REMAKING CHINATEX Today_Aug03_1.pdf · President BJ Habibie undertook the Big Bang — the decentralisation of power to Indonesia's regions. It was a bold gamble by Habibie to quell

®

August/September 2003

®

I N T E R N AT I O N A L

In this Issue

Jonathan Story

Face-saving solutionneeded for Hong Kong

SAFTA - services willbe the big winner

'Risky' to float yuan

ASEAN revisits energy

www.asiatoday.com.auPrint Post Approved PP240725/00001

Twentieth year of publication

Annual subscription (Australia) including password to ASIA TODAY ONLINE $130 (inc GST), Airmail to Hong Kong HK$850, Singapore S$190, Europe/USA/Canada US$110.

Brand names thekey – and Chinais buying!

Chinatex President and CEO Zhao Boya

REMAKING CHINATEX:REMAKING CHINATEX:

GLOBAL ORGANIZERS OF INSTITUTIONALFINANCE & INVESTMENT CONFERENCES

For More Information, Please Visit:

www.imn.org/a525/atm/

Email: [email protected]: (212) 768-2800 ext. 1Fax: (212) 768-2484

i n format ion management ne twork

held in conjunction with

15-16 October 2003 • The Island Shangri-La • Hong Kong

Sponsors include:

TOPICS TO BE DISCUSSED INCLUDE:

• International Roundtable Investment Discussion with Pension Funds from 3 Continents

• Investment in China: Qualified Foreign Institutional Investor (QFII) Scheme & Pension Reform

• Absolute Return Strategies: The Best Strategies and How to Implement Them

• Hedge Fund, Hedge Fund Indices and the Issue of Transparency

• Indexing Strategies in a High Volatility/Low Return Environment

• Enhanced Indexing for Risk Controlled Alpha

• Corporate Governance and Socially Responsible Investing

• Transaction Costs, Trading Strategies & Transition Management

• Rethinking Asset Allocations in Today’s Challenging Market

• The Many Uses of ETFs: International Investment, Sector Rotation & Hedging

Masters of Investment Management

THE FIFTH ANNUAL

Masters of Investment Management

ASIA TODAY INTERNATIONAL Volume 21, No.4, August/September 2003 Twentieth Year of PublicationPublished in Australia since 1983 by East Asia News and Features (Australia) Pty. Limited (ABN 48 343 588 913). Office address: Level 29Chifley Tower, 2 Chifley Square, Sydney NSW, Australia. Production Office: Level 1, 1463 Pittwater Road, Narrabeen NSW 2101, Australia.Telephone (612) 9970-6477. Fax (61 2) 9913-2003. Mailing address (all correspondence): Box N7, Grosvenor Place Post Office, Sydney NSW1220, Australia. E-mail <[email protected]>. Website <www.asiatoday.com.au >.

®

INTERNATIONAL

ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 2003 3

REMAKING CHINATEX: China's National Textile Imports and Exports Corporation is buying up offshore cottonplantations and will acquire interests in companies engaged in fashion design in Europe, the US and Japan. ChinatexPresident 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 cri-sis which is fashioned to both reinforce China's emerging status on the international stage and to play for domesticconsumption, according to China analyst Jonathan Story, Professor of International Political Economy at INSEAD. Hesays a face-saving operation is needed 7-9

'RISKY' TO FLOAT THE YUAN: Morgan Stanley Chief Economist Stephen Roach is urg-ing China to resist pressure for a revaluation - he says Japan has led the way in China-bashing over the past year. ABN AMRO believes that when revaluation does come, it islikely to be a one-off move of 15-20 per cent 9

ASEAN REVISITS ENERGY GRIDS: ASEAN is again moving towards a cross-bordergas and electricity grid. It has approved a Master Plan for power inter-connection, butemergence of common gas and power markets where energy is traded appears to besome way off 10-11

ADVISORIES 'SELF-DEFEATING': Issuing travel advisories against countries hit by terrorism plays into the hands of those who want to disruptbusiness, 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 forthose involved in the finance, business services and education sectors, says Simon Taskunas, a solicitor with Freehills in Perth 17

Zhao Boya:A US$200 million shopping list.

Jonathan Story

Expand your international networks, forge trade relations and identify new opportunities.The Asia Pacific Cities Summit brings business and government together to discussmutually beneficial opportunities, issues and set long term goals. The only forum of itskind in the Asia-Pacific region, it’s a great opportunity for you to meet with some of theregion’s brightest minds, make new contacts and do business. This year’s topic is EmergingFutures of the City - focusing on the key issues which affect quality of life and economicopportunities in our cities.

Numbers are limited so to ensure your place in the future of regional business, visitwww.apcsummit.org or call +61 7 3403 6179 for an information pack.

20 - 22 October 2003Brisbane Queensland Australia

An initiative of In partnership with

Everyone will be talking the same language.

Business.

Register online now by visiting www.apcsummit.org

BUP0000078

TNT Deliversto and from over 200 countries around the globe.

Importing swimwear from Taipei?Exporting toys to Paris?

TNT International offers you a faster andmore reliable freight service to and fromover 200 countries worldwide.

Well over one hundred flights arrive intoAustralia each week carrying time-sensitive

freight for TNT International customers.An equal number of departures leavingAustralia take shipments worldwide.

TNT International provides its customerswith advanced technology capabilities thatdeliver cutting-edge track and trace func-tions. This allows you to track your con-signment from pick-up to delivery.

For faster and more reliable imports andexports call TNT International on

13 11 50

IN JANUARY 2001, then-President BJ Habibie undertook

the Big Bang — the decentralisation ofpower to Indonesia's regions.

