Performance Improvement Confirmed by AmCham Survey
The American Chamber of Commerce has just published its 2002
White Paper on “American Business in China.” The paper includes key findings of
the 2001 “AmCham Membership Questionnaire,” reporting on the performance,
perspectives and plans of 170 AmCham members. Despite the global economic downturn in 2001, 60% said their revenue increased,
building on the trend of revenue increases in 2000.
Companies are proving that markets do exist for their products in China,
although frequent shifts in market characteristics require constant monitoring
to maintain the right positioning. Issues to watch out for include customer
decision-making criteria, competitor technology levels and geographic growth
patterns. In contrast to increase in revenues, only 49% reported an increase in profit
margins, and more companies suffered from a fall in margins than a fall in
revenues. At a time when headquarters are looking to their China subsidiaries to
outperform subsidiaries elsewhere, continued production overcapacity and
deflationary pressures are driving down prices and impacting on margins. One
result has been the increasing exploration of export opportunities throughout
the rest of Asia, particularly in the machinery equipment sector. Another
consequence has been the restructuring of activities in China, with more
companies outsourcing manufacturing. This not only reduces fixed assets and
fixed costs, but enables greater attention to be paid to product development,
marketing and sales. Most companies are optimistic about the near future, with 83% expecting China’s
accession to the WTO to increase demand, and 87% planning to expand. However,
35% were “very concerned” about the implementation of the WTO agreement. This anxiety results from the perception that bureaucratic inertia, lack of
transparency, inconsistent enforcement of the law and strict regulatory control
are deeply rooted in China. Although WTO membership should address these
business and legal issues, local governments may choose to ignore the WTO
agreement, or new regulations may be issued to counterbalance WTO commitments. The majority of companies suffer from human resource constraints at the
management level and they fear that staff retention will become an increasing
problem. In order to keep key staff, it is necessary to offer more than financial
remuneration in the employment package. Staff are looking for international
exposure, reporting to those high up in the corporate structure, and the
prestige of working for Fortune 500 companies. It is these intangibles that will
become increasingly important, not only in retaining staff, but also in
motivating them.
If you would like to know more about this topic, please
contact:
James Sinclair in our Shanghai office (email: jsinclair@fiducia-china.com tel.:
(+86) 21-5298 1805).
New Car Loan Rules to Boost Car Purchase
The central People’s Bank of China is working out new regulations for car
loan services, in an attempt to promote domestic car purchase. The new rules
will be different from those issued in 1998 and will exclude companies from the
list of borrowers: financial institutions can offer car loans only to individual
buyers.
Meanwhile, the Central Bank plans to enlarge the terms of car loans from five
years to eight years. With this extension, car purchasing will become an
affordable option for more consumers.
The banking regulator recommends financial institutions have increased
independence in setting their loan rates. They will enjoy a fluctuation of fifty
percent up and thirty percent down for the agreed loan rate. According to the
new rules, down payments will be reduced to ten percent of the car cost, down
from the twenty percent set by the Central Bank in 1998. The rules will also
call off the limitation of „hukou“, China’s residential registration system, in
applying for car loans. According to the rules issued in 1998, local banks can
only provide car loans to residents who hold a local „hukou“ card.
If you would like to know more about the automotive industry in China, please
contact:
Thomas Thiele in our Beijing office (email: tthiele@fiducia-china.com tel.:
(+86) 10-6590 6108).
China Reconsiders RMB Exchange Rate
Governor Dai Xianglong of the People’s Bank of China dropped a bombshell in a
speech given to Japanese bankers on 28 March 2002. He seemed to suggest that
China is considering greater flexibility of the exchange rate by introducing a
basket system to replace the managed floating rate to the US Dollar. Is this a
signal that we are moving to full convertibility? Probably not, at least not in
the short term.
History of the RMB peg, or as China prefers to call it, the managed floating
rate, started in 1994. Since then the nominal RMB to dollar exchange rate has
appreciated 5%. China’s long term goal is to maintain stability of the currency
in order to have a positive effect on economic growth.
Dai Xianglong has long
defended the policy by stating that the driving force in China’s economy is
still domestic consumption and investment. External factors, such as balance of
payment and external debt, play a subsidiary role. Stability rather than
flexibility of the exchange rate is the goal.
A recent comment by US Treasury Secretary Paul O’Neill suggested that China’s
WTO accession may lead to increased global interlinkages and therefore it should
review its current RMB peg. The same sentiment was echoed by the International
Monetary Fund and the Asian Development Bank.
However, it is unlikely that China will make immediate changes to the policy.
Besides the concerns over economic stability, there are wider implications if
China decides to change direction. For example, such a change may cause anxiety
over the Hong Kong Dollar peg to the US Dollar.
