Chinese Economy Monitor--- Note 1

Chinese Economy Monitor--- Note 1

By B. Raman

(What will be the impact of the global financial and economic melt-down on the Chinese economy? This question should be of interest to the other countries of the South and the South-East Asian region. If the Chinese economy is badly affected, they too are likely to feel the negative consequences of the down-turn in the Chinese economy. Keeping this in view, we intend bringing out a periodic "Chinese Economy Monitor" based on open information. Here goes the first Monitor in the series---B. Raman)

Citic Pacific Faces Enquiry

The Securities and Futures Commission (SFC) of Hong Kong announced on October 22,2008, that it has undertaken an enquiry into the affairs of the Citic Pacific, the Hong Kong listed branch of the China International Trust and Investment Corporation, following a report submitted by the Citic Pacific to the Hong Kong Stock Exchange on October 20, allegedly admitting that two of its senior executives had entered into unauthorised foreign exchange forward contracts in Euros and Australian dollars, which have already resulted in a loss of US $ 104 million, with a possibility of further losses, which could run up to another US $ 200 million. Among those reportedly facing enquiry are a Finance Director of the Company and the daughter of the Chairman of the company, who occupied a senior position in the company. It has been reported that pending the enquiry she has already been demoted. Albert Ho, a member of the Hong Kong Legislative Assembly, has accused the company of concealing this information from the investors. The Citic Pacific has reportedly admitted that it became aware of this unauthorised transaction on September 7. According to Ho, the company did not mention this in a circular issued by it to the investors on September 12. The prices of the shares of the company fell by 55 per cent on October 21 and by another 10 per cent on October 22.---- Source Agence France Presse (AFP).

Toy Industry In A Crisis

2. Another toy factory in China catering to the US market went bankrupt on October 22 and closed down its production, rendering 900 workers jobless. The toy factory is called the Chong Yik Toy company. It is owned by a Hong Kong businessman and is based in Shenzhen in the Guangdong province. Some of the workers have alleged that they were not paid their salaries for the last four months. Some payments were made to them by the company as well as the local Chinese authorities at the time of the termination of their services. Last week, the Hong Kong listed Smart Union Toys factory in Dongguan in the Guangdong province closed down after terminating the services of 7000 workers. According to the Xinhua news agency, in the first seven months of this year, 3631 small scale enterprises producing toys mainly for the US market have closed down due to a decline in the demand for China-made toys from the US. These enterprises, which have closed down, constituted 52.7 per cent of all toy-making companies in China--- Source "South China Morning Post" and AFP.

Shipping Companies Face Difficulties

3. After the aviation industry, the shipping industry is facing a crisis due to a decrease in demand for cargo space. Share prices of some major shipping companies, which haul bulk freight such as iron ore, coal and grains, have fallen by 50-70 per cent in the past few months. "The global economic slowdown will push some shipping lines into bankruptcy," Marc Faber, a famed investor and editor of the "Gloom Boom & Doom" report, told AFP. Standard & Poor's also said this week that the Asian shipping market has suffered double-digit declines on the US-Asia route in June and July, as well as being hit with higher operating costs. There are reports of idle vessels being put to anchor, and question marks over the many orders for new ships that were placed in brighter times, years ahead of expected completion dates. "Pain levels could be high for companies that agreed to pay 2007 top-dollar prices for dry bulk ships, or who agreed to pay high long-term charters," said an article in the Far Eastern Economic Review this month. Container shipping was hit first earlier this year as demand for Asian-made goods in the US and Europe dropped off. In a chain reaction, Asian factories manufacturing electronics and consumer items for the US and European markets began lowering output, and the need for raw materials has declined.
Container shippers, bulk operators and port authorities across the region are reporting slowdowns. Malaysia's Port Klang said it had been hit by a decline in cargo handling since the start of October, due to a retail downturn and lower vehicle sales in the US and Europe. The
Shanghai International Port has said that growth in cargo traffic dropped sharply to 9.9 per cent in the first half of 2008 on the "increasingly grave global economy and trade situation". "Faced with the severe economic situation at home and abroad, the port industry has met with the most complicated operation environment in recent years," it said. Hong Kong, which is sensitive to any drop in demand for toys, gadgets and clothes made in the factory-belt of China's southern Guangdong province, said that after an increase of 6.7 per cent in container traffic in August, growth dropped suddenly in September to just 1.2 per cent. "Given the global gloomy economic outlook, Hong Kong is expected to face a much tougher export trade environment," said Hong Kong Container Terminal Operators Association chairman Alan Lee.
In Taiwan's seven harbours, volumes fell 2.23 per cent in the nine months to September, and in southern Kaohsiung city, business was down 1.76 per cent. "We are seeing a rapid decline in the volume of exports," an official with the Japanese Shipowners' Association said of the decline in demand. Shipping rates have been falling to levels s not seen since the Asian financial crisis in 1997-1998.A so-called capesize vessel, most commonly used to carry coal and iron ore, now costs under US$11,000 a day to hire, about half the charge in May.
Container shipping lines have said they expect cargo demand on the US-Asia route to fall by as much as eight per cent in 2008.
"It's a safe statement that no carrier is operating profitably in the eastbound transpacific market today," said Ron Widdows, chairman of the Transpacific Stabilisation Agreement - a forum of major shipping lines. However, the group said vessels are still running at 90 per cent capacity as firms cut costs by consolidating routes and returning chartered vessels, and take advantage of the downturn to lay up ships for repairs. Widdows said the industry was confident that government efforts to unclog global finance would be effective, restoring confidence and paving the way for a shipping recovery in late 2009.---- Source AFP

