforce its<br />
emerging status on the international<br />
stage. But, more importantly, it will<br />
play for domestic consumption.<br />
The upshot will be a Hong Kong<br />
that is given more freedom — but<br />
that can come about only if there is a degree of<br />
confidence and trust between the Mainland<br />
and the democratic movement in Hong Kong,<br />
says Story. "If there is a breakdown in confidence<br />
there will be repercussions for Beijing —<br />
and China's credibility could suffer. My hunch<br />
is that an awful lot of effort is now under way<br />
to allow Hong Kong to live as a more open<br />
Continued page 8<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 7
CHINA MUDDLING THROUGH<br />
OCEANIA<br />
From page 7<br />
society." While the hard-line Article 23 will<br />
remain, some compromise will be reached that<br />
the people of Hong Kong can accept. Story<br />
also believes Hong Kong will move towards<br />
domestic election of a Chief Administrator in<br />
2007, as stated in the Basic Law.<br />
His rationale is that 2007 is the year before<br />
the 2008 Beijing Olympics — an event that can<br />
cement China's position in the global community.<br />
In 1962, Japan hosted the Games, and this<br />
marked a turning point for Japan — it began to<br />
"invade" the world with its products. In 1988,<br />
South Korea played Games host — an event<br />
that was credited for ushering in an end to martial<br />
law and the beginning of democratisation.<br />
"I anticipate subtle changes in the (Chinese)<br />
Government between now and the Olympics,<br />
and this does not exclude political changes,"<br />
says Story. He expects an improvement in<br />
China's handling of human right issues, leading<br />
eventually to more transparency — a step<br />
towards a more open society.<br />
Since the early 1990s, direct elections have<br />
been held in China at village level. Story says<br />
these elections are very important, born out<br />
of necessity to appease agitated peasants<br />
infuriated with the practices and corruption<br />
of local government officials. And Shenzhen,<br />
the first coastal economic zone, will learn<br />
from Hong Kong to improve local governance.<br />
The fundamental glue holding China<br />
together today is its party state — and Hong<br />
Kong is an exception.<br />
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ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003<br />
❝I anticipate subtle<br />
changes in (the<br />
Chinese) Government<br />
between now and the<br />
Olympics, and this<br />
does not exclude<br />
political changes❞<br />
Chinese people do not wish to revisit the<br />
past, says Story. Millions of Chinese have<br />
markedly raised their standard of living. China<br />
has muddled through to get to where it is, and<br />
Story expects it will continue to muddle<br />
through in future, dealing with partial reforms,<br />
and hoping that millions more of its people<br />
will enjoy greater prosperity.<br />
China has to manage itself as it opens its<br />
market, says Story. One lesson came with the<br />
massive April 1999 demonstrations by the<br />
Falungong cult, which used mobile phones to<br />
rally its members. Market reform has contributed<br />
to promoting conditions for a more<br />
garrulous society. At the same time, the<br />
monopoly of the party State is shrinking.<br />
China's leadership wants to succeed — and has<br />
done so, so far.<br />
Political changes will be gradual, says Story,<br />
because China will not go for the Big Bang —<br />
the way Society leader Mikhail Gorbachev<br />
introduced glasnost (openness) under perestroika,<br />
a programme of economic, political<br />
and social restructuring.<br />
Story says events in Indonesia in 1998,<br />
although Indonesia was not a communist<br />
country, shocked China. "Indonesia is a 'patrimonial<br />
society' that was forced into rapid<br />
changes in the wake of the 1997 financial<br />
Continued page 9
BUSINESS OUTLOOK<br />
BEIJING PRESSURED TO REVALUE<br />
From page 8<br />
crisis. The speed of political and economic<br />
reforms has set Indonesia back, he says (the<br />
standard of living has fallen to a post-1997<br />
level). "The interesting question is how far<br />
Indonesia can go now."<br />
He expects China to be more pro-active in<br />
geopolitical issues, and says the most critical<br />
issue today is North Korea. On its own, and<br />
with limited resources, Beijing realises that it<br />
has to work with other nations, most notably<br />
the United States. He says relations with<br />
Washington warmed considerably when<br />
former president Jiang Zemin called George<br />
W Bush the day after the September 11 attack<br />
on New York and Washington.<br />
As the last surviving Communist state, China<br />
does not have a model on which to go forward.<br />
It has come too far to turn back to pre-<br />
1978, when China embarked on its open door<br />
policies. Story says the Chinese will have to<br />
learn by experimentation. Its approach to market<br />
and political reform has been exploratory.<br />
This explains why huge diversity of practice<br />
across China exists.<br />
S&P puts Hong Kong<br />
ratings on watch<br />
WHATEVER the political outcome<br />
of protests in Hong Kong, sovereign<br />
ratings will depend on the<br />
Government's ability to tackle fiscal overruns<br />
successfully, while pursuing a coherent<br />
macro-economic mix, Standard & Poor's said<br />
in a statement. The ratings will also depend<br />
on Hong Kong maintaining its fiscal,<br />
economic and financial autonomy.<br />
The ratings agency said major public misgivings<br />
include the Government's inability to<br />
correctly identify problems, co-ordinate or<br />
design policies consistently and transparently,<br />
and articulate a coherent strategy.<br />
"Going forward, the Administration will have<br />
to adapt to and accommodate this political culture,<br />
which calls for more open governance<br />
and public debate," S&P said, adding that this<br />
year's budget deficit was likely to widen to<br />
more than 7 per cent of GDP because of the<br />
SARS outbreak. "Better governance in future,<br />
as perceived by the public and investors, might<br />
boost confidence and help sustain a recovery."<br />
S&P said current political development<br />
remains fluid. "Without sufficient support in<br />
the legislature, the Government would be<br />
largely ineffective, and this would lead to a<br />
worse policy environment. Alternatively, a<br />
more reduced role could be envisaged for<br />
(Chief Executive Tung Chee-hwa) in order to<br />
mollify the public.<br />
"If Mr Tung steps down, which is likely to<br />
occur only with the nod from Beijing, policy<br />
uncertainty could be alleviated by a Beijingsanctioned<br />
successor plan, or at least an<br />
interim Government that depends on the<br />
existing bureaucracy," S & P said.<br />
HK banks to trade yuan<br />
■ CHINA is reportedly considering allowing<br />
Hong Kong lenders to provide personal yuan<br />