It was a bold gamble by Habibie to quellgrowing political unrest in the provincesduring the chaotic post-Soeharto days. Butfrom the very beginning, it was obviousthat Indonesia was far from ready fordevolution. Most crucially, the laws thatwere to set the rules for the regions werenot properly in place.

Since then, Jakarta has bumbled along —resolving some problems while othersremain. A key issue is the question of rev-enue raising and taxes. In the early days,inexperienced local level bureaucrats tookadvantage of the right to raise revenue toimpose their own taxes, including wildcattaxes, especially in resource-rich regions.The targets were often foreign investors.They created an extremely unpredictablebusiness environment.

The World Bank undertook a review ofIndonesia's Big Bang in a report pub-lished in July. In it, the Bank says thatmending weaknesses in the various regu-lations will take time. Amendments arerequired in key sectors, namely laws and

perhaps even the constitution.Quite simply, the present sys-

tem is not working, says theBank. The current legislationallows local governments toissue regional taxes as long asthey comply with the principlestated in the decentralisationlaw. The regions have strongincentives to impose impropertaxes and levies and Jakartadoes not have the capacity tosupervise, nor the willingnessto cancel, illegal taxes, says thereport.

The way forward, it suggests, is torestrict regional taxes and levies to a lim-ited closed list. At the same time theregions should be granted additional tax-ing powers more suited to a local admin-istration. The report says land and build-ing tax, considered a local tax in mostcountries around the world, is one suchpotential tax. In Indonesia, Jakartashares revenue from this tax with theregions.

A further option is to strengthen theregions’ own revenue base by increasingthe maximum rate allowed on existing

taxes. Rate for regional taxessuch as car, hotel and restau-rant surcharges are limited byJakarta, and almost all regionalgovernments charge the maxi-mum rate allowed.

While the central govern-ment should probably continuesetting a ceiling on local taxes,the report also says that newlocal taxes could be considered.It is being debated in Indonesiatoday whether the regionsshould be entitled to a

surcharge on personal income tax andlocal business taxes or payroll tax.

Understandably a poor country likeIndonesia, especially the resource-poorregions, need all the revenue possible tocover public expenditure. But local governments must learn from the biggerregions that to be seen to be rapacious isthe surest way to remain poor.

Without business confidence, therewill be no investment, and no invest-ment means no tax revenue.

Zhao has overseen a gradualshift away from trading to anexpanded range of activities.

The remaking of Chinatexunderlines the urgent changefacing China's many State-owned foreign trading corpo-rations, set up to trade in commodities.

Like all foreign trade compa-nies, when created in 1951Chinatex became a window tothe world. In the interveningyears, Chinatex has grown tobe a billion-dollar company.Zhao says Chinatex has anannual turnover of US$1 billion and assets valued atUS$1 billion. About 70 per cent of revenue comes fromtrade and 30 per cent fromother businesses.

But such anachronistic for-eign trade companies belongto an era when China was aclosed economy. They are a

contradiction in a China that is movingquickly to integrate with the global economy.

O P I N I O N BJ HABIBE’S ‘BIG BANG’


FLORENCECHONG

REMAKING CHINATEX BRAND NAMESTHE KEY - AND CHINAIS BUYING . . .

CHINA'S National TextileImports and ExportsCorporation is buying upoffshore cotton plantationsand will be seeking to acquire interests incompanies engaged infashion design in Europe,the US and Japan . . .

By FLORENCE CHONGEditor ASIA TODAY INTERNATIONAL

THE TASK BEFORE Zhao Boya isconsiderable. He is charged with

transforming a traditional foreign trade compa-ny into a diversified group involved in themanufacture of branded garments and in theproduction and export of fabrics.

As President and Chief Executive of ChinaNational Textile Imports and ExportsCorporation, known as Chinatex, Zhao seesChina owning companies engaged in design inEurope, the United States and Japan.

Over the next five years, Chinatex willincrease investment onshore and offshore. Thiswill include acquisition of cotton plantationsoverseas (including Australia) to feed itsexpanding manufacturing operations at home.

Central to the plan is restructuring of the

Zhao Boya: China will expand into the branded goods business.

Continued page 6

State-owned enterprise from a monolithic,anachronistic body into a dynamic 21st centurycompany. Since taking over the helm in 1998,

Revisiting Indonesia’s regional tax laws

■ Bank Mandiri IPO may set trend for investors, page 11.

Japan: Nikkei International Ltd., 1-9-5 OtemachiChiyoda-ku Toyko 100-8066. Tel (81 3) 5255-0751, Fax(81 3) 5255-0752 Contact Ken Machida, email:[email protected]

Korea: BISCOM, 521 Midopa Building, 145 Dangju-dong, Chongno-ku, Seoul. 110-071. Tel (82 2) 739-7840, Fax (82 2) 732-3662, email: [email protected]

Philippines: Eastgate Publishing Corporation, 704Prestige Tower Condominium, Emerald Avenue, OrtigasCenter, Pasig City 1605, Philippines. Tel (63 2) 633-4004-6, Fax (63 2) 635-9221, email:[email protected]: Lorie Fernandez.

Singapore: Pacom Media Pte Ltd, 52 Foch Road#02-01, Singapore 209274. Email:[email protected] Tel (65) 392-3188, Fax (65) 392-3086. Contact: Karen Chan.

Taiwan: Spacemark Media Services, 2nd Fl, 22-18,Section 1, Chang-An East Road, Taipei, Taiwan. Tel(886 2) 2522 2282, Fax (886 2) 2522 2281. Contact:Tammy Hsu.

Thailand: Joel Publicity, Suite 3, 8th Floor, SuriwongBusiness Centre, