remaking chinatex - Asia Today International

In this Issue 

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Face-saving solution 

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ASEAN revisits energy 

INTERNATIONAL 

Jonathan Story 

August/September 2003 

REMAKING 

CHINATEX: 

Brand names the 

key – and China 

is buying! 

Chinatex President 

and CEO Zhao Boya 

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ASIA TODAY INTERNATIONAL 

Volume 21, No. 4, August/September 2003 

Twentieth Year of Publication 

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INTERNATIONAL 

REMAKING CHINATEX: China's National Textile Imports and Exports Corporation is buying up offshore cotton 

plantations and will acquire interests in companies engaged in fashion design in Europe, the US and Japan. Chinatex 

President and Chief Executive Zhao Boya details his strategic plan in our exclusive report. 5-7 

MORE 'FREEDOM' FOR HONG KONG Hong Kong will be given more freedom in a solution to the current crisis 

which is fashioned to both reinforce China's emerging status on the international stage and to play for domestic 

consumption, according to China analyst Jonathan Story, Professor of International Political Economy at INSEAD. He 

says a face-saving operation is needed 7-9 

'RISKY' TO FLOAT THE YUAN: Morgan Stanley Chief Economist Stephen Roach is urging 

China to resist pressure for a revaluation - he says Japan has led the way in Chinabashing 

over the past year. ABN AMRO believes that when revaluation does come, it is 

likely to be a one-off move of 15-20 per cent 9 

Zhao Boya: 

A US$200 million shopping list. 

ASEAN REVISITS ENERGY GRIDS: ASEAN is again moving towards a cross-border 

gas and electricity grid. It has approved a Master Plan for power inter-connection, but 

emergence of common gas and power markets where energy is traded appears to be 

some way off 10-11 

Jonathan Story 

ADVISORIES 'SELF-DEFEATING': Issuing travel advisories against countries hit by terrorism plays into the hands of those who want to disrupt 

business, says Richard Gordon, Philippines Tourism Secretary and current Chairman of the Pacific Area Travel Association 13 

SERVICES THE BIG WINNER FROM SAFTA: Australia's new Free Trade Agreement with Singapore is expected to bring immediate benefits for 

those involved in the finance, business services and education sectors, says Simon Taskunas, a solicitor with Freehills in Perth 17 

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OPINION 

IN JANUARY 2001, then- 

President BJ Habibie undertook 

the Big Bang — the decentralisation of 

power to Indonesia's regions. 

It was a bold gamble by Habibie to quell 

growing political unrest in the provinces 

during the chaotic post-Soeharto days. But 

from the very beginning, it was obvious 

that Indonesia was far from ready for 

devolution. Most crucially, the laws that 

were to set the rules for the regions were 

not properly in place. 

Since then, Jakarta has bumbled along — 

resolving some problems while others 

remain. A key issue is the question of revenue 

raising and taxes. In the early days, 

inexperienced local level bureaucrats took 

advantage of the right to raise revenue to 

impose their own taxes, including wildcat 

taxes, especially in resource-rich regions. 

The targets were often foreign investors. 

They created an extremely unpredictable 

business environment. 

The World Bank undertook a review of 

Indonesia's Big Bang in a report published 

in July. In it, the Bank says that 

mending weaknesses in the various regulations 

will take time. Amendments are 

required in key sectors, namely laws and 

perhaps even the constitution. 

Quite simply, the present system 

is not working, says the 

Bank. The current legislation 

allows local governments to 

issue regional taxes as long as 

they comply with the principle 

stated in the decentralisation 

law. The regions have strong 

incentives to impose improper 

taxes and levies and Jakarta 

does not have the capacity to 

supervise, nor the willingness 

to cancel, illegal taxes, says the 

report. 

The way forward, it suggests, is to 

restrict regional taxes and levies to a limited 

closed list. At the same time the 

regions should be granted additional taxing 

powers more suited to a local administration. 

The report says land and building 

tax, considered a local tax in most 

countries around the world, is one such 

potential tax. In Indonesia, Jakarta 

shares revenue from this tax with the 

regions. 

A further option is to strengthen the 

regions’ own revenue base by increasing 

the maximum rate allowed on existing 

BJ HABIBE’S ‘BIG BANG’ 

Revisiting Indonesia’s regional tax laws 

FLORENCE 

CHONG 

REMAKING CHINATEX 

CHINA'S National Textile 

Imports and Exports 

Corporation is buying up 

offshore cotton plantations 

and will be seeking 

to acquire interests in 

companies engaged in 

fashion design in Europe, 

the US and Japan . . . 

By FLORENCE CHONG 

Editor ASIA TODAY INTERNATIONAL 

THE TASK BEFORE Zhao Boya is 

considerable. He is charged with 

transforming a traditional foreign trade company 

into a diversified group involved in the 

manufacture of branded garments and in the 

production and export of fabrics. 

As President and Chief Executive of China 

National Textile Imports and Exports 

Corporation, known as Chinatex, Zhao sees 

China owning companies engaged in design in 

Europe, the United States and Japan. 

Over the next five years, Chinatex will 

increase investment onshore and offshore. This 

will include acquisition of cotton plantations 

overseas (including Australia) to feed its 

expanding manufacturing operations at home. 

Central to the plan is restructuring of the 

Zhao Boya: 

China will expand into the branded goods business. 

State-owned enterprise from a monolithic, 

anachronistic body into a dynamic 21st century 

company. Since taking over the helm in 1998, 

taxes. Rate for regional taxes 

such as car, hotel and restaurant 

surcharges are limited by 

Jakarta, and almost all regional 

governments charge the maximum 

rate allowed. 

While the central government 

should probably continue 

setting a ceiling on local taxes, 

the report also says that new 

local taxes could be considered. 

It is being debated in Indonesia 

today whether the regions 

should be entitled to a 

surcharge on personal income tax and 

local business taxes or payroll tax. 

Understandably a poor country like 

Indonesia, especially the resource-poor 

regions, need all the revenue possible to 

cover public expenditure. But local 

governments must learn from the bigger 

regions that to be seen to be rapacious is 

the surest way to remain poor. 

Without business confidence, there 

will be no investment, and no investment 

means no tax revenue. 

■ Bank Mandiri IPO may set trend for 

investors, page 11. 

BRAND NAMES 

THE KEY - 

AND CHINA 

IS BUYING . . . 

Zhao has overseen a gradual 

shift away from trading to an 

expanded range of activities. 

The remaking of Chinatex 

underlines the urgent change 

facing China's many Stateowned 

foreign trading corporations, 

set up to trade 

in commodities. 

Like all foreign trade companies, 

when created in 1951 

Chinatex became a window to 

the world. In the intervening 

years, Chinatex has grown to 

be a billion-dollar company. 

Zhao says Chinatex has an 

annual turnover of US$1 

billion and assets valued at 

US$1 billion. About 70 per 

cent of revenue comes from 

trade and 30 per cent from 

other businesses. 

But such anachronistic foreign 

trade companies belong 

to an era when China was a 

closed economy. They are a 

contradiction in a China that is moving 

quickly to integrate with the global economy. 

Continued page 6 


ISSN 1445-4300 

PUBLISHER 

Barry Pearton 

EDITOR 

Florence Chong 

Volume 21, No. 4, August/September 2003 

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From page 5 

THE CHINATEX PLAN 

Chinatex's role was – and is – to import wool 

and cotton to feed the Chinese textile industry 

which, in turn, produces the raw materials 

needed to run its large garment-making sector. 

Chinatex then exports garments to China's markets 

around the world. 

But Chinatex has already moved a long way 

from its original role. Today, it has more than 

30 subsidiaries and overseas enterprises, and 

40 manufacturing plants. The businesses cover 

production and sale of all textiles, ranging from 

raw materials, yarns and fabric to readymade 

garments. 

Zhao has no illusion that the long-term 

future of Chinatex lies in its ability to adapt 

to changes in both the global and 

Chinese economies. 