banking services to Hong Kong residents in an<br />
extension of the new Closer Economic<br />
Partnership Arrangement with Hong Kong.<br />
'Risky' to float the yuan<br />
A REPORT from Morgan<br />
Stanley's Chief Economist,<br />
Stephen Roach, urges<br />
China to resist pressure for<br />
a revaluation. It says Japan<br />
has led the way in Chinabashing<br />
over the past year<br />
. . .<br />
BEIJING HAS AGAIN come under<br />
pressure to revalue its currency following<br />
recent devaluation of the US dollar.<br />
Critics argue that the weaken US currency has<br />
given China an unfair competitive edge in the<br />
global market. The currency is unofficially<br />
pegged at around 8.30 renmibi to a dollar.<br />
Stephen Roach, Chief Economist with<br />
Morgan Stanley in New York, was in China in<br />
July and firmly believes Beijing should not bow<br />
to pressure. “Assuming the dollar has a good<br />
deal further to go on the downside, as I suspect<br />
— perhaps as much as 20 per cent over<br />
the next couple of years — most believe that<br />
China’s current competitive advantage will<br />
become all the more pronounced,” he writes in<br />
a recent report, The Scapegoating of China.<br />
Roach says the Chinese are acutely sensitive<br />
to global opinion, and are quite concerned at<br />
this obvious shift in sentiment. “Although<br />
Chinese officials remain unwavering in their<br />
commitment to the renminbi’s peg, I was asked<br />
repeatedly for my thoughts on how to handle<br />
this delicate issue. I urged the Chinese to stay<br />
the course — to leave their RMB policy<br />
unchanged,” he says.<br />
China does not compete on the basis of an<br />
undervalued currency, he adds. It competes<br />
mainly in terms of labour costs, technology,<br />
quality control, infrastructure and reform. He<br />
believes that if China was to revalue the RMB<br />
upward by 10 per cent, its exports would suffer<br />
only minimal loss of market share.<br />
Until China completely reforms its capital<br />
markets, it would be premature and risky to<br />
float its currency, says Roach. “That’s a critical<br />
lesson of the <strong>Asia</strong>n financial crisis that an impatient<br />
world should not lose sight of when putting<br />
pressure on China.”<br />
The general perception is that China is grabbing<br />
the world’s exports market. Roach (and<br />
many other prominent economists espouse<br />
the same view) argues that Chinese subsidiaries<br />
of global multinationals — and<br />
Chinese joint ventures with industrial-world<br />
partners — accounted for 65 per of China’s<br />
total exports from 1994 to 2003. In that time,<br />
China’s annual exports soared from US$121 billion<br />
to US$365.4 billion.<br />
Roach is scathing of those countries which<br />
are critical of China’s currency policy.<br />
“Unwilling to accept responsibility for their<br />
own shortcomings, the wealthy economies of<br />
the industrial world are making China a scapegoat<br />
for their weak recoveries,” he says. “That’s<br />
especially true of Japan, which has led the way<br />
in China-bashing over the past year.”<br />
Roach points out that the Japanese yen averaged<br />
close to 300 yen against the US dollar in<br />
the 1970s and about 220 yen in the 1980s —<br />
compared to the 115-120 range today. “It<br />
strikes me as extremely hypocritical for Japan<br />
to criticise China for emulating a strategy that<br />
was central to its own development model,” he<br />
says. “Putting pressure on China to revalue its<br />
currency is a poor excuse for Japan’s inability<br />
or unwillingness to reform.”<br />
He is equally critical of the motives of<br />
Washington. America’s largest trade deficit is<br />
now with China — a US$103 billion shortfall in<br />
2002, and on track to exceed that amount in<br />
2003. Roach argues that trade deficits should<br />
not come as a surprise for a savings-short US<br />
economy. “If America weren’t trading with<br />
China, those deficits would have to occur with<br />
other nations — Canada, Mexico, other Latin<br />
economies, Japan, or possibly even Europe. If<br />
the United States wants to reduce its trade<br />
deficit, it must come to grips with more fundamental<br />
problems of its own — namely, a<br />
rapidly-vanishing national savings rate,” he says.<br />
One-off lift likely<br />
■ ABN AMRO says Chinese authorities will try<br />
to keep the US$/RMB exchange rate steady as<br />
far as possible, and that when they do let the<br />
RMB appreciate, it is likely to be a one-off<br />
move of 15-20 per cent. The bank says there is<br />
now US$151 billion in foreign currency<br />
deposits in banks in China. If the Bank of<br />
China announced overnight a widening of the<br />
exchange rate band or allowed a gradual<br />
appreciation, China corporates and individuals<br />
would be unlikely to continue keeping their<br />
money in US$.<br />
"The People's Bank of China is now buying<br />
US$600 million every day to keep the currency<br />
steady," ABN AMRO says, adding that two factors<br />
are holding back the decision to allow the<br />
RMB to appreciate. The Chinese government is<br />
still concerned about deflation - it will want to<br />
see higher inflation before giving up the unofficial<br />
peg; and there is no guarantee that the<br />
speculative capital inflow would disppear after<br />
a 15-20 per cent appreciation.<br />
China to capture<br />
electronics growth<br />
CHINA IS EXPECTED to capture<br />
77 per cent of an estimated US$60<br />
billion increase in electronics manufacturing<br />
in emerging markets by 2005, says a new<br />
report from the <strong>International</strong> Finance<br />
Corporation.<br />
China's share of global production will then<br />
exceed that of Western Europe. Engineering<br />
and design will also move to emerging markets<br />
– with labour costs up to 80 per cent<br />
lower than developed regions, says the IFC.<br />
The study by IFC and management<br />
Continued page 10<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 9
BUSINESS OUTLOOK<br />
ELECTRONICS - WHERE THE GROWTH IS<br />
From page 9<br />
consulting firm Booz Allen Hamilton, found<br />
that electronics production activity in emerging<br />
markets will nearly double, from US$65 billion<br />
in 2001 to US$125 billion by 2005 – and will<br />
account for 43 per cent of total worldwide<br />
manufacturing growth. More than threefourths<br />
(77 per cent) of the growth in developing<br />
countries will be in China, with China<br />
increasing its share of global electronics production<br />
from eight to 14 per cent, a growth<br />
rate twice as fast as any other country.<br />
The study estimates that electronics production<br />
in China will be a US$80 billion<br />
business by 2005. Emerging market growth<br />
outside of China will be primarily in other<br />
developing Southeast <strong>Asia</strong>n countries,<br />
Eastern Europe and Mexico.<br />
Gains in developing countries will not be<br />
limited to manufacturing. Higher-value services<br />
such as engineering and design functions<br />
will increasingly migrate to developing<br />
nations over the next few years, although<br />
this transition will trail the more rapid shift<br />
in production.<br />
India and Russia in particular have an abundance<br />
of highly-skilled labour, with labour<br />
costs up to 80 per cent lower than in the<br />
developed world.<br />
The SARS epidemic has raised concern<br />
about economic growth in China and other<br />
emerging markets. However, a follow-up to<br />
the original survey found that most respondents<br />
expect SARS to have a very limited and<br />
only temporary effect on the shift of electronics<br />
production towards developing markets.<br />
According to 22 per cent<br />
of senior executives surveyed,<br />
SARS should have no<br />
impact on the movement of<br />
electronics manufacturing to<br />
China, 64 per cent expect<br />
only a slight temporary<br />
impact, and only 14 per<br />
cent expect it to have even<br />
a moderate impact on this<br />
trend. None of the respondents<br />
expect SARS to have a<br />
significant impact on the<br />
long-term growth of electronics production in<br />
developing markets.<br />
"This dramatic increase in production clearly<br />
demonstrates the growing strength of<br />
emerging markets," said Dick Ranken, director<br />
of IFC's Global Manufacturing and Services<br />
Department. "In fact, a main driver of this<br />
trend is the rising importance of economies<br />
such as China as end-user markets for these<br />
products, which increases their competitive<br />
advantage in the manufacturing process."<br />
"Emerging markets offer cost savings that<br />
are critical for survival in today's hyper-competitive<br />
environment," said Barry Jaruzelski,<br />
Booz Allen Vice President. "Large multinational<br />
corporations are leading the drive to<br />
emerging markets - and taking their smaller<br />
suppliers with them."<br />
The report highlights several other major<br />
findings:<br />
■ In emerging markets, final assembly, displays,<br />
and semiconductors will provide the<br />
❝Emerging markets<br />
offer cost savings that<br />
are critical for survival<br />
in today's hyper-competitive<br />
environment.<br />
Large multinationals<br />
are leading the drive<br />
to emerging markets.❞<br />
highest level of growth<br />
through 2005.<br />
■ China will continue to<br />
hold commanding positions<br />
in key value chain elements<br />
such as assembly, displays,<br />
and semiconductors, as it<br />
evolves into the hub of<br />
electronics manufacturing.<br />
By 2005, 45 per cent of all<br />
high volume assembly will<br />
occur in China.<br />
■ The <strong>Asia</strong> Pacific region,<br />
particularly China, currently dominates electronics<br />
manufacturing in emerging markets:<br />
— 83 per cent of electronic displays manufactured<br />
in emerging markets are produced in<br />
the <strong>Asia</strong> Pacific region, with 44 per cent from<br />
China;<br />
— For connectors and cables, 78 per cent of<br />
the emerging markets' output is from the <strong>Asia</strong><br />
Pacific region, including 66 per cent from<br />
China; and<br />
— Eastern Europe and Latin America<br />
account for 25 per cent and 16 per cent,<br />
respectively, of battery production in emerging<br />
markets.<br />
■ By sector, production growth will be led<br />
by computers and peripherals, with an estimated<br />
$47 billion increase between 2001<br />
and 2005, followed by consumer electronics<br />
($20 billion), handheld devices ($16 billion),<br />
automotive electronics, and telecom (both<br />
$11 billion).<br />
ASEAN revisits regional energy grids<br />
ASEAN is again moving<br />
towards a cross-border gas<br />
and electricity grid. It has<br />
approved a Master Plan for<br />
power inter-connection,<br />
but emergence of common<br />
gas and power markets<br />
where energy is traded is<br />
some way off . . .<br />
From ANDREW SYMON<br />
ASIA TODAY INTERNATIONAL Correspondent<br />
SINGAPORE:<br />
A more integrated,<br />
co-operative approach to meeting<br />
energy demand is slowly emerging among<br />
Southeast <strong>Asia</strong>n countries.<br />
Following progress in removal of tariff<br />
barriers to trade in goods under the ASEAN<br />
Free Trade Agreement (AFTA), attention is<br />
being given to promotion of cross-border<br />
gas and power supply to more efficiently<br />
meet energy demand. In July, the 10 ASEAN<br />
member states approved a comprehensive<br />
Master Plan for power interconnection. The<br />
plan proposes 11 main new transmission<br />
interconnections between countries, to be<br />
built by 2020. It complements a plan for<br />
inter-country gas transmission connections,<br />
which ASEAN ministers agreed to last year.<br />
Currently, there are three cross-border<br />
power transmission lines - from Laos to<br />
Thailand, supplying hydro power to<br />
Thailand; and two-way interconnections<br />
between Thailand and peninsular Malaysia,<br />
and Malaysia and Singapore. There are also<br />
cross-border gas pipelines in operation, taking<br />
gas from Myanmar to Thailand, from<br />
peninsular Malaysia to Singapore and from<br />
Indonesia to Singapore.<br />
The ministers endorsed the power plan during<br />
a meeting at Langawi Island, Malaysia, on<br />
July 3. In a statement issued after the meeting,<br />
they welcomed progress made in the Trans-<br />
ASEAN gas pipeline and the ASEAN power<br />
grid projects and said they “look forward to<br />
working collectively to provide greater stability<br />
and security of energy supply in the<br />
ASEAN region”. Strong private sector participation<br />
in the gas and power interconnection<br />
projects is necessary, they say. Ministers recommended<br />
development of an enabling<br />
framework to ensure construction is carried<br />
out on a commercial basis.<br />
The power plan broadly divides the region<br />
into two. There is a “west system”, featuring<br />
new interconnections within the Mekong<br />
region - Cambodia, Laos, Myanmar, Thailand<br />
and Vietnam - and also between Thailand and<br />
peninsular Malaysia; Malaysia and Sumatra in<br />
Indonesia; peninsular Malaysia and Singapore;<br />
Singapore and Batam in Indonesia; and<br />
Singapore and Sumatara. Thailand is put forward<br />
as a hub for the west system. Power from<br />
the Mekong region, much of it hydro-produced<br />
from Laos and Myanmar, would be transmitted<br />
or “wheeled” through Thailand to countries to<br />
the south — providing the tariff is competitive<br />
to the production cost of the gas and coal-fired<br />
power plants in the south.<br />
An “east system” proposes interconnections<br />
between the different countries on Borneo<br />
island - Brunei, the Malaysian states of Sabah<br />
and Sarawak, and Indonesian Kalimantan. A<br />
long-distance submarine interconnection with<br />
the Philippines and the Borneo system was<br />
found not to be economically viable in the<br />
period to 2020. Similarly a once-mooted submarine<br />
link between Borneo and peninsular<br />
Malaysia was not considered viable.<br />
Earlier, Malaysia had proposed that the<br />
planned Bakun hydro dam project in Sarawak<br />
could supply the peninsula and possibly the<br />
Philippines as it would generate far more<br />
power than the relatively small economy of<br />
Sarawak would need. This dam has long been<br />
controversial because of feared environmental<br />
damage to the Rejang river system and its<br />
impact on local communities. A smaller dam<br />
project is now contemplated.<br />
The power study was carried out by the<br />
Heads of ASEAN Power Utilities (Hapua). The<br />
gas plan was developed by the ASEAN<br />
Council on Petroleum, which represents<br />
national oil companies.<br />
The Hapua co-ordinator for the power<br />
Continued page 11<br />
10<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003
ASEAN'S ENERGY BID<br />
From page 10<br />
study, Prutichai Chonglertyanichkul,<br />
Assistant Director of System Planning at the<br />
Electricity Generating Authority of Thailand,<br />
said interconnection could result in significant<br />
savings. “Each country does not need to<br />
install as much power generation. You can<br />
reduce the reserve margin each country would<br />
otherwise need if it pursues self-sufficiency,”<br />
he said. “If you stand alone, when the system<br />
is not meeting full demand, then you may have<br />
to stand down some power plants because<br />
demand is not sufficient. If systems are interconnected,<br />
then this can be avoided as power<br />
plants can still operate by transferring power to<br />
another country.”<br />
There were also environmental benefits. “If<br />
you stand alone, you will need more power<br />
plants, producing more carbon dioxide emissions<br />
and so on,” he said. Politically, the power<br />
interconnections would encourage closer relations<br />
between countries. But concerns over<br />
supply security could still make it difficult for<br />
countries to commit too much of their power<br />
supply needs to generators in neighbouring<br />
countries, Prutichai added.<br />
Some propose that ASEAN members should<br />
enter into an energy treaty that could guarantee<br />
that member countries would not interrupt supply,<br />
similar to the law governing cross border<br />
supply in Europe.<br />
More cross-border links, however, do not<br />
mean rapid emergence of common gas and<br />
power markets where energy is traded — as is<br />
the case to various degrees in North America,<br />
Europe, Australia and New Zealand. Policies in<br />
Southeast <strong>Asia</strong>n countries vary significantly.<br />
Some states, such as Malaysia, are not prepared<br />
to entirely liberalise gas and power supply<br />
industries for fear of shortages and price spikes,<br />
as occurred in California.<br />
Only Singapore has a power pool market.<br />
The Philippines plans to establish one, while<br />
Thailand has reversed its earlier intention to<br />
institute a power market. Private power supply<br />
through independent generators selling under<br />
long-term contacts, if not in power-pooling systems,<br />
is supported throughout the region nevertheless,<br />
especially as State-owned power<br />
companies alone are not able to finance all the<br />
needed generation plant.<br />
Bank Mandiri IPO<br />
may set trend in<br />
investor sentiment<br />
From TOM MCCAWLEY<br />
ASIA TODAY INTERNATIONAL Correspondent<br />
'OMANDIRI' in Bahasa Indonesia,<br />
the national language, means independent.<br />
On July 14, Bank Mandiri, Indonesia’s<br />
largest State-owned bank by assets, took a<br />
major step towards its own independence. It<br />
made a strong debut on the Jakarta Stock<br />
Exchange, following on initial public offering<br />
earlier in July.<br />
Despite a small bomb blast at the Parliament,<br />
Bank Mandiri shares rose 26 per cent as foreigners<br />
who had missed the earlier IPO rushed<br />
to buy. It was a proud day for officials who<br />
Continued page 13<br />
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ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 11
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BUSINESS OUTLOOK<br />
From page 10<br />
remember when Bank Mandiri, just four years<br />
ago, was created from four failed state banks,<br />
their assets pooled and bad loans written off.<br />
Mandiri was fortified by the Indonesian Bank<br />
Restructuring Agency (IBRA), with bonds that<br />
still make up most of its assets.<br />
Now, the successful IPO is a strong sign that<br />
international sentiment is shifting not only for<br />
Indonesian stocks, but for the wider economy.<br />
The launch was carefully timed to coincide<br />
with rising confidence in the market. So far, the<br />
Jakarta Stock Exchange is up by more than 25<br />
per cent this year. Indonesia is likely to graduate<br />
from the US$5 billion <strong>International</strong><br />
Monetary Fund loan programme at the end of<br />
2003. It's officials have praised the macro-economic<br />
management of the government of<br />
Megawati Sukarnoputri.<br />
In a bid to stimulate investment, Bank<br />
Indonesia has lowered its interest rates to their<br />
lowest levels in nine years. Indonesia’s oncebattered<br />
currency, the rupiah, is up by 20 per<br />
cent this year. The good macro-economic news<br />
has helped persuade investors that Bank<br />
Mandiri is a good buy. In late June, the government<br />
increased the size of the offering from<br />
15 to 20 per cent due to strong demand, mainly<br />
from overseas investors. In fact, most<br />
investor demand came from outside Indonesia.<br />
At the end of book-building in late June, foreign<br />
investors accounted for 80 per cent of the<br />
issue. Two-thirds came from institutions, which<br />
are traditionally unwilling to commit major<br />
funds to Indonesia. Indonesia recently sold<br />
stakes in Bank Niaga (to Malaysia’s Commerce<br />
Asset Holdings Bhd), an in Bank Danamon (to<br />
Temasek Holdings of Singapore, the Singapore<br />
government's investment wing).<br />
Bank Mandiri is attractive for several reasons.<br />
It is the largest stock in the banking sector after<br />
Bank Negara Indonesia and Bank Central <strong>Asia</strong>,<br />
counting among the top 10 capitalised stocks<br />
on the exchange. At current prices, Bank<br />
Mandiri's publicly available stock is worth<br />
around US$400 million. Mandiri is relatively<br />
cheap - priced at 1.06 times its book value<br />
compared to 1.5 for Bank Danamon, another<br />
major bank.<br />
Importantly, Mandiri has growth potential. It<br />
is a major platform for entry into a market of<br />
210 million people. The bank has assets of<br />
some Rp260 trillion ($31.65 billion). As of<br />
March 31, Mandiri had 700 branches, with<br />
some eight million customers.<br />
Local analysts claim Mandiri's share price will<br />
keep rising. In mid-July, the bank was added to<br />
the influential Morgan Stanley Capital<br />
<strong>International</strong> Standard Indices. The move is<br />
likely to boost confidence in the stock as overseas<br />
funds often use the MSCI as a benchmark<br />
for decision-making.<br />
Concerns remain over the quality of Bank<br />
Mandiri’s assets. Most of the bank’s income<br />
come from bonds issued when the bank was<br />
recapitalised in the <strong>Asia</strong>n crisis of 1997-98. The<br />
bank is also finding it difficult to loan as corporate<br />
defaults remain at a high level.<br />
The Government's low interest policy also<br />
poses risks for Mandiri. If the bank does not<br />
resume large-scale corporate lending this year,<br />
earnings could be damaged. After the success<br />
of the Mandiri launch, the government is likely<br />
to push ahead with an IPO in another major<br />
State-owned bank, Bank Rakyat Indonesia.<br />
TOURISM SHAPES UP AFTER SARS<br />
Advisories 'self-defeating'<br />
ISSUING travel advisories<br />
against countries hit by<br />
terrorism plays into the<br />
hands of those who<br />
want to disrupt business,<br />
says Richard Gordon,<br />
Philippines Tourism<br />
Secretary and current<br />
Chairman of the Pacific<br />
Area Travel Association . . .<br />
THE PHILIPPINES suffered another<br />
setback on July 27 when para-military<br />
groups “hijacked” a downtown office<br />
block in Manila. To Richard Gordon, the man<br />
who is working doubly hard to restore confidence<br />
in his country’s tourism industry, it is<br />
yet another public relations nightmare.<br />
Bad news, it seems, never ends. And what<br />
Gordon, the Philippines Tourism Secretary,<br />
fears most is “stigmatisation” that comes from<br />
such incidents.<br />
During a visit to Australia to help rebuild<br />
the image of the Philippines as a tourist destination,<br />
Gordon was at pains to stress that the<br />
Philippines has more than 7,000 islands, and<br />
that incidents in Manila or in Minandao should<br />
not tarnish the rest of the country.<br />
Recurrence of terrorist acts is like a rollercoaster<br />
ride for those in charge of tourism.<br />
Gordon says there has been a paradigm shift<br />
in global terrorism, with terrorists graduating<br />
from hijacking planes to using the<br />
planes themselves as weapons.<br />
“The world has to put on a brave<br />
front in dealing with terrorism. We<br />
have to learn to cope,” he says.<br />
Countries have taken precautions,<br />
but they must also realise that issuing<br />
travel advisories against countries<br />
hit by terrorists is self-defeating,<br />
in a sense playing into the<br />
hands of those who want to disrupt<br />
business and tourism.<br />
Following an agreement reached<br />
at an <strong>Asia</strong>n tourism Ministerial meeting<br />
this year, Southeast <strong>Asia</strong>n countries have<br />
agreed to share intelligence and information.<br />
Gordon, who is also Chairman for 2003-4 of<br />
the Pacific Area Travel Association (PATA) and<br />
concurrently World Tourism Organisation<br />
Commissioner for East <strong>Asia</strong>, says the outbreak<br />
of SARS led to concerned countries advising<br />
their own citizens to avoid travelling to affected<br />
areas. This provided a sobering experience<br />
for countries like Canada, which for the first<br />
time realised the flow-on impact of travel<br />
advisories — which affect not only the<br />
tourism and transportation sectors but ripple<br />
out to insurance companies and the wider<br />
business community as visitors cancel trips.<br />
Gordon says he does not argue against the<br />
use of travel advisories, but governments<br />
need to be “smarter in issuing them”. He says<br />
they ought to be region-specific. He also says<br />
the world did not issue travel advisories<br />
Richard Gordon:<br />
Governments need to<br />
be smarter in issuing<br />
advisories.<br />
against Japan after the Sarin gas incident in<br />
Tokyo, or the United States after September 11<br />
terrorist attacks on New York and Washington<br />
in 2001.<br />
But the global tourism industry is resilient,<br />
says Gordon. It has started to recover from the<br />
impact of SARS, which is estimated to have<br />
cost some US$11 billion (AUD17 billion) in<br />
international tourism revenue in the two worst<br />
months of the outbreak. SARS affected the<br />
major travel hubs of the region — Singapore,<br />
Hong Kong, Taiwan and China.<br />
Intra-<strong>Asia</strong> travel is a major contributor to<br />
tourism in the region. Of the 132 million visits<br />
to <strong>Asia</strong>n destinations last year, Gordon says 84<br />
million were intra-<strong>Asia</strong> travel. <strong>Asia</strong> is the<br />
world’s second-largest market after the US.<br />
This is why the financial costs of SARS were<br />
higher than those of September 11 or the<br />
October 18 2002 Bali bombing. Gordon says it<br />
will take six months for the industry to recover<br />
from the fall-out of SARS. Airline capacity is<br />
increasing, and regional initiatives are now in<br />
place, offering attractive deals for long-haul<br />
visitors to <strong>Asia</strong>.<br />
It is crucial, Gordon says, that the industry<br />
regains the confidence of travellers.<br />
As well, he says, Southeast <strong>Asia</strong>n countries<br />
have undertaken a key initiative in offering<br />
special airfare and hotel packages to lure<br />
long-haul travellers back to the region.<br />
Regional airlines and hotels are participating<br />
in these special fares and room rates to<br />
encourage long-haul tourists to visit multiple<br />
destinations. Travellers pay US$120 extra for<br />
each sector, for example from Manila to Hong<br />
Kong, or Hong Kong to Singapore,<br />
with five-star hotels charging from<br />
US$70 a night.<br />
Domestically, Gordon has made<br />
“long weekends” official policy in<br />
the Philippines, ensuring that public<br />
holidays which fall during the week<br />
are moved to the Friday or Monday.<br />
The only day that cannot be moved<br />
is Labour Day. “We do this in consultation<br />
with business,” he says. “As<br />
long as we tell them in advance, they<br />
support the idea.” He says the long<br />
weekends have resulted in a 20 per<br />
cent rise in domestic tourism. “This is good for<br />
our transportation industry, hotels and resorts.”<br />
Last year tourism generated US$82 billion<br />
worldwide. Long-term growth is projected at<br />
5.5 per cent, although growth dropped to 4.3<br />
per cent last year.<br />
Tourism is the positive face of globalisation,<br />
Gordon says. It is one sector that can produce<br />
immediate benefits to the people of a country<br />
that opens its doors to the world. The most<br />
important thing is that those involved in the<br />
industry do not have to have college degrees.<br />
He says tourism have been credited with raising<br />
the standard of living of millions of people in<br />
poor countries. Not only is tourism a key generator<br />
of foreign exchange to <strong>Asia</strong>. With China<br />
and India being part of <strong>Asia</strong>,<br />
