Market Profile on Chinese Mainland

An Expert's View about Business Environment in China

Posted on: 29 Jan 2012

Current Economic Development
The Chinese economy grew by 9.2% and 10.4% in 2009 and 2010 respectively. In the four quarters of 2011, real GDP grew by 9.7%, 9.5%, 9.1% and 8.9% respectively, resulting in annual growth of 9.2% for 2011.
As the Chinese economy revived in the second half of 2009, measures had been taken to minimize the chance of inflation and economic overheating. The People’s Bank of China (PBOC) raised the reserve requirement ratio six times in 2010 and five times in the first half of 2011. The reserve requirement ratio for large commercial banks reached 21% on 18 May 2011. The PBOC has also raised the base lending rate for three times so far in 2011. As inflation is moderating in recent months, the PBOC reduced the reserve requirement ratio by 0.5 percentage points on 5 December 2011.
Fixed assets investment is one of the major driving forces of the economy. After growing by 30.1% in 2009, fixed assets investment continued to grow by 24.5% in 2010. In 2011, fixed assets investment (excluding rural households) grew by 23.8% (or 16.1% in real terms), slightly slower than 25.6% growth recorded for the first half of 2011.
Retail sales of consumer goods grew by 15.5% in 2009 and 18.4% in 2010. Continued growth in disposable income has contributed to the steady increase in retail sales. Government subsidies and tax breaks for home electronic appliances and automobiles have also helped to boost consumer demand. In December 2011, retail sales grew by 18.1%, up from 17.3% in November. In 2011, total retail sales increased by 17.1% with sales of jewellery went up by 42.1%, clothing and footwear went up by 24.2%, furniture went up by 32.8%, automobiles went up by 14.6% and household electrical appliances went up by 21.6%.
The consumer price index (CPI) went up by 5.9% in 2008 with food prices increased by 14.3%. In 2009, CPI dropped slightly by 0.7%. In 2010, CPI increased by 3.3% on average with food prices increased by 7.2%. In December 2011, CPI moderated to 4.1% from 6.5% in July with food prices grew by 9.1%, down from 14.8% in July. In 2011, CPI went up by 5.4% on average with food prices increased by 11.8% and non-food prices increased by 2.6%.
In 2009 and 2010, added-value of industrial output (by state enterprises and large enterprises with annual sales exceeding RMB5 million) grew by 11% and 15.7% respectively. In 2010, added-value of industrial output grew by 15.7%, while the output of heavy industries grew by 16.5%, light industries increased by 13.6% and the output of foreign invested companies grew by 14.5%. In December 2011, added-value of industrial output grew by 12.8%. In 2011, added-value of industrial output grew by 13.9% and the output of foreign invested companies increased by 10.4%.
China’s Manufacturing Purchasing Managers’ Index (PMI) (compiled by China Federation of Logistics & Purchasing and China Logistics Information Centre) improved slightly from 49% in November 2011 to 50.3% in December. The sub-index of new export order also improved slightly to 48.6% in December from 45.6% in November, but remained in the contraction zone.
Money supply - the growth of M2 (broad money supply) accelerated to 13.6% in December 2011 from 12.7% in November. The growth of RMB loans also picked up slightly by growing at 15.8% in December compared to 15.6% in November.
China's non-state sector expands rapidly and experiences healthy development in recent years. The status and economic contribution of private enterprises received official recognition in the 9th National People’s Congress held in March 1999. By the end of 2010, there were 8.4 million private-owned enterprises (comparing to 1.76 million at end-2000). By the end of 2010, there were 948,202 private enterprises in Guangdong province.
Beginning 21 July 2005, China reformed the Renminbi (RMB) exchange rate regime by moving into a managed floating exchange rate system with reference to a basket of currencies, and the exchange rate of RMB was re-valued to 8.11 per US dollar on 21 July 2005. Effective 21 May 2007, the floating band of RMB against the US dollar is enlarged from 0.3% to 0.5% around the central parity published by the People’s Bank of China on each working day. At the end of December 2011, the exchange rate of RMB was 6.2933 per US dollar compared to 6.7813 at the end of June 2010.
China's foreign exchange reserves reached US$3,181 billion by the end of 2011, the largest in the world. Foreign debts amounted to US$642.5 billion at the end of June 2011, of which 28.1% was medium- or long-term debts and 71.9% was short-term debts. The debt service ratio stood at 1.63% in 2010.
In 2010, the number of foreign tourists grew by 19.1% to 26.1 million. Total foreign exchange earnings from tourism increased by 15.5% to US$45.8 billion. According to the World Tourism Organization, China remained the 4th most popular tourist-destination (behind France, the US and Spain) in the world in 2009.