Chinatex has hired strategy consultants 

Roland Berger from Germany to map out a 

strategic plan for the next five years. The 

review emphasises that garments will remain 

the core strategic business, but the plan calls 

for increased trading activities which will be 

complemented by investment – especially to 

build up brand names. 

❝Chinatex has already 

moved a long way 

from its original role. It 

has more than 30 subsidiaries 

and overseas 

enterprises, and 40 

manufacturing plants.❞ 

"China is not known for international brand 

names. We are seen as a processor rather than 

a maker of branded goods," Zhao says. He is 

seeking design capability through investment 

in well-established design companies in 

Europe, the US and Japan. 

As an example, the Chinatex subsidiary in 

Germany, Mode Contor Hamburg Chinatex, 

will engage fashion designers from Germany 

and Denmark to help launch Chinatex into the 

world of high fashion. Last year, Chinatex 

signed an agency agreement with Tom Tailor 

of Germany, a company known for its casual 

wear, and said to be the "latest brand for the 

young in Europe and the US". Under the agreement, 

Chinatex will be responsible for production, 

allocation, promotion and sales of Tom 

Tailor products in China. 

"We think it will be difficult to parade 

internationally-known brands in China 

because fashion comes from Europe and the 

United States," says Zhao. Chinatex will 

expand into the branded goods business both 

through training of its own staff and by 

acquiring mid-sized brand names in Europe 

and Japan. Chinatex has interests in two companies 

in the US – one based in Los Angeles, 

the other in New York. It is continuing to look 

for acquisitions. 

Over the next five years, Zhao expects the 

Group to spend up to US$200 million investing 

to broaden its business base. "This is only a 

rough plan," he explains. "But we hope to 

invest in two kinds of operations within five 

years or more. One is to buy some mature 


6 

ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003

BUSINESS OUTLOOK: CHINA 

SQUARING UP TO HK PROBLEMS 

From page 6 

businesses in China to enlarge our capability in 

producing, retailing garments and finishing 

fabrics. The second is to buy mature businesses 

in overseas countries, especially in 

Europe, the US and Hong Kong. (This will 

enable us) to build up our international 

name brand garments, retailing networks 

and design capability – for both our domestic 

and global markets." 

As China's standard of living rises, Zhao sees 

a growing market at home. Chinatex intends to 

meet China's growing demand for quality garments, 

which will be driven by the middle 

class. Chinatex will also give priority to fabrics. 

Its corporate aim is to become one of China's 

"most influential" fabric suppliers, working 

closely with dealers in key markets. It also 

seeks a higher share of the domestic market. 

"We want to produce combed wool for the 

production of woollen fabrics and garments," 

he says. Chinatex will also invest in factories, 

and already has a target acquisition in South 

China. He says Chinatex will become a producer 

of woollen fabrics. 

Chinatex is a key player today in the import 

of raw wool to China. Zhao says the company 

is responsible for one quarter of all wool 

purchased from Australia, worth a total of 

AUD1.5 billion last year. Australia has onethird 

of the Chinese wool market. China also 

imports wool from New Zealand, South 

America and South Africa. 

As part of its internal restructuring, Zhao says 

Chinatex wool-buying operations will be 

streamlined. Since 1982, the company has 

operated Chinatex (Aus) Wool Co Pty Ltd, 

based in Sydney, to bid for Australian wool. 

This company secures half of Chinatex's total 

imports from Australia. The other half is handled 

by another Chinatex company, based in 

Beijing. From next year, says Zhao, there will 

be just one company, headed by Gong Zheng- 

Yi, who is currently Managing Director of the 

Sydney-based firm. 

At around US$200 million a year, Zhao says 

Chinatex's wool business is smaller than its 

US$250-million-a-year cotton business. "We 

export cotton, but not woollen products," he 

says. Cotton products range from fabrics to garments 

to raw yarns and manchester. 

Currently, Zhao says, Chinatex owns three 

cotton spinning and weaving factories which 

have 200,000 spindles and about 2,000 weaving 

looms. "We have capacity to produce 

around 15 million pieces of garments now. 

This makes us one of the largest manufacturers, 

he says. Chinatex also buys from other Chinese 

manufacturers, giving it a total annual volume 

of 30 million pieces. 

Since 1996, Chinatex has been investing in 

cotton farms in Australia. With its latest acquisitions, 

says Zhao, Chinatex will have a total of 

four farms, covering 50 sq km, located in 

Moree, northern NSW. 

Of China's accession to WTO, Zhao says: 

"If we didn't join the WTO, we would not 

enjoy the benefits of global agreements 

shared by WTO members – especially after 

the quota system for the textile trade is 

abandoned." Under the Agreement on 

Textiles and Clothing (ATC), negotiated during 

the Uruguay Round, WTO members are 

to abandon a quota system, which has dominated 

the global textile trade since the early 

1960s, by 2004. By 2005, importing 

countries will no longer be able to 

discriminate between exporters. 

In fact, the ATC itself will no 

longer exist. 

As a developing economy, China 

was a beneficiary of the quota system, 

although increasingly it has lost 

preferential treatment under that system. 

However, under plans initiated 

by the European Union, least developed 

countries continue to have 

preferential access to developed 

markets. Other developed countries, 

including the United States and Australia, also 

offer special access to their markets for leastdeveloped 

countries. 

In terms of scale of economy and availability 

of labour, China ranks as the most competitive 

player in the garments and textiles sector. 

According to the World Trade Organisation, 

China held 11.4 per cent of global exports trade 

in textiles in 2001, compared with 6.9 per cent 

in 1990. In value, China's export trade 

Zhao Boya: 

Buying one quarter of all 

wool purchased from 

Australia. 

amounted to almost US$17 billion. 

China imported food worth 

US$15.43 billion, or 10.9 per cent of 

the global import share. 

"Until 2004, (we will not be able) 

to have a scientific idea about the 

competitiveness of different countries 

– because of the quota system," 

says Zhou. "But once the quota system 

is gone, we will have a better 

idea of which countries are the most 

competitive producers." Zhao says 

China has the advantage of having a 

competent and skilled workforce. 

He says the Chinese Government would like 

to see China keep its position as a major player 

in the global market. Certainly, he says, over the 

next 10 to 20 years the sector will continue to 

be an important employer of Chinese workers. 

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the publisher. 

More 'freedom' for HK 

HONG KONG will be given 

more freedom in a solution 

to the current crisis which 

is fashioned to both reinforce 

China's emerging 

status on the international 

stage and to play for 

domestic consumption, 

according to a leading student 

of Chinese affairs . . . 

BEIJING IS EXPECTED to use a 

variation of the dramatic exit formula 

it employed after bungling the SARS outbreak 

to hopefully restore the confidence of 

Hong Kong people in China’s leadership, 

according to China analyst Jonathan Story. 

Since the Tung Administration 

pushed to pass a National Security 

Bill, known locally as Article 23, 

Hong Kong has been gripped by distrust 

of and anger towards its 

Government. The controversy has 

become the most serious challenge 

to the leadership of Chief Executive 

Tung Chee-hwa. 

Story says Beijing realises that if 

the Hong Kong situation is not 

resolved, it has the potential to 

become a major problem — with 

implications for the Mainland itself. "The population 

(in Hong Kong) is disturbed, and, unless 

managed properly, this will become a major 

political problem," Story told ASIA TODAY 

INTERNATIONAL. If the past is a guide, some 

face-saving operation will be needed." 

Story, whose latest book, China: The Race 

to Market, has just been released, has specialised 

in observing the transformation of 

command to market economies over three 

Jonathan Story: 

China learned the hard 

way in the SARS crisis. 

decades. He believes Beijing is involved in 

behind-closed-door negotiations with Tung 

and Hong Kong opposition leaders to seek a 

solution to the imbroglio. 

"Over the next four weeks, I expect China to 

find a face-saving way out of the crisis in Hong 

Kong," says Story, who is Professor of 

International Political Economy at INSEAD, the 

leading French academic institution. Beijing 

will resolve the political controversy in Hong 

Kong, he says, because it is confronted by the 

reality of China's inclusion in the global village. 

China learned the hard way in the handling 

of the SARS crisis. Its initial denial led to global 

condemnation of government inaction. 

Stung by the criticism, Beijing took drastic 

action, including the sacking of Health 

Minister Zhang Wenkang and Beijing's mayor, 

Meng Xeunong. Story expects Beijing to seek 

an "exit" from the Hong Kong imbroglio in 

similar dramatic fashion. 

Asked whether Tung will be 

replaced, Story says the most likely 

outcome will be to elevate Tung to a 

more "honorable" position, and to 

install a Secretary who will be, in 

effect, the Chief Executive. He says 

the manner in which China resolves 

the Hong Kong problem will be 

fashioned partly to reinforce its 

emerging status on the international 

stage. But, more importantly, it will 

play for domestic consumption. 

The upshot will be a Hong Kong 

that is given more freedom — but 

that can come about only if there is a degree of 

confidence and trust between the Mainland 

and the democratic movement in Hong Kong, 

says Story. "If there is a breakdown in confidence 

there will be repercussions for Beijing — 

and China's credibility could suffer. My hunch 

is that an awful lot of effort is now under way 

to allow Hong Kong to live as a more open 



CHINA MUDDLING THROUGH 

OCEANIA 

From page 7 

society." While the hard-line Article 23 will 

remain, some compromise will be reached that 

the people of Hong Kong can accept. Story 

also believes Hong Kong will move towards 

domestic election of a Chief Administrator in 

2007, as stated in the Basic Law. 

His rationale is that 2007 is the year before 

the 2008 Beijing Olympics — an event that can 

cement China's position in the global community. 

In 1962, Japan hosted the Games, and this 

marked a turning point for Japan — it began to 

"invade" the world with its products. In 1988, 

South Korea played Games host — an event 

that was credited for ushering in an end to martial 

law and the beginning of democratisation. 

"I anticipate subtle changes in the (Chinese) 

Government between now and the Olympics, 

and this does not exclude political changes," 

says Story. He expects an improvement in 

China's handling of human right issues, leading 

eventually to more transparency — a step 

towards a more open society. 

Since the early 1990s, direct elections have 

been held in China at village level. Story says 

these elections are very important, born out 

of necessity to appease agitated peasants 

infuriated with the practices and corruption 

of local government officials. And Shenzhen, 

the first coastal economic zone, will learn 

from Hong Kong to improve local governance. 

The fundamental glue holding China 

together today is its party state — and Hong 

Kong is an exception. 

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ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 

❝I anticipate subtle 

changes in (the 

Chinese) Government 

between now and the 

Olympics, and this 

does not exclude 

political changes❞ 

Chinese people do not wish to revisit the 

past, says Story. Millions of Chinese have 

markedly raised their standard of living. China 

has muddled through to get to where it is, and 

Story expects it will continue to muddle 

through in future, dealing with partial reforms, 

and hoping that millions more of its people 

will enjoy greater prosperity. 

China has to manage itself as it opens its 

market, says Story. One lesson came with the 

massive April 1999 demonstrations by the 

Falungong cult, which used mobile phones to 

rally its members. Market reform has contributed 

to promoting conditions for a more 

garrulous society. At the same time, the 

monopoly of the party State is shrinking. 

China's leadership wants to succeed — and has 

done so, so far. 

Political changes will be gradual, says Story, 

because China will not go for the Big Bang — 

the way Society leader Mikhail Gorbachev 

introduced glasnost (openness) under perestroika, 

a programme of economic, political 

and social restructuring. 

Story says events in Indonesia in 1998, 

although Indonesia was not a communist 

country, shocked China. "Indonesia is a 'patrimonial 

society' that was forced into rapid 

changes in the wake of the 1997 financial 

Continued page 9

BUSINESS OUTLOOK 

BEIJING PRESSURED TO REVALUE 

From page 8 

crisis. The speed of political and economic 

reforms has set Indonesia back, he says (the 

standard of living has fallen to a post-1997 

level). "The interesting question is how far 

Indonesia can go now." 

He expects China to be more pro-active in 

geopolitical issues, and says the most critical 

issue today is North Korea. On its own, and 

with limited resources, Beijing realises that it 

has to work with other nations, most notably 

the United States. He says relations with 

Washington warmed considerably when 

former president Jiang Zemin called George 

W Bush the day after the September 11 attack 

on New York and Washington. 

As the last surviving Communist state, China 

does not have a model on which to go forward. 

It has come too far to turn back to pre- 

1978, when China embarked on its open door 

policies. Story says the Chinese will have to 

learn by experimentation. Its approach to market 

and political reform has been exploratory. 

This explains why huge diversity of practice 

across China exists. 

S&P puts Hong Kong 

ratings on watch 

WHATEVER the political outcome 

of protests in Hong Kong, sovereign 

ratings will depend on the 

Government's ability to tackle fiscal overruns 

successfully, while pursuing a coherent 

macro-economic mix, Standard & Poor's said 

in a statement. The ratings will also depend 

on Hong Kong maintaining its fiscal, 

economic and financial autonomy. 

The ratings agency said major public misgivings 

include the Government's inability to 

correctly identify problems, co-ordinate or 

design policies consistently and transparently, 

and articulate a coherent strategy. 

"Going forward, the Administration will have 

to adapt to and accommodate this political culture, 

which calls for more open governance 

and public debate," S&P said, adding that this 

year's budget deficit was likely to widen to 

more than 7 per cent of GDP because of the 

SARS outbreak. "Better governance in future, 

as perceived by the public and investors, might 

boost confidence and help sustain a recovery." 

S&P said current political development 

remains fluid. "Without sufficient support in 

the legislature, the Government would be 

largely ineffective, and this would lead to a 

worse policy environment. Alternatively, a 

more reduced role could be envisaged for 

(Chief Executive Tung Chee-hwa) in order to 

mollify the public. 

"If Mr Tung steps down, which is likely to 

occur only with the nod from Beijing, policy 

uncertainty could be alleviated by a Beijingsanctioned 

successor plan, or at least an 

interim Government that depends on the 

existing bureaucracy," S & P said. 

HK banks to trade yuan 

■ CHINA is reportedly considering allowing 

Hong Kong lenders to provide personal yuan 

banking services to Hong Kong residents in an 

extension of the new Closer Economic 

Partnership Arrangement with Hong Kong. 

'Risky' to float the yuan 

A REPORT from Morgan 

Stanley's Chief Economist, 

Stephen Roach, urges 

China to resist pressure for 

a revaluation. It says Japan 

has led the way in Chinabashing 

over the past year 

. . . 

BEIJING HAS AGAIN come under 

pressure to revalue its currency following 

recent devaluation of the US dollar. 

Critics argue that the weaken US currency has 

given China an unfair competitive edge in the 

global market. The currency is unofficially 

pegged at around 8.30 renmibi to a dollar. 

Stephen Roach, Chief Economist with 

Morgan Stanley in New York, was in China in 

July and firmly believes Beijing should not bow 

to pressure. “Assuming the dollar has a good 

deal further to go on the downside, as I suspect 

— perhaps as much as 20 per cent over 

the next couple of years — most believe that 

China’s current competitive advantage will 

become all the more pronounced,” he writes in 

a recent report, The Scapegoating of China. 

Roach says the Chinese are acutely sensitive 

to global opinion, and are quite concerned at 

this obvious shift in sentiment. “Although 

Chinese officials remain unwavering in their 

commitment to the renminbi’s peg, I was asked 

repeatedly for my thoughts on how to handle 

this delicate issue. I urged the Chinese to stay 

the course — to leave their RMB policy 

unchanged,” he says. 

China does not compete on the basis of an 

undervalued currency, he adds. It competes 

mainly in terms of labour costs, technology, 

quality control, infrastructure and reform. He 

believes that if China was to revalue the RMB 

upward by 10 per cent, its exports would suffer 

only minimal loss of market share. 

Until China completely reforms its capital 

markets, it would be premature and risky to 

float its currency, says Roach. “That’s a critical 

lesson of the Asian financial crisis that an impatient 

world should not lose sight of when putting 

pressure on China.” 

The general perception is that China is grabbing 

the world’s exports market. Roach (and 

many other prominent economists espouse 

the same view) argues that Chinese subsidiaries 

of global multinationals — and 

Chinese joint ventures with industrial-world 

partners — accounted for 65 per of China’s 

total exports from 1994 to 2003. In that time, 

China’s annual exports soared from US$121 billion 

to US$365.4 billion. 

Roach is scathing of those countries which 

are critical of China’s currency policy. 

“Unwilling to accept responsibility for their 

own shortcomings, the wealthy economies of 

the industrial world are making China a scapegoat 

for their weak recoveries,” he says. “That’s 

especially true of Japan, which has led the way 

in China-bashing over the past year.” 

Roach points out that the Japanese yen averaged 

close to 300 yen against the US dollar in 

the 1970s and about 220 yen in the 1980s — 

compared to the 115-120 range today. “It 

strikes me as extremely hypocritical for Japan 

to criticise China for emulating a strategy that 

was central to its own development model,” he 

says. “Putting pressure on China to revalue its 

currency is a poor excuse for Japan’s inability 

or unwillingness to reform.” 

He is equally critical of the motives of 

Washington. America’s largest trade deficit is 

now with China — a US$103 billion shortfall in 

2002, and on track to exceed that amount in 

2003. Roach argues that trade deficits should 

not come as a surprise for a savings-short US 

economy. “If America weren’t trading with 

China, those deficits would have to occur with 

other nations — Canada, Mexico, other Latin 

economies, Japan, or possibly even Europe. If 

the United States wants to reduce its trade 

deficit, it must come to grips with more fundamental 

problems of its own — namely, a 

rapidly-vanishing national savings rate,” he says. 

One-off lift likely 

■ ABN AMRO says Chinese authorities will try 

to keep the US$/RMB exchange rate steady as 

far as possible, and that when they do let the 

RMB appreciate, it is likely to be a one-off 

move of 15-20 per cent. The bank says there is 

now US$151 billion in foreign currency 

deposits in banks in China. If the Bank of 

China announced overnight a widening of the 

exchange rate band or allowed a gradual 

appreciation, China corporates and individuals 

would be unlikely to continue keeping their 

money in US$. 

"The People's Bank of China is now buying 

US$600 million every day to keep the currency 

steady," ABN AMRO says, adding that two factors 

are holding back the decision to allow the 

RMB to appreciate. The Chinese government is 

still concerned about deflation - it will want to 

see higher inflation before giving up the unofficial 

peg; and there is no guarantee that the 

speculative capital inflow would disppear after 

a 15-20 per cent appreciation. 

China to capture 

electronics growth 

CHINA IS EXPECTED to capture 

77 per cent of an estimated US$60 

billion increase in electronics manufacturing 

in emerging markets by 2005, says a new 

report from the International Finance 

Corporation. 

China's share of global production will then 

exceed that of Western Europe. Engineering 

and design will also move to emerging markets 

– with labour costs up to 80 per cent 

lower than developed regions, says the IFC. 

The study by IFC and management 




ELECTRONICS - WHERE THE GROWTH IS 

From page 9 

consulting firm Booz Allen Hamilton, found 

that electronics production activity in emerging 

markets will nearly double, from US$65 billion 

in 2001 to US$125 billion by 2005 – and will 

account for 43 per cent of total worldwide 

manufacturing growth. More than threefourths 

(77 per cent) of the growth in developing 

countries will be in China, with China 

increasing its share of global electronics production 

from eight to 14 per cent, a growth 

rate twice as fast as any other country. 

The study estimates that electronics production 

in China will be a US$80 billion 

business by 2005. Emerging market growth 

outside of China will be primarily in other 

developing Southeast Asian countries, 

Eastern Europe and Mexico. 

Gains in developing countries will not be 

limited to manufacturing. Higher-value services 

such as engineering and design functions 

will increasingly migrate to developing 

nations over the next few years, although 

this transition will trail the more rapid shift 

in production. 

India and Russia in particular have an abundance 

of highly-skilled labour, with labour 

costs up to 80 per cent lower than in the 

developed world. 

The SARS epidemic has raised concern 

about economic growth in China and other 

emerging markets. However, a follow-up to 

the original survey found that most respondents 

expect SARS to have a very limited and 

only temporary effect on the shift of electronics 

production towards developing markets. 

According to 22 per cent 

of senior executives surveyed, 

SARS should have no 

impact on the movement of 

electronics manufacturing to 

China, 64 per cent expect 

only a slight temporary 

impact, and only 14 per 

cent expect it to have even 

a moderate impact on this 

trend. None of the respondents 

expect SARS to have a 

significant impact on the 

long-term growth of electronics production in 

developing markets. 

"This dramatic increase in production clearly 

demonstrates the growing strength of 

emerging markets," said Dick Ranken, director 

of IFC's Global Manufacturing and Services 

Department. "In fact, a main driver of this 

trend is the rising importance of economies 

such as China as end-user markets for these 

products, which increases their competitive 

advantage in the manufacturing process." 

"Emerging markets offer cost savings that 

are critical for survival in today's hyper-competitive 

environment," said Barry Jaruzelski, 

Booz Allen Vice President. "Large multinational 

corporations are leading the drive to 

emerging markets - and taking their smaller 

suppliers with them." 

The report highlights several other major 

findings: 

■ In emerging markets, final assembly, displays, 

and semiconductors will provide the 

❝Emerging markets 

offer cost savings that 

are critical for survival 

in today's hyper-competitive 

environment. 

Large multinationals 

are leading the drive 

to emerging markets.❞ 

highest level of growth 

through 2005. 

■ China will continue to 

hold commanding positions 

in key value chain elements 

such as assembly, displays, 

and semiconductors, as it 

evolves into the hub of 

electronics manufacturing. 

By 2005, 45 per cent of all 

high volume assembly will 

occur in China. 

■ The Asia Pacific region, 

particularly China, currently dominates electronics 

manufacturing in emerging markets: 

— 83 per cent of electronic displays manufactured 

in emerging markets are produced in 

the Asia Pacific region, with 44 per cent from 

China; 

— For connectors and cables, 78 per cent of 

the emerging markets' output is from the Asia 

Pacific region, including 66 per cent from 

China; and 

— Eastern Europe and Latin America 

account for 25 per cent and 16 per cent, 

respectively, of battery production in emerging 

markets. 

■ By sector, production growth will be led 

by computers and peripherals, with an estimated 

$47 billion increase between 2001 

and 2005, followed by consumer electronics 

($20 billion), handheld devices ($16 billion), 

automotive electronics, and telecom (both 

$11 billion). 

ASEAN revisits regional energy grids 

ASEAN is again moving 

towards a cross-border gas 

and electricity grid. It has 

approved a Master Plan for 

power inter-connection, 

but emergence of common 

gas and power markets 

where energy is traded is 

some way off . . . 

From ANDREW SYMON 

ASIA TODAY INTERNATIONAL Correspondent 

SINGAPORE: 

A more integrated, 

co-operative approach to meeting 

energy demand is slowly emerging among 

Southeast Asian countries. 

Following progress in removal of tariff 

barriers to trade in goods under the ASEAN 

Free Trade Agreement (AFTA), attention is 

being given to promotion of cross-border 

gas and power supply to more efficiently 

meet energy demand. In July, the 10 ASEAN 

member states approved a comprehensive 

Master Plan for power interconnection. The 

plan proposes 11 main new transmission 

interconnections between countries, to be 

built by 2020. It complements a plan for 

inter-country gas transmission connections, 

which ASEAN ministers agreed to last year. 

Currently, there are three cross-border 

power transmission lines - from Laos to 

Thailand, supplying hydro power to 

Thailand; and two-way interconnections 

between Thailand and peninsular Malaysia, 

and Malaysia and Singapore. There are also 

cross-border gas pipelines in operation, taking 

gas from Myanmar to Thailand, from 

peninsular Malaysia to Singapore and from 

Indonesia to Singapore. 

The ministers endorsed the power plan during 

a meeting at Langawi Island, Malaysia, on 

July 3. In a statement issued after the meeting, 

they welcomed progress made in the Trans- 

ASEAN gas pipeline and the ASEAN power 

grid projects and said they “look forward to 

working collectively to provide greater stability 

and security of energy supply in the 

ASEAN region”. Strong private sector participation 

in the gas and power interconnection 

projects is necessary, they say. Ministers recommended 

development of an enabling 

framework to ensure construction is carried 

out on a commercial basis. 

The power plan broadly divides the region 

into two. There is a “west system”, featuring 

new interconnections within the Mekong 

region - Cambodia, Laos, Myanmar, Thailand 

and Vietnam - and also between Thailand and 

peninsular Malaysia; Malaysia and Sumatra in 

Indonesia; peninsular Malaysia and Singapore; 

Singapore and Batam in Indonesia; and 

Singapore and Sumatara. Thailand is put forward 

as a hub for the west system. Power from 

the Mekong region, much of it hydro-produced 

from Laos and Myanmar, would be transmitted 

or “wheeled” through Thailand to countries to 

the south — providing the tariff is competitive 

to the production cost of the gas and coal-fired 

power plants in the south. 

An “east system” proposes interconnections 

between the different countries on Borneo 

island - Brunei, the Malaysian states of Sabah 

and Sarawak, and Indonesian Kalimantan. A 

long-distance submarine interconnection with 

the Philippines and the Borneo system was 

found not to be economically viable in the 

period to 2020. Similarly a once-mooted submarine 

link between Borneo and peninsular 

Malaysia was not considered viable. 

Earlier, Malaysia had proposed that the 

planned Bakun hydro dam project in Sarawak 

could supply the peninsula and possibly the 

Philippines as it would generate far more 

power than the relatively small economy of 

Sarawak would need. This dam has long been 

controversial because of feared environmental 

damage to the Rejang river system and its 

impact on local communities. A smaller dam 

project is now contemplated. 

The power study was carried out by the 

Heads of ASEAN Power Utilities (Hapua). The 

gas plan was developed by the ASEAN 

Council on Petroleum, which represents 

national oil companies. 

The Hapua co-ordinator for the power 


10 


ASEAN'S ENERGY BID 

From page 10 

study, Prutichai Chonglertyanichkul, 

Assistant Director of System Planning at the 

Electricity Generating Authority of Thailand, 

said interconnection could result in significant 

savings. “Each country does not need to 

install as much power generation. You can 

reduce the reserve margin each country would 

otherwise need if it pursues self-sufficiency,” 

he said. “If you stand alone, when the system 

is not meeting full demand, then you may have 

to stand down some power plants because 

demand is not sufficient. If systems are interconnected, 

then this can be avoided as power 

plants can still operate by transferring power to 

another country.” 

There were also environmental benefits. “If 

you stand alone, you will need more power 

plants, producing more carbon dioxide emissions 

and so on,” he said. Politically, the power 

interconnections would encourage closer relations 

between countries. But concerns over 

supply security could still make it difficult for 

countries to commit too much of their power 

supply needs to generators in neighbouring 

countries, Prutichai added. 

Some propose that ASEAN members should 

enter into an energy treaty that could guarantee 

that member countries would not interrupt supply, 

similar to the law governing cross border 

supply in Europe. 

More cross-border links, however, do not 

mean rapid emergence of common gas and 

power markets where energy is traded — as is 

the case to various degrees in North America, 

Europe, Australia and New Zealand. Policies in 

Southeast Asian countries vary significantly. 

Some states, such as Malaysia, are not prepared 

to entirely liberalise gas and power supply 

industries for fear of shortages and price spikes, 

as occurred in California. 

Only Singapore has a power pool market. 

The Philippines plans to establish one, while 

Thailand has reversed its earlier intention to 

institute a power market. Private power supply 

through independent generators selling under 

long-term contacts, if not in power-pooling systems, 

is supported throughout the region nevertheless, 

especially as State-owned power 

companies alone are not able to finance all the 

needed generation plant. 

Bank Mandiri IPO 

may set trend in 

investor sentiment 

From TOM MCCAWLEY 

ASIA TODAY INTERNATIONAL Correspondent 

'OMANDIRI' in Bahasa Indonesia, 

the national language, means independent. 

On July 14, Bank Mandiri, Indonesia’s 

largest State-owned bank by assets, took a 

major step towards its own independence. It 

made a strong debut on the Jakarta Stock 

Exchange, following on initial public offering 

earlier in July. 

Despite a small bomb blast at the Parliament, 

Bank Mandiri shares rose 26 per cent as foreigners 

who had missed the earlier IPO rushed 

to buy. It was a proud day for officials who 


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From page 10 

remember when Bank Mandiri, just four years 

ago, was created from four failed state banks, 

their assets pooled and bad loans written off. 

Mandiri was fortified by the Indonesian Bank 

Restructuring Agency (IBRA), with bonds that 

still make up most of its assets. 

Now, the successful IPO is a strong sign that 

international sentiment is shifting not only for 

Indonesian stocks, but for the wider economy. 

The launch was carefully timed to coincide 

with rising confidence in the market. So far, the 

Jakarta Stock Exchange is up by more than 25 

per cent this year. Indonesia is likely to graduate 

from the US$5 billion International 

Monetary Fund loan programme at the end of 

2003. It's officials have praised the macro-economic 

management of the government of 

Megawati Sukarnoputri. 

In a bid to stimulate investment, Bank 

Indonesia has lowered its interest rates to their 

lowest levels in nine years. Indonesia’s oncebattered 

currency, the rupiah, is up by 20 per 

cent this year. The good macro-economic news 

has helped persuade investors that Bank 

Mandiri is a good buy. In late June, the government 

increased the size of the offering from 

15 to 20 per cent due to strong demand, mainly 

from overseas investors. In fact, most 

investor demand came from outside Indonesia. 

At the end of book-building in late June, foreign 

investors accounted for 80 per cent of the 

issue. Two-thirds came from institutions, which 

are traditionally unwilling to commit major 

funds to Indonesia. Indonesia recently sold 

stakes in Bank Niaga (to Malaysia’s Commerce 

Asset Holdings Bhd), an in Bank Danamon (to 

Temasek Holdings of Singapore, the Singapore 

government's investment wing). 

Bank Mandiri is attractive for several reasons. 

It is the largest stock in the banking sector after 

Bank Negara Indonesia and Bank Central Asia, 

counting among the top 10 capitalised stocks 

on the exchange. At current prices, Bank 

Mandiri's publicly available stock is worth 

around US$400 million. Mandiri is relatively 

cheap - priced at 1.06 times its book value 

compared to 1.5 for Bank Danamon, another 

major bank. 

Importantly, Mandiri has growth potential. It 

is a major platform for entry into a market of 

210 million people. The bank has assets of 

some Rp260 trillion ($31.65 billion). As of 

March 31, Mandiri had 700 branches, with 

some eight million customers. 

Local analysts claim Mandiri's share price will 

keep rising. In mid-July, the bank was added to 

the influential Morgan Stanley Capital 

International Standard Indices. The move is 

likely to boost confidence in the stock as overseas 

funds often use the MSCI as a benchmark 

for decision-making. 

Concerns remain over the quality of Bank 

Mandiri’s assets. Most of the bank’s income 

come from bonds issued when the bank was 

recapitalised in the Asian crisis of 1997-98. The 

bank is also finding it difficult to loan as corporate 

defaults remain at a high level. 

The Government's low interest policy also 

poses risks for Mandiri. If the bank does not 

resume large-scale corporate lending this year, 

earnings could be damaged. After the success 

of the Mandiri launch, the government is likely 

to push ahead with an IPO in another major 

State-owned bank, Bank Rakyat Indonesia. 

TOURISM SHAPES UP AFTER SARS 

Advisories 'self-defeating' 

ISSUING travel advisories 

against countries hit by 

terrorism plays into the 

hands of those who 

want to disrupt business, 

says Richard Gordon, 

Philippines Tourism 

Secretary and current 

Chairman of the Pacific 

Area Travel Association . . . 

THE PHILIPPINES suffered another 

setback on July 27 when para-military 

groups “hijacked” a downtown office 

block in Manila. To Richard Gordon, the man 

who is working doubly hard to restore confidence 

in his country’s tourism industry, it is 

yet another public relations nightmare. 

Bad news, it seems, never ends. And what 

Gordon, the Philippines Tourism Secretary, 

fears most is “stigmatisation” that comes from 

such incidents. 

During a visit to Australia to help rebuild 

the image of the Philippines as a tourist destination, 

Gordon was at pains to stress that the 

Philippines has more than 7,000 islands, and 

that incidents in Manila or in Minandao should 

not tarnish the rest of the country. 

Recurrence of terrorist acts is like a rollercoaster 

ride for those in charge of tourism. 

Gordon says there has been a paradigm shift 

in global terrorism, with terrorists graduating 

from hijacking planes to using the 

planes themselves as weapons. 

“The world has to put on a brave 

front in dealing with terrorism. We 

have to learn to cope,” he says. 

Countries have taken precautions, 

but they must also realise that issuing 

travel advisories against countries 

hit by terrorists is self-defeating, 

in a sense playing into the 

hands of those who want to disrupt 

business and tourism. 

Following an agreement reached 

at an Asian tourism Ministerial meeting 

this year, Southeast Asian countries have 

agreed to share intelligence and information. 

Gordon, who is also Chairman for 2003-4 of 

the Pacific Area Travel Association (PATA) and 

concurrently World Tourism Organisation 

Commissioner for East Asia, says the outbreak 

of SARS led to concerned countries advising 

their own citizens to avoid travelling to affected 

areas. This provided a sobering experience 

for countries like Canada, which for the first 

time realised the flow-on impact of travel 

advisories — which affect not only the 

tourism and transportation sectors but ripple 

out to insurance companies and the wider 

business community as visitors cancel trips. 

Gordon says he does not argue against the 

use of travel advisories, but governments 

need to be “smarter in issuing them”. He says 

they ought to be region-specific. He also says 

the world did not issue travel advisories 

Richard Gordon: 

Governments need to 

be smarter in issuing 

advisories. 

against Japan after the Sarin gas incident in 

Tokyo, or the United States after September 11 

terrorist attacks on New York and Washington 

in 2001. 

But the global tourism industry is resilient, 

says Gordon. It has started to recover from the 

impact of SARS, which is estimated to have 

cost some US$11 billion (AUD17 billion) in 

international tourism revenue in the two worst 

months of the outbreak. SARS affected the 

major travel hubs of the region — Singapore, 

Hong Kong, Taiwan and China. 

Intra-Asia travel is a major contributor to 

tourism in the region. Of the 132 million visits 

to Asian destinations last year, Gordon says 84 

million were intra-Asia travel. Asia is the 

world’s second-largest market after the US. 

This is why the financial costs of SARS were 

higher than those of September 11 or the 

October 18 2002 Bali bombing. Gordon says it 

will take six months for the industry to recover 

from the fall-out of SARS. Airline capacity is 

increasing, and regional initiatives are now in 

place, offering attractive deals for long-haul 

visitors to Asia. 

It is crucial, Gordon says, that the industry 

regains the confidence of travellers. 

As well, he says, Southeast Asian countries 

have undertaken a key initiative in offering 

special airfare and hotel packages to lure 

long-haul travellers back to the region. 

Regional airlines and hotels are participating 

in these special fares and room rates to 

encourage long-haul tourists to visit multiple 

destinations. Travellers pay US$120 extra for 

each sector, for example from Manila to Hong 

Kong, or Hong Kong to Singapore, 

with five-star hotels charging from 

US$70 a night. 

Domestically, Gordon has made 

“long weekends” official policy in 

the Philippines, ensuring that public 

holidays which fall during the week 

are moved to the Friday or Monday. 

The only day that cannot be moved 

is Labour Day. “We do this in consultation 

with business,” he says. “As 

long as we tell them in advance, they 

support the idea.” He says the long 

weekends have resulted in a 20 per 

cent rise in domestic tourism. “This is good for 

our transportation industry, hotels and resorts.” 

Last year tourism generated US$82 billion 

worldwide. Long-term growth is projected at 

5.5 per cent, although growth dropped to 4.3 

per cent last year. 

Tourism is the positive face of globalisation, 

Gordon says. It is one sector that can produce 

immediate benefits to the people of a country 

that opens its doors to the world. The most 

important thing is that those involved in the 

industry do not have to have college degrees. 

He says tourism have been credited with raising 

the standard of living of millions of people in 

poor countries. Not only is tourism a key generator 

of foreign exchange to Asia. With China 

and India being part of Asia, 

the region is potentially the largest single 

market for global tourism. 

■ Business Travel, page 30. 


ASIA PULSE 

THE INFORMATION HEARTBEAT OF ASIA 

The information heartbeat of Asia 

ASIA PULSE is a joint venture involving the resources 

of (AAP) - AAP Information Services Pty Ltd (Australia); 

(ANTARA) - LKBN ANTARA (Indonesia); (Bernama) - 

Bernama (Malaysia); (Nikkei) - Nihon Keizai Shimbun Inc 

(Japan); (ONA) - Oman News Agency (Oman); (IRNA) - 

Islamic Republic Newsagency (Iran); (PNA) - Philippines 

News Agency (Philippines); (PPI) - Pakistan Press 

International (Pakistan); (PTI) - The Press Trust of India 

Ltd (India); (Yonhap) - Yonhap News Agency (Korea); 

(VNA) - Vietnam News Agency (Vietnam); and (XIC) - 

Xinhua Information Centre (China). 

TRIAL RUN ON THREE GORGES 

YICHANG — The first power generator of 

China’s Three Gorges Project, the largest of 

its kind in the world, has been connected to 

the power grid to begin generating electricity. 

Yang Qing, vice-general manager of the 

China Yangtze River Three Gorges Project 

Development Corporation, said the generating 

unit will supply 12.9 million kwh per day 

to the Central China and East China Power 

Grids. The unit will have to pass a 30-day 

trial operation period before beginning commercial 

production in mid-August. 

SAMSUNG SALES UP IN INDIA 

NEW DELHI — Samsung India has posted a 

70 per cent increase in sales turnover to 

Rs12,150 million (US$262.9 million) for the 

six months ending June 30, 2003. Flat television 

sales grew 275 per cent to 150,000 units, 

and there was a 116 per cent increase in 

colour television sales at 690,000 units. 

Refigerator sales were up by 55 per cent at 

180,000 units, washing machines up 70 per 

cent, and microwave and airconditioners up 

82 per cent and 81 per cent respectively for 

the half. 

J-POWER OPTS FOR WIND POWER 

TOKYO — Electric Power Development Co., 

known as J-Power, plans in 2004 to build 

Japan’s largest wind power generation plant 

in Fukushima Prefecture, investing 10 billion 

yen (US$84.35 million) to install about 30 

wind power generators with a combined output 

of 60,000kw, enough to supply about 

36,000 households with electricity for a year. 

J-Power plans to sell the entire output to 

Tokyo Electric Power Co., starting in 2005. 