Container Traffic Down

4. Shanghai's port, one of the world's busiest, has cut its container traffic target for the year by five per cent, blaming the global financial crisis and an economic slowdown. The Shanghai International Port Group's handling volume is expected to reach 28.5 million twenty-foot equivalent units (TEU), less than its earlier target of 30 million TEU. Lower trade volume due to the weakening global economy, slowing domestic growth and natural disasters in China this year have affected the port's container operations. China's economy expanded by nine per cent in the third quarter, the lowest level in about five years as the global credit crisis put a dent in its booming economy. The port operator's container throughput rose 10.4 per cent from a year earlier to 13.82 million TEU in the first half, sharply slower than the growth in 2007, when throughput jumped 20.4 per cent to 26.2 million TEU. In the first nine months of 2008, container processing in Chinese ports rose 14.9 per cent to 94.5 million TEU, 2.2 per cent lower than the first half, according to Ministry of Transport figures.--- Source "Shanghai Securities News" and AFP.

Move For Financial Watchdog

5.Japan, China and South Korea will set up an Asian watchdog body to monitor the health of financial institutions in a bid to counter global economic chaos.They hope to have the first meeting in Tokyo next month and also invite other Asian nations including the 10 members of the Association of Southeast Asian Nations (ASEAN).It would serve as a regional version of the Financial Stability Forum, a panel that advises the Group of Seven major economies and exchanges information among them. Japan also hopes the meeting would discuss enhancing controls on the financial system. The move came as US and European leaders called for an emergency summit in November to discuss ways to restore the battered global financial sector. Japanese Prime Minister Taro Aso is also sounding out whether the South Korean and Chinese leaders can travel to Japan by the end of the year for an inaugural three-way economic summit. Japanese Government officials declined to comment on the reports. ---Source "Yomiuri Shimbun" and the Kyodo news agency.

Real Estate

6. China will exempt property transactions from stamp tax and value-added tax from November 1 to boost the ailing real estate market, state media reported on October 22, citing the Finance Ministry.

Impact On Sino-Indian Trade

My comment: The down-turn in the Chinese economy is likely to affect Sino-Indian bilateral trade which has galloped to a record US $ 30 billion and could affect Indian iron ore producers. Iron ore constitutes about 55 per cent of Indian exports to China. With the Olympics over and with the sluggish real estate market and a suspension of the construction of new factories, the demand for steel in China could come down.

( The writer is Additional Secretary (retd), Cabinet Secretariat, Govt. of India, New Delhi, and, presently, Director, Institute For Topical Studies, Chennai. He is also associated with the Chennai Centre For China Studies. E-mail: seventyone2@gmail.com)