Foreign Trade and Investment
In 2010, China's total external trade reached US$2,973 billion, ranked second in the world after the US. Its exports and imports ranked first and second in the global economy respectively. In 2010, exports grew by 31.3% while imports soared by 38.7%. In December 2011, growth of exports slowed to 13.4% and imports slowed to 11.8%. In 2011, exports and imports grew by 20.3% and 24.9% respectively, resulting in a US$155.1 billion trade surplus.
Export-processing trade continued to be the major form of external trade. Export-processing trade accounted for 51% of China's total exports in 2007. The share dropped slightly to 47.3% in 2008 and bounced back to 48.8% in 2009. In 2009, exports and imports related to processing trade decreased by 13.1% and 14.8% respectively. In 2010, exports and imports of processing trade grew by 26.2% and 29.5% respectively.
In 2010, exports of machinery, electrical and electronic products declined by 30.9% while garments and footwear dropped by 20.9% and 27.1% respectively. In 2011, exports of machinery, electrical and electronic products grew at 16.3%. Exports of garments and footwear grew by 18.3% and 17.1% respectively.
In 2010, China's top ten trading partners were U.S, Japan, Hong Kong, South Korea, Taiwan, Germany, Australia, Malaysia, Brazil and India. China's total trade with these ten economies together accounted for 56.8% of China's total external trade in 2010.
In 2010, exports of foreign-invested enterprises (FIEs) grew by 28.3%, accounting for 54.6% of China’s total exports, and imports increased by 35.3%, representing 52.9% of China’s total imports.
In 2010, the number of newly approved foreign-funded investment projects totalled 27,406, increased by 16.9%, while utilized foreign direct investment grew by 17.4% to US$105.7 billion. By the end of 2010, China approved a cumulative of 710,703 foreign investment projects, with actual utilized overseas FDI amounting to US$1,078.7 billion. The leading sources of investment included Hong Kong, Taiwan, Japan, Singapore, the US, South Korea , UK and Germany.
In 2010, FDI made by Chinese enterprises in overseas markets stood at US$68.8 billion (+21.7%), of which, FDI in non-financial sectors grew by 25.9% to US$60.2 billion. Hong Kong is the largest recipient of capital from Chinese enterprises, accounting for 62.8% of the total outward FDI up to 2010. Business services (mainly investment holdings), wholesale and retail, mining and manufacturing are the leading sectors (non-financial sectors) of China's outward FDI.

Trade and Investment Policies
As a move to liberalize trade, China has continued to reduce administrative barriers to trade by increasingly switching to the use of tariffs and exchange rates adjustments. Since its WTO accession, China has basically fulfilled all its tariff reduction commitment. The average tariff rate remains at 9.8% beginning 2012, progressively down from 15.3% in 2001.
China has gradually liberalized its foreign trading system. According to the amended Foreign Trade Law which went into effect from July 2004, all types of enterprises, including private enterprises, can register for the trading right. Individual Chinese are also allowed to conduct foreign trade under the amended Foreign Trade Law.
On 31 October 2000, the Chinese government amended the Laws on Wholly Foreign-owned Enterprises and Sino-foreign Cooperative Joint Ventures to comply with the WTO accession requirements. The Chinese government also passed the amendments to the Law of Sino-foreign Equity Joint Ventures (EJVs). After the amendments, foreign enterprises enjoy greater autonomy in sourcing raw material either in the Chinese Mainland or from elsewhere and are no longer subject to the domestic sales ratio restriction.
A new version of the “Catalogue for the Guidance of Foreign Investment Industries” came into effect on 1 December 2007. Foreign-invested projects under the categories of “encouraged” will enjoy tariff-free imports of machinery and equipment for their own use and the import value-added tax will also be exempted.
In addition, the central government has also introduced tariff-free and VAT-exemption imports of capital equipment for projects within the hi-tech and priority sectors such as energy, agriculture, transport, infrastructure, production of raw materials, and tertiary industries, as well as in the pillar industries. These moves are targeted to attract high-quality overseas investment, introduce high technologies and know-how to rationalize the country's industrial structure.

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Posted: 29 January 2012

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