SINGAPORE’S GDP DOWN 

SINGAPORE — Singapore’s gross domestic 

product [GDP] contracted 4.3 per cent 

year-on-year in real terms in the second 

quarter of 2003, according to advance 

government estimates. On an annualised 

quarter-on-quarter basis, real GDP fell by 

11.8 per cent, compared with growth of 1.2 

per cent in the previous quarter. GDP 

growth in the second quarter was 

predictably weak as a result of the weak 

global environment and the SARS outbreak. 

NO TAIWAN CEILING FOR FTTS 

TAIPEI — Qualified foreign institutional 

investors will no longer be subject to a ceiling 

of US$3 billion on their investments. Also gone 

is a requirement that money pledged by foreign 

investors in the local stock market must be 

brought into Taiwan within two years. 

However, the investors’ licenses to buy and sell 

stock on the local bourse will be suspended if 

they fail to funnel any money into the market 

within three years of obtaining permission. 

HK RECOVERING FROM SARS 

HONG KONG — Air traffic figures for June 

at Hong Kong International Airport showed 

life slowly returning to normal for the local 

aviation industry. The effect of SARS was still 

apparent, with June total passenger traffic 

figure down 57.2 per cent compared with the 

same month last year, but it was an improvement 

on May, when passenger traffic was 

down 79.9 per cent from the same month 

last year. 

PIRELLI INVESTING IN INDONESIA 

JAKARTA — Pirelli has announced plans to 

establish a tyre factory in Indonesia with an 

investment of US$100 million and a production 

capacity of 5,000 pieces per day. The factory 

will concentrate on tyres for four-wheeled 

vehicles and light trucks. 

GM TO EXPAND IN INDIA 

MUMBAI — General Motors Corporation will 

invest Rs6,000 million (US$129.7 million) in its 

Indian subsidiary during the current fiscal 

year. The parent company has received clearance 

to invest up to Rs13,800 million in 

General Motors India for new products and 

development purposes. 

INSURANCE COVER UP IN CHINA 

BEIJING — The combined premiums of 

Chinese and foreign insurance companies in 

China topped 212.61 billion yuan (US$25.7 

billion) in the first half of this year, up 32 per 

cent year-on-year. Total payments for the sixmonth 

period were 26.7 billion (US$3.23 billion), 

five billion yuan more than last year. 

The outbreak of SARS stimulated domestic 

demand for insurance. 

TOYOTA JV IN GUANGZHOU 

NAGOYA — Toyota Motor Corp. aims to start 

joint production of passenger cars with China’s 

Guangzhou Automobile Group Co. by 2005. 

The two plan to establish an equally-owned 

joint venture this year and to invest slightly 

more than 30 billion yen (US$254 million) to 

build a factory. Initially, 30,000 units of the 

Camry will be produced each year. By boosting 

its presence in southern China, where many of 

the wealthy live, Toyota hopes to obtain a 10 

per cent share of the Chinese market by 2010. 

US BUYING BIG FROM VIETNAM 

HANOI — The US is Vietnam’s top importer 

and the British Virgin Islands is pouring most 

money into the country, according to half-year 

government statistics. Growing at 183 per cent, 

US sales accounted for one-fifth of Vietnam’s 

total export turnover in the first six months of 

the year followed by Indonesia, Portugal and 

South Africa, with growth of 114, 83 and 75 per 

cent, respectively. Deputy Trade Minister, Mai 

Van Dau, attributed the performance to all-out 

efforts from the government and businesses to 

promote trade and tap new markets. 

CONSUMERS CLOSING WALLETS 

SEOUL — Consumer confidence declined to 

an all-time low in June due to concerns over 

the moribund economy and sluggish growth, 

the National Statistical Office (NSO) said. The 

report showed that, regardless of the size of 

monthly income, people will spend less in the 

coming months than they did in the past. 

TELECOMS BIDS IN PAKISTAN 

ISLAMABAD — The government has 

announced the opening of its fixed-line telephone 

sector to private investors after abolishing 

the monopoly of the state-run Pakistan 

Telecommunication Company Limited [PTCL] 

earlier this year. “Licences will be issued to private 

operators for a period of 20 years,” said 

Federal Minister for Information Technology 

Awais Leghari, adding that licences will be 

issued to private companies for fixed-telephony 

in Pakistan through a transparent process with 

open bids. 

THAI AIRWAYS TO OFFER SHARES 

BANGKOK — Thai Airways International said 

it will seek to raise 15 billion baht (US$360 million) 

through a share offering in November by 

issuing 300 million new shares to the public. 

Thai Airways plans to cut government ownership 

to 70 per cent from 93 per cent by selling 

the shares, the Bangkok Post said. The airline 

made a net profit of 8.3 billion baht in the first 

six months of the current financial year. 

PANVA GAS EXPANDS IN CHINA 

CHENGDU — The Hong Kong-based Panva 

Gas Holdings Limited plans to invest HK$3 

billion (US$389 million) exploring gas 

resources in Sichuan Province, southwest 

China, within the next two to three years. 

Sources with the Hong Kong company 

said it will step into the Sichuan gas market 

by taking over gas companies in the 

province and establishing joint ventures. 

Panva Gas has set up more than 20 joint 

ventures on the Chinese mainland since 

1997., for a total investment of HK$1 billion 

(US$130 million), and has taken over three 

gas companies in Sichuan. 

©Asia Pulse Pte Ltd. 

Each day Asia Pulse creates up to 250 items of news, business 

opportunities, expert commentary and industry profiles. Asia Pulse is 

a unique joint venture involving the resources of Asia’s major news 

and information groups. 

Contact: Asia Pulse Production Centre 

Phone: (612) 9322 8634 

Fax: (612) 9322 8639 

http://www.asiapulse.com 

Email: apulse@ozemail.com.au 

14 



WHERE ECONOMIES ARE HEADING 

Asian construction slowdown on way 

THE construction sector in 

Singapore and Hong Kong 

is expected to contract 

significantly in 2003, compunded 

by the impact of 

SARS, according to a new 

BIS Shrapnel report . . . 

BECAUSE OF slower-than-expected 

global economic recovery, particularly 

in the US, and the SARS impact, growth in 

the construction sector in East and Southeast 

Asia is expected to contract in 2003, according 

to BIS Shrapnel. 

Writing in the BIS Shrapnel research series 

Building and Construction Asia Pacific, 2002 

to 2005, co-authors Adeline Wong and Jason 

Anderson suggest that the construction sector 

in Singapore and Hong Kong will contract significantly 

in 2003, compounded by the impact 

of SARS. The co-authors expect the SARS outbreak 

to fracture a previously fragile recovery 

in these economies. 

Meanwhile, construction activity in South 

Korea and the Philippines is expected to move 

into a downswing in 2003, with activity in 

China, Indonesia, Malaysia, Taiwan and 

Thailand to experience moderate growth. 

The paper forecasts construction in most 

Asian countries to achieve some recovery in 

2004 and 2005, setting the stage for stronger 

growth in the second half of the decade. 

China: The residential and non-residential 

building sector in China is expected to remain 

steady in 2003, before growth gathers momentum 

in 2004 and 2005 underpinned by strong 

underlying demand for affordable housing, and 

for commercial and industrial property amid 

further market deregulation in 2005. 

Total building completions in Beijing and 

Shanghai are forecast to increase by 2-5 per 

cent in 2003. Completions are, however, 

expected to fall back in 2004, mainly as a 

result of a stock build-up and a recent ban on 

construction loans to developers of high-end 

residential units. 

By 2005, construction growth is expected 

across all four cities — Beijing, Shanghai, 

Guangzhou and Shenzhen — with Beijing 

recording strongest growth. Growth in Beijing 

over the three years to 2007 will be underpinned 

by building activity undertaken to 

spruce up the city for the 2008 Olympic 

Games, and also by Olympic Games-related 

building projects. 