the region is potentially the largest single<br />
market for global tourism.<br />
■ Business Travel, page 30.<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 13
ASIA PULSE<br />
THE INFORMATION HEARTBEAT OF ASIA<br />
The information heartbeat of <strong>Asia</strong><br />
ASIA PULSE is a joint venture involving the resources<br />
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Xinhua Information Centre (China).<br />
TRIAL RUN ON THREE GORGES<br />
YICHANG — The first power generator of<br />
China’s Three Gorges Project, the largest of<br />
its kind in the world, has been connected to<br />
the power grid to begin generating electricity.<br />
Yang Qing, vice-general manager of the<br />
China Yangtze River Three Gorges Project<br />
Development Corporation, said the generating<br />
unit will supply 12.9 million kwh per day<br />
to the Central China and East China Power<br />
Grids. The unit will have to pass a 30-day<br />
trial operation period before beginning commercial<br />
production in mid-August.<br />
SAMSUNG SALES UP IN INDIA<br />
NEW DELHI — Samsung India has posted a<br />
70 per cent increase in sales turnover to<br />
Rs12,150 million (US$262.9 million) for the<br />
six months ending June 30, 2003. Flat television<br />
sales grew 275 per cent to 150,000 units,<br />
and there was a 116 per cent increase in<br />
colour television sales at 690,000 units.<br />
Refigerator sales were up by 55 per cent at<br />
180,000 units, washing machines up 70 per<br />
cent, and microwave and airconditioners up<br />
82 per cent and 81 per cent respectively for<br />
the half.<br />
J-POWER OPTS FOR WIND POWER<br />
TOKYO — Electric Power Development Co.,<br />
known as J-Power, plans in 2004 to build<br />
Japan’s largest wind power generation plant<br />
in Fukushima Prefecture, investing 10 billion<br />
yen (US$84.35 million) to install about 30<br />
wind power generators with a combined output<br />
of 60,000kw, enough to supply about<br />
36,000 households with electricity for a year.<br />
J-Power plans to sell the entire output to<br />
Tokyo Electric Power Co., starting in 2005.<br />
SINGAPORE’S GDP DOWN<br />
SINGAPORE — Singapore’s gross domestic<br />
product [GDP] contracted 4.3 per cent<br />
year-on-year in real terms in the second<br />
quarter of 2003, according to advance<br />
government estimates. On an annualised<br />
quarter-on-quarter basis, real GDP fell by<br />
11.8 per cent, compared with growth of 1.2<br />
per cent in the previous quarter. GDP<br />
growth in the second quarter was<br />
predictably weak as a result of the weak<br />
global environment and the SARS outbreak.<br />
NO TAIWAN CEILING FOR FTTS<br />
TAIPEI — Qualified foreign institutional<br />
investors will no longer be subject to a ceiling<br />
of US$3 billion on their investments. Also gone<br />
is a requirement that money pledged by foreign<br />
investors in the local stock market must be<br />
brought into Taiwan within two years.<br />
However, the investors’ licenses to buy and sell<br />
stock on the local bourse will be suspended if<br />
they fail to funnel any money into the market<br />
within three years of obtaining permission.<br />
HK RECOVERING FROM SARS<br />
HONG KONG — Air traffic figures for June<br />
at Hong Kong <strong>International</strong> Airport showed<br />
life slowly returning to normal for the local<br />
aviation industry. The effect of SARS was still<br />
apparent, with June total passenger traffic<br />
figure down 57.2 per cent compared with the<br />
same month last year, but it was an improvement<br />
on May, when passenger traffic was<br />
down 79.9 per cent from the same month<br />
last year.<br />
PIRELLI INVESTING IN INDONESIA<br />
JAKARTA — Pirelli has announced plans to<br />
establish a tyre factory in Indonesia with an<br />
investment of US$100 million and a production<br />
capacity of 5,000 pieces per day. The factory<br />
will concentrate on tyres for four-wheeled<br />
vehicles and light trucks.<br />
GM TO EXPAND IN INDIA<br />
MUMBAI — General Motors Corporation will<br />
invest Rs6,000 million (US$129.7 million) in its<br />
Indian subsidiary during the current fiscal<br />
year. The parent company has received clearance<br />
to invest up to Rs13,800 million in<br />
General Motors India for new products and<br />
development purposes.<br />
INSURANCE COVER UP IN CHINA<br />
BEIJING — The combined premiums of<br />
Chinese and foreign insurance companies in<br />
China topped 212.61 billion yuan (US$25.7<br />
billion) in the first half of this year, up 32 per<br />
cent year-on-year. Total payments for the sixmonth<br />
period were 26.7 billion (US$3.23 billion),<br />
five billion yuan more than last year.<br />
The outbreak of SARS stimulated domestic<br />
demand for insurance.<br />
TOYOTA JV IN GUANGZHOU<br />
NAGOYA — Toyota Motor Corp. aims to start<br />
joint production of passenger cars with China’s<br />
Guangzhou Automobile Group Co. by 2005.<br />
The two plan to establish an equally-owned<br />
joint venture this year and to invest slightly<br />
more than 30 billion yen (US$254 million) to<br />
build a factory. Initially, 30,000 units of the<br />
Camry will be produced each year. By boosting<br />
its presence in southern China, where many of<br />
the wealthy live, Toyota hopes to obtain a 10<br />
per cent share of the Chinese market by 2010.<br />
US BUYING BIG FROM VIETNAM<br />
HANOI — The US is Vietnam’s top importer<br />
and the British Virgin Islands is pouring most<br />
money into the country, according to half-year<br />
government statistics. Growing at 183 per cent,<br />
US sales accounted for one-fifth of Vietnam’s<br />
total export turnover in the first six months of<br />
the year followed by Indonesia, Portugal and<br />
South Africa, with growth of 114, 83 and 75 per<br />
cent, respectively. Deputy Trade Minister, Mai<br />
Van Dau, attributed the performance to all-out<br />
efforts from the government and businesses to<br />
promote trade and tap new markets.<br />
CONSUMERS CLOSING WALLETS<br />
SEOUL — Consumer confidence declined to<br />
an all-time low in June due to concerns over<br />
the moribund economy and sluggish growth,<br />
the National Statistical Office (NSO) said. The<br />
report showed that, regardless of the size of<br />
monthly income, people will spend less in the<br />
coming months than they did in the past.<br />
TELECOMS BIDS IN PAKISTAN<br />
ISLAMABAD — The government has<br />
announced the opening of its fixed-line telephone<br />
sector to private investors after abolishing<br />
the monopoly of the state-run Pakistan<br />
Telecommunication Company Limited [PTCL]<br />
earlier this year. “Licences will be issued to private<br />
operators for a period of 20 years,” said<br />
Federal Minister for Information Technology<br />
Awais Leghari, adding that licences will be<br />
issued to private companies for fixed-telephony<br />
in Pakistan through a transparent process with<br />
open bids.<br />
THAI AIRWAYS TO OFFER SHARES<br />
BANGKOK — Thai Airways <strong>International</strong> said<br />