Governor Dai’s speech was more a response to the worrying trend of the Yen’s
devaluation rather than a positive signal for immediate shift in the RMB managed
floating rate. So far, the People’s Bank has not taken any action. RMB is still
traded within a narrow band of 0.15% as of 15 May 2002 in the Hong Kong money
market.
RMB Depreciation?
Since China has become a WTO member, there has been an interesting debate on
the trend of the RMB exchange rates. Because of oversupply of forex through an
increase of foreign direct investment, some Chinese leaders believe that
liberalization of the foreign exchange policy will lead to the strengthening of
RMB.
Others, including Governor Dai, are more concerned about the flooding of
foreign goods into the Chinese market. The lower customs revenue and narrowing
trade surplus, coupled with sharp devaluation of the Yen, may put downward
pressure on the RMB exchange rate.
Furthermore, financial reforms that encourage outward investment may also
have the effect of slowing the accumulation of foreign exchange reserves. This
would lead to a narrowing of the trade surplus and weaken RMB. For these
reasons, it is understandable why the authorities are paying more attention to
the longer-term trends and adopting a cautious approach to any change in the
managed floating rate.
Capital Account Conversion
Governor Dai has on other occasions mentioned that full RMB convertibility
remains China’s long term goal. This has been the objective since 1993. China is
not yet ready for making such an important step, at least in the immediate
future. Interest rate liberalization will have to come first. Other major
considerations would include a sound banking system, a mature capital market and
strong macroeconomic management.
Foreign Exchange to be traded in China’s Interbank Market
Starting from the first week of June, the China Foreign Exchange Trade System
(CFETS) is offering a new product. Commercial banks located in China will be
allowed to buy and sell foreign currency through CFETS, the national interbank
market. This move will bring China’s financial market closer to international
standards. China is already the fourth largest trading country in the world.
Shanghai’s dream of becoming an international financial center is one step
closer to reality. It has been reported that the first transaction was done
through Commerzbank, which bought USD 5 million from a cluster of smaller
domestic banks in China. CFETS has been operating for some time, but so far the only currency traded
is RMB. Foreign or local banks seeking foreign currency funding would have to
borrow from overseas branches or offshore interbank markets. The new avenue for
funding will benefit borrowers in China in the following ways:
- Improve liquidity -
China holds a total of USD 86 billion personal deposits, which are mostly
idle cash. The forex interbank market would allow financial institutions to
lend to or borrow from each other with their surplus funds, improving overall
liquidity.
- Cost reduction -
Since settlement can be done onshore at T+0 for financial institutions
using the Shanghai Interbank Market, the efficiency will lead to lower costs
for local borrowers.
- Better service -
Before the existence of a forex interbank market, domestic banks were
unable to handle large loan amounts because they had to arrange payments from
outside China. This problem can how be solved with the onshore funding.
- Liberalisation of interest rate -
Larger trading volume in the interbank market may help establish benchmark
rates for hard currency deposits and loans, similar to LIBOR or SIBOR. A
vibrant and efficient interbank market will enable SAFE and People’s Bank to
gain valuable experience in liberalizing in the financial market, leading
ultimately to capital conversion.
- Resistance from foreign banks -
The foreign banking community is lukewarm about the new reform. The
government’s aversion to offshore fund raising may increase their operating
costs. Foreign banks now enjoy a tax advantage since only the margin made on
the loans is subject to Chinese tax. In the future, if the loans are funded
from the Shanghai interbank market, the tax liability may be calculated on the
full interest earned. Initial resistance from the foreign banks to a more
vibrant domestic interbank market is therefore understandable.
If you require advice on financial issues related
to China, please contact Victor Sun
(email vsun@fiducia-china.com tel: (+852)
22586634.)
FMC Events
Strategic Investment Valuation in China
| Date: |
25.-26. July 2002 Venue: Sheraton Hong Kong |
| Speakers: |
Thomas Thiele, Regional Manager,
CDI China
Janine S. Canham, Partner, CMS Cameron McKenna
Luke Filei, Consultant, CMS Cameron McKenna |
Workshop Highlights:
- How to Avoid Overvaluation of your Acquisitions' Assets & Ascertain
Profitable Investment Decisions in China?
- What are the Pitfalls of Traditional Valuation Methods in Assessing the
true Value of your China Investment?
- Understand the Critical Role of Due Diligence during a Mergers and
Acquisitions Process
- The Importance of Option Pricing Applications in M&A Valuations
Please click
http://www.ibc-asia.com for more information and registration for the
IBC conference on M&A in Hong Kong
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Copyright © 2001 Fiducia Management Consultants. All rights reserved.
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