Hong Kong: The construction sector is 

expected to continue into its fifth year of 

downturn in 2003 and is not expected to bottom 

out until 2004, when gross value of construction 

work performed will to be 33 per cent 

below its 1998 record peak. The protracted 

downturn is ascribed mainly to the depressed 

residential property sector. A rebound of three 

per cent in aggregate construction value is forecast 

for 2005, principally due to a recovery in 

the residential construction market. 

Indonesia: The rebound in Indonesia’s 

construction sector is expected to continue 

over the next three years, but growth is forecast 

to be lower than during the previous three 

years. Total completion value in 2005 will still 

be 30 per cent below the levels of the mid- 

1990s. Stronger growth is expected from the 

retail building sector in response to tightening 

prime retail space supply. 

Malaysia: Despite a persistent supply 

overhang across the property sector, the construction 

sector in Malaysia is expected to 

continue to average annual growth of two per 

cent over the three years to 2005. The sector 

will be sustained mainly by infrastructure, low 

to medium-cost housing and institutional 

building projects. The commercial and industrial 

building sector will remain constrained by 

high vacancy levels. 

Philippines: Construction sector growth is 

expected to contract nine per cent in 2003, due 

to a significant decline in non-residential building 

activity as retail building activity falls back 

from an exceptionally high level in 2002. The 

sector is forecast to rebound moderately in 

2004 and 2005, backed by steady, solid growth 

in residential and retail building, and infrastructure 

projects. 

Singapore: Construction demand in 

Singapore is expected to contract 22 per cent in 

2003 because of a significant downswing in 

non-residential building and subdued residential 

and civil engineering activity. The rebound 

forecast for 2004 is from a low base, mainly 

backed by residential redevelopment and 

retrofitting activity as well as retail and office 

refurbishments. New building activity is expected 

to gather some strength in 2005, in response 

to an economic recovery. 

South Korea: Residential building activity 

is expected to move into a two-year steep 

downturn in 2003 and 2004, due to excess 

housing stock. Overall construction demand is 

expected to decline by six per cent in 2003 and 

remain subdued in 2004. However, a 

resumption of growth in building activity is 

forecast for 2005, backed by a pick-up in 

demand for residential, commercial and industrial 

property. 

Taiwan: Taiwan’s construction sector is 

expected to stabilise in 2003, backed by a five 

per cent rebound in the civil engineering construction 

sector. Growth is forecast to resume 

in 2004 and 2005 at an annual average of 11 

per cent. Residential and non-residential 

building sector growth is, however, off a lowbase. 

The residential building sector is expected 

to continue to be constrained by a chronic 

excess in housing supply. However, a turnaround 

in non-residential building activity will 

be supported by a pick-up in demand for 

office and factory buildings through stronger 

economic growth and rising direct trade with 

mainland China. 

Thailand: Over the 2003-2005 forecast 

period, construction sector growth is expected 

to strengthen, supported by a continued 

rebound in the residential building sector 

and a turnaround in the non-residential and 

civil engineering sectors. Residential building 

activity has been boosted by a pick-up in 

new housing demand. Over the forecast 

period, the residential building sector will be 

aided further by the Government’s aim to 

build 600,000 low-cost units over the 2003- 

2007 period. The non-residential building 

sector will be underpinned by retail, hotel 

and industrial building activity amid 

strengthening business confidence. 

Visit www.bis.com.au 

Real recovery this time 

By ROGER DONNELLY, Chief Economist, 

Export Finance and Insurance Corporation 

FOR 18 MONTHS now, the world 

economy has been showing several 

signs of getting back onto its feet after the 2000 

dot.com crash and subsequent 2000-01 slowdown, 

only to stumble back every time into 

very weak growth. 

In the March quarter, GDP was dead flat in 

the eurozone, and growth only 0.6 per cent pa 

in Japan and 1.9 per cent pa in America. In the 

current June quarter, Asia, excluding Japan, is 

slumping, because of SARS, the eurozone continues 

to tread water, and Japan looks as if it's 

shrinking again. 

Pessimists are saying the worst isn't over. 

The Bank of Japan has cut its interest rate to 

zero. The Federal Reserve has cut interest 

rates 550 basis points over the past 2 1/2 years 

to 1 per cent. And the Japanese and American 

governments have also been energetically 

priming the fiscal pumps through spending 

boosts and tax cuts. 

Yet despite this, economies are failing to 

pick up; excess capacity is lingering; businesses 

are having to offer steep discounts to shift 

production; inflation is falling to 1 per cent pa 

or below in America and the eurozone; while 

the deflation that Japan has been experiencing 

for the past four years is getting worse. 

What if central banks cut interest rates all 

the way to zero and activity still doesn't rev 

up That's the really frightening question. 

Inflation could fall to zero, and then become 

deflation — sustained. Real interest rates 

would rise. Falling prices and falling demand 

could feed off and reinforce each other. We 

could be staring at a situation that resembled 

at best Japan since its bubble burst in 1990 - 

or at worst, the Great Depression. 

Fortunately, this doesn't look likely. The 

drags of war, high oil prices and SARS are starting 

to fade. Thanks to the recent world sharemarket 

rally and decline in long bond rates, 

financial conditions - the cost of capital - have 

eased considerably. (Though the recent bond 

selloff will have to be watched.) 

A lot of post-bubble balance sheet adjustment 

has already been undertaken - deleveraging, 



From page 15 


recapitalisation, write-off of excess capacity. And 

there is much monetary and fiscal stimulus still 

to come out of the pipeline - including from the 

recent US$350b American tax cut. 

Besides, if worse comes to worst, central 

bankers led by the US Federal Reserve have 

professed themselves ready to do all it takes to 

ward of deflation - including buying long-dated 

government bonds and extending credit direct 

to business - all a far cry from their dazzled-bythe-headlights 

inaction in the 1930s. 

So yes, we believe the stars are finally coming 

into line for a recovery. We are currently 

calling a return to trend growth of about 3 1/2 

pre cent for the world economy by end-2003 or 

early 2004. No vigorous rebound - there isn't 

the pent-up demand. Still, these would be conditions 

conducive to a gradual pick-up in 

exports after their downtrend this past two 

years. One snag could be the US dollar correction 

currently under way. This has the potential 

to push Japan and the eurozone into recession 

by undermining their export and import-competing 

industries - unless the authorities in 

those areas manage to stimulate more domestic 

demand-led growth. 

In addition, the counterpart of further US 

dollar weakness could be further A$ strength. 

That would be a headwind for exporters to battle 

as they patiently wait for their overseas markets 

to leave the doldrums. It needn't work that 

way - markets may soon judge that it's time to 

pile back into US dollar assets again, given the 

way America continues to outgrow the eurozone 

and Japan. But for all that, US dollar 

depreciation is a stress worth subjecting your 

business plan to. Another stress worth thinking 

about is a further slide in activity in Japan, 

which is looking very weak. 

Thankfully, the expansionary impulses finally 

seem to be overcoming the drags. So 

although there have been a lot of false starts, 

this time a recovery could be on for real, even 

if it is a little weak and accompanied by a 

stronger Australian dollar. 

Malaysia to lift it’s 

domestic spending 

MALAYSIA could be Asia's next 

domestic consumption story, according 

a report by ABN AMRO. It says Malaysia is 

striving to transform its economy from one that 

is largely agriculture/mining and manufacturing-based 

to one that is competitive in downstream 

support services. 

"Medium-term, the real excitement with 

Malaysia lies in the possibility of a spurt in consumption 

turning to sustained structural 

domestic demand," the report says. "Malaysia 

stands out because its surplus savings are the 

largest in Asia and its demographics arguably 

the most attractive." 

ABN AMRO says both Malaysia's and 

Singapore's corporate earnings and absolute 

share prices have, in the past, been closely 

influenced by global growth cycles. "This time 

round, a weak US$ and continued robust 

demand for resources/commodities are providing 

somewhat of a saving grace for both countries. 

We are expecting a moderate recovery in 

both economies and corporate earnings 

over the second half." 

16

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