it will seek to raise 15 billion baht (US$360 million)<br />
through a share offering in November by<br />
issuing 300 million new shares to the public.<br />
Thai Airways plans to cut government ownership<br />
to 70 per cent from 93 per cent by selling<br />
the shares, the Bangkok Post said. The airline<br />
made a net profit of 8.3 billion baht in the first<br />
six months of the current financial year.<br />
PANVA GAS EXPANDS IN CHINA<br />
CHENGDU — The Hong Kong-based Panva<br />
Gas Holdings Limited plans to invest HK$3<br />
billion (US$389 million) exploring gas<br />
resources in Sichuan Province, southwest<br />
China, within the next two to three years.<br />
Sources with the Hong Kong company<br />
said it will step into the Sichuan gas market<br />
by taking over gas companies in the<br />
province and establishing joint ventures.<br />
Panva Gas has set up more than 20 joint<br />
ventures on the Chinese mainland since<br />
1997., for a total investment of HK$1 billion<br />
(US$130 million), and has taken over three<br />
gas companies in Sichuan.<br />
©<strong>Asia</strong> Pulse Pte Ltd.<br />
Each day <strong>Asia</strong> Pulse creates up to 250 items of news, business<br />
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14<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003
BUSINESS OUTLOOK<br />
WHERE ECONOMIES ARE HEADING<br />
<strong>Asia</strong>n construction slowdown on way<br />
THE construction sector in<br />
Singapore and Hong Kong<br />
is expected to contract<br />
significantly in 2003, compunded<br />
by the impact of<br />
SARS, according to a new<br />
BIS Shrapnel report . . .<br />
BECAUSE OF slower-than-expected<br />
global economic recovery, particularly<br />
in the US, and the SARS impact, growth in<br />
the construction sector in East and Southeast<br />
<strong>Asia</strong> is expected to contract in 2003, according<br />
to BIS Shrapnel.<br />
Writing in the BIS Shrapnel research series<br />
Building and Construction <strong>Asia</strong> Pacific, 2002<br />
to 2005, co-authors Adeline Wong and Jason<br />
Anderson suggest that the construction sector<br />
in Singapore and Hong Kong will contract significantly<br />
in 2003, compounded by the impact<br />
of SARS. The co-authors expect the SARS outbreak<br />
to fracture a previously fragile recovery<br />
in these economies.<br />
Meanwhile, construction activity in South<br />
Korea and the Philippines is expected to move<br />
into a downswing in 2003, with activity in<br />
China, Indonesia, Malaysia, Taiwan and<br />
Thailand to experience moderate growth.<br />
The paper forecasts construction in most<br />
<strong>Asia</strong>n countries to achieve some recovery in<br />
2004 and 2005, setting the stage for stronger<br />
growth in the second half of the decade.<br />
China: The residential and non-residential<br />
building sector in China is expected to remain<br />
steady in 2003, before growth gathers momentum<br />
in 2004 and 2005 underpinned by strong<br />
underlying demand for affordable housing, and<br />
for commercial and industrial property amid<br />
further market deregulation in 2005.<br />
Total building completions in Beijing and<br />
Shanghai are forecast to increase by 2-5 per<br />
cent in 2003. Completions are, however,<br />
expected to fall back in 2004, mainly as a<br />
result of a stock build-up and a recent ban on<br />
construction loans to developers of high-end<br />
residential units.<br />
By 2005, construction growth is expected<br />
across all four cities — Beijing, Shanghai,<br />
Guangzhou and Shenzhen — with Beijing<br />
recording strongest growth. Growth in Beijing<br />
over the three years to 2007 will be underpinned<br />
by building activity undertaken to<br />
spruce up the city for the 2008 Olympic<br />
Games, and also by Olympic Games-related<br />
building projects.<br />
Hong Kong: The construction sector is<br />
expected to continue into its fifth year of<br />
downturn in 2003 and is not expected to bottom<br />
out until 2004, when gross value of construction<br />
work performed will to be 33 per cent<br />
below its 1998 record peak. The protracted<br />
downturn is ascribed mainly to the depressed<br />
residential property sector. A rebound of three<br />
per cent in aggregate construction value is forecast<br />
for 2005, principally due to a recovery in<br />
the residential construction market.<br />
Indonesia: The rebound in Indonesia’s<br />
construction sector is expected to continue<br />
over the next three years, but growth is forecast<br />
to be lower than during the previous three<br />
years. Total completion value in 2005 will still<br />
be 30 per cent below the levels of the mid-<br />
1990s. Stronger growth is expected from the<br />
retail building sector in response to tightening<br />
prime retail space supply.<br />
Malaysia: Despite a persistent supply<br />
overhang across the property sector, the construction<br />
sector in Malaysia is expected to<br />
continue to average annual growth of two per<br />
cent over the three years to 2005. The sector<br />
will be sustained mainly by infrastructure, low<br />
to medium-cost housing and institutional<br />
building projects. The commercial and industrial<br />
building sector will remain constrained by<br />
high vacancy levels.<br />
Philippines: Construction sector growth is<br />
expected to contract nine per cent in 2003, due<br />
to a significant decline in non-residential building<br />
activity as retail building activity falls back<br />
from an exceptionally high level in 2002. The<br />
sector is forecast to rebound moderately in<br />
2004 and 2005, backed by steady, solid growth<br />
in residential and retail building, and infrastructure<br />
projects.<br />
Singapore: Construction demand in<br />
Singapore is expected to contract 22 per cent in<br />
2003 because of a significant downswing in<br />
non-residential building and subdued residential<br />
and civil engineering activity. The rebound<br />
forecast for 2004 is from a low base, mainly<br />
backed by residential redevelopment and<br />
retrofitting activity as well as retail and office<br />
refurbishments. New building activity is expected<br />
to gather some strength in 2005, in response<br />
to an economic recovery.<br />
South Korea: Residential building activity<br />
is expected to move into a two-year steep<br />
downturn in 2003 and 2004, due to excess<br />
housing stock. Overall construction demand is<br />
expected to decline by six per cent in 2003 and<br />
remain subdued in 2004. However, a<br />
resumption of growth in building activity is<br />
forecast for 2005, backed by a pick-up in<br />
demand for residential, commercial and industrial<br />
property.<br />
Taiwan: Taiwan’s construction sector is<br />
expected to stabilise in 2003, backed by a five<br />
per cent rebound in the civil engineering construction<br />
sector. Growth is forecast to resume<br />
in 2004 and 2005 at an annual average of 11<br />
per cent. Residential and non-residential<br />
building sector growth is, however, off a lowbase.<br />
