Fiducia China Focus Newsletter

• New Safety Mark coming into force on 1. May
  
  
• High Profile Investment Projects
  
  

• Legend Group Ltd.
  
  
• PRC Investment in the United Kingdom
  
  
• CSRC Liberalizes Listings of Foreign Exchanges
  
  
• China’s Outward Investment - A New Boost from Eximbank
  
  
• New index for China’s economy
  
  
• Shanghai's Real Estate - A Bubble To Pop?
  
  
• Important Changes in Foreign Exchange Management
  
  

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www.fiducia-china.com
Publisher
Fiducia Management Consultants

Press Contact: 
Patrick Kriegeskorte
info@fiducia-china.com

All liabilities excluded. This Newsletter is based on information obtained from sources (government, business associates, companies, publications, etc.) believed to be reliable. However Fiducia Management Consultants does not make representations as to it's accuracy, completeness or correctness.

Fiducia Management Consultants is China Partner of Corporate Development International, a global partnership specialising in mergers, acquisitions and divestitures.   www.cdiglobal.com

New Safety Mark coming into force on 1. May

The China Compulsory Certification System (CCC) will become effective on May 1st 2003 for both domestically made products and for imports. This Product Safety License System is administered by The State Administration of the People's Republic of China for Quality Supervision, Inspection and Quarantine and it replaces existing certificates, including CCIB and CCEE.

The Chinese Government claims that the new regulations will raise product quality standards in the affected categories closer to those of the US and Europe.

Currently 19 product groups ranging from electrical apparatus to automobiles are covered by this scheme of mandatory certification and individual products need to bear the certificate prior to market access. Imported products without the CCC mark may be held at the border by Chinese customs and be subject to penalties.

Click here for a list of the first catalogue of products subject to compulsory certification.

Industry sources say that the system is bureaucratic, overdone and costly as for example mandatory certifications in foreign countries (e.g. EC norms) are only partly recognized, thus making it necessary for imports to be re-examined and re-approved. This also applies for goods not made in China, e.g. Porsche cars. Additionally inexperience and shortage of staff for the mandatory factory inspection in the home country make the implementation challenging.

Growing numbers of PRC enterprises are attracted to overseas investment because of the high media attention paid to a group of Chinese multinationals. A famous example is Haier who now has more than 13 production plants located overseas including South Carolina, USA and Indonesia, and recently bought an office building in Downtown Manhattan.

Other well publicized outward investors are Sinochem with 115 offices in over 30 countries and with chemical plants in the US and Thailand, Konka with its R&D centre in Silicon Valley and Kelon with a design centre in Japan. In 2002 Guangdong based TCL Corporation purchased Schneider, a well known German brand for brown goods. TCL’s motivation was the usage of the brand name, rather than the interest to manufacture in Germany.

Beijing based BOE Technology acquired a subsidiary of Korea’s Hynix Semiconductor for US$ 200 million. The purchase was motivated by the desire to acquire core crystal flat-display technology which was previously only in the hands of South Korean and Japanese companies. In future it is expected that Chinese companies will be behind growing numbers of major overseas investments.

The statistics tend to confirm what is visually obvious, that the real estate market in Shanghai is soaring. Property investment has risen 14.2% year-on-year to RMB 72 billion (EUR 8,1 billion), commercial and residential realty sales by 16.3% to RMB 81 billion (EUR 9,1 billion), together resulting in an overall increase in prices by 10%. This development has raised the concern that, once again, a bubble is forming in the Shanghai property market. Back at the height of the Asian crisis, 50% of Shanghai’s 3.2 million square meter capacity was empty, and Grade-A rents slumped by 75% during three years.

To prevent this from happening again, the government has toughened real estate regulations by increasing the minimum deposit requirement for mortgages, strengthening the control of land supply, and intensifying supervision over real estate loans. Moreover, the title deed tax has been doubled from 0.75% to 1.5%, and income tax deductions for home purchasers will end in May.

On the other hand, the real estate developers are playing down the talk of another bubble. They argue that with Shanghai’s economy flourishing, and the upcoming World Expo in 2010, it is natural that real estate prices are rising.

Even though capacities have grown as much as 14-fold since the early 1990’s, the total capacity today roughly only equals that of Frankfurt in Germany, a considerably smaller place than Shanghai. With an increasing domestic demand for real estate and the expected extension of lease-terms, rents will be less cyclical and there will be a downward trend in vacancy rates.

Whilst the debate will undoubtedly continue and a degree of consolidation in the near term likely due to slight oversupply, the market will stabilize in the mid- to long term. As such, there is, and will be, no bubble to pop.

Being dissatisfied with the quality of China’s national statistics the investment bank Goldman Sachs decided to launch its own monthly index to measure the development of China’s economy.

Goldman Sachs bases its China Activity Index on official key data that is relatively difficult to be tampered with: foreign trade, traffic levels (road, rail and air), energy usage etc. Goldman Sachs estimates that on the basis of its index China's GDP growth in 1998 was 4 percent instead of the official 7.8 percent and for 2002 it was actually close to 10 percent, instead of the official figure of about 8 percent.

Considering the ongoing concerns about the quality of Chinese statistics Goldman Sachs’s assessment provides for a useful second look when judging China’s economic performance. This new index however challenges the validity of analysis published by institutions like World Bank, Asian Development Bank etc. which is based on China’s official figures.

National and provincial trading companies have had subsidiaries in the UK for a number of years already. These include Sinochem, Sinopec, Minmetals and Topglory.

However, since 1998 more than 30 manufacturing businesses have been set up in South Wales, Yorkshire, Newcastle or Merseyside to take advantage of the discretionary grants provided by the UK government. In Scottish industrial zones, PRC companies are rumored to be on the way to become the largest Asian investors, overtaking Japan and Taiwan.
 

The CSRC (China Securities Regulatory Commission) will no longer review legal opinions on overseas-incorporated companies with mainland assets seeking listings on foreign exchanges. Previously, such companies were required to get a “no comment” letter from the CSRC.

China’s State Administration of Foreign Exchange (SAFE) has announced significant liberalization of the foreign exchange system for foreign companies operating in China. The rules come into effect from 1 April 2003 and represent an improved investment climate. Major measures being introduced are:

1. New accounts system is introduced into the banking system
   
   In addition to the Settlement and Capital Accounts, foreign investors will now be allowed to open Multi-Currency Investment Accounts for the purpose of undertaking construction and engineering contracts, exploration of natural resources and risk investments (portfolio investors and venture capitalists). Specialized accounts are also to be permitted for acquisition of assets, expenditure related to market survey, planning and provision of guarantees.
   
   A new category of Offshore Accounts is introduced to facilitate the transfer of investment funds from a foreign investor into an existing foreign invested enterprise. Such transfer will not require SAFE approval if a capital receipt certificate has been issued.The new bank accounts system will benefit foreign companies without a presence in China but with business dealings in the domestic market.
    
2. New sources of foreign capital
   
   In the past, foreign investors’ contribution of capital would only be confined to convertible currencies, imported equipment, intellectual properties and RMB profit after tax. From April 2003 on, they will be allowed (subject to SAFE approval) to contribute new investments in the form of reserve funds from the original foreign invested enterprise, undistributed profits, unrealized investment returns, proceeds from the sale of shares or assets for re-investment as well as their own foreign exchange maintained in a domestic bank account onshore.
   
   Foreign investors can pay for the acquisition of new shares in Chinese companies by remitting capital from abroad or by utilizing RMB profits generated from China operations and other legally owned assets. This is subject to approval from SAFE.
    
3. Foreign investment of less than 25%
   
   The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has introduced a new category of foreign investors who do not invest more than 25% in a China enterprise. From the foreign exchange point of view, these foreign investors will enjoy the same privileges as the other investors, including the ability to borrow foreign currency loans. The new SAFE rules will still have to be coordinated with relevant government authorities.

These new measures will facilitate the contribution of capital from foreign investors, especially those classified as FDI who were unable to utilize their foreign and RMB accounts in China for
M&A related activities. As expected, there may be further implementation rules in order for the new system to be in place.

The Export-Import Bank of China (Eximbank) was set up in 1994 as a policy bank to provide export credit insurance, concessionary loans and on-lending of foreign government funds to Chinese corporations. Until year-end 2002, Eximbank has provided concessionary loans and guarantees of nearly RMB 300 billion (EUR 33,8 billion) for the export of machinery, hi-tech products and overseas activities by PRC construction firms. Certain funds are also available to foreign funded companies in China.

The Central Government has now made assistance to overseas investments by Chinese enterprises a prime target. It is recognized that in order to be competitive in the global business environment, Chinese companies will have to develop their international investments. Eximbank is poised to provide funding for the more efficient Chinese enterprises to set up production facilities abroad and to cooperate with multinationals in joint overseas operations.
 

Chinese companies are increasingly internationalising their businesses. Some of these companies are unknown or little known to the overseas business community, out of this reason we want to introduce such companies.

Legend is a diversified company providing advanced IT products and services. This ranges from designing computers to providing Internet services, from manufacturing IT components to setting up corporate IT solutions.

Typical for Chinese companies, Legend has a listed company in Hong Kong in order to tap capital from overseas.
 

Legend Group now headquartered in Shanghai was established in 1984, and employs today 7320 staff. As the manufacturer of China’s top-selling computer brand and a market share for home PC’s between 35 to 40 percent they have created a reputation that has grown and flourished. Legends desktop computers rank fifth in the world at 2.9 percent and their commercial computers are ranked sixth with 2.4 percent of the global market.

*Preliminary estimate, Note: HP includes Compaq shipments

In 2002 Legend started shifting their operational focus from PC manufacturing into the Digital Arena and launched so far a range of new digital products including digital cameras, audio players, printers and e-home products.

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