The residential building sector is expected<br />
to continue to be constrained by a chronic<br />
excess in housing supply. However, a turnaround<br />
in non-residential building activity will<br />
be supported by a pick-up in demand for<br />
office and factory buildings through stronger<br />
economic growth and rising direct trade with<br />
mainland China.<br />
Thailand: Over the 2003-2005 forecast<br />
period, construction sector growth is expected<br />
to strengthen, supported by a continued<br />
rebound in the residential building sector<br />
and a turnaround in the non-residential and<br />
civil engineering sectors. Residential building<br />
activity has been boosted by a pick-up in<br />
new housing demand. Over the forecast<br />
period, the residential building sector will be<br />
aided further by the Government’s aim to<br />
build 600,000 low-cost units over the 2003-<br />
2007 period. The non-residential building<br />
sector will be underpinned by retail, hotel<br />
and industrial building activity amid<br />
strengthening business confidence.<br />
Visit www.bis.com.au<br />
Real recovery this time<br />
By ROGER DONNELLY, Chief Economist,<br />
Export Finance and Insurance Corporation<br />
FOR 18 MONTHS now, the world<br />
economy has been showing several<br />
signs of getting back onto its feet after the 2000<br />
dot.com crash and subsequent 2000-01 slowdown,<br />
only to stumble back every time into<br />
very weak growth.<br />
In the March quarter, GDP was dead flat in<br />
the eurozone, and growth only 0.6 per cent pa<br />
in Japan and 1.9 per cent pa in America. In the<br />
current June quarter, <strong>Asia</strong>, excluding Japan, is<br />
slumping, because of SARS, the eurozone continues<br />
to tread water, and Japan looks as if it's<br />
shrinking again.<br />
Pessimists are saying the worst isn't over.<br />
The Bank of Japan has cut its interest rate to<br />
zero. The Federal Reserve has cut interest<br />
rates 550 basis points over the past 2 1/2 years<br />
to 1 per cent. And the Japanese and American<br />
governments have also been energetically<br />
priming the fiscal pumps through spending<br />
boosts and tax cuts.<br />
Yet despite this, economies are failing to<br />
pick up; excess capacity is lingering; businesses<br />
are having to offer steep discounts to shift<br />
production; inflation is falling to 1 per cent pa<br />
or below in America and the eurozone; while<br />
the deflation that Japan has been experiencing<br />
for the past four years is getting worse.<br />
What if central banks cut interest rates all<br />
the way to zero and activity still doesn't rev<br />
up That's the really frightening question.<br />
Inflation could fall to zero, and then become<br />
deflation — sustained. Real interest rates<br />
would rise. Falling prices and falling demand<br />
could feed off and reinforce each other. We<br />
could be staring at a situation that resembled<br />
at best Japan since its bubble burst in 1990 -<br />
or at worst, the Great Depression.<br />
Fortunately, this doesn't look likely. The<br />
drags of war, high oil prices and SARS are starting<br />
to fade. Thanks to the recent world sharemarket<br />
rally and decline in long bond rates,<br />
financial conditions - the cost of capital - have<br />
eased considerably. (Though the recent bond<br />
selloff will have to be watched.)<br />
A lot of post-bubble balance sheet adjustment<br />
has already been undertaken - deleveraging,<br />
Continued page 16<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 15
From page 15<br />
BUSINESS OUTLOOK<br />
recapitalisation, write-off of excess capacity. And<br />
there is much monetary and fiscal stimulus still<br />
to come out of the pipeline - including from the<br />
recent US$350b American tax cut.<br />
Besides, if worse comes to worst, central<br />
bankers led by the US Federal Reserve have<br />
professed themselves ready to do all it takes to<br />
ward of deflation - including buying long-dated<br />
government bonds and extending credit direct<br />
to business - all a far cry from their dazzled-bythe-headlights<br />
inaction in the 1930s.<br />
So yes, we believe the stars are finally coming<br />
into line for a recovery. We are currently<br />
calling a return to trend growth of about 3 1/2<br />
pre cent for the world economy by end-2003 or<br />
early 2004. No vigorous rebound - there isn't<br />
the pent-up demand. Still, these would be conditions<br />
conducive to a gradual pick-up in<br />
exports after their downtrend this past two<br />
years. One snag could be the US dollar correction<br />
currently under way. This has the potential<br />
to push Japan and the eurozone into recession<br />
by undermining their export and import-competing<br />
industries - unless the authorities in<br />
those areas manage to stimulate more domestic<br />
demand-led growth.<br />
In addition, the counterpart of further US<br />
dollar weakness could be further A$ strength.<br />
That would be a headwind for exporters to battle<br />
as they patiently wait for their overseas markets<br />
to leave the doldrums. It needn't work that<br />
way - markets may soon judge that it's time to<br />
pile back into US dollar assets again, given the<br />
way America continues to outgrow the eurozone<br />
and Japan. But for all that, US dollar<br />
depreciation is a stress worth subjecting your<br />
business plan to. Another stress worth thinking<br />
about is a further slide in activity in Japan,<br />
which is looking very weak.<br />
Thankfully, the expansionary impulses finally<br />
seem to be overcoming the drags. So<br />
although there have been a lot of false starts,<br />
this time a recovery could be on for real, even<br />
if it is a little weak and accompanied by a<br />
stronger Australian dollar.<br />
Malaysia to lift it’s<br />
domestic spending<br />
MALAYSIA could be <strong>Asia</strong>'s next<br />
domestic consumption story, according<br />
a report by ABN AMRO. It says Malaysia is<br />
striving to transform its economy from one that<br />
is largely agriculture/mining and manufacturing-based<br />
to one that is competitive in downstream<br />
support services.<br />
"Medium-term, the real excitement with<br />
Malaysia lies in the possibility of a spurt in consumption<br />
turning to sustained structural<br />
domestic demand," the report says. "Malaysia<br />
stands out because its surplus savings are the<br />
largest in <strong>Asia</strong> and its demographics arguably<br />
the most attractive."<br />
ABN AMRO says both Malaysia's and<br />
Singapore's corporate earnings and absolute<br />
share prices have, in the past, been closely<br />
influenced by global growth cycles. "This time<br />
round, a weak US$ and continued robust<br />
demand for resources/commodities are providing<br />
somewhat of a saving grace for both countries.<br />
We are expecting a moderate recovery in<br />
both economies and corporate earnings<br />
over the second half."<br />
16<br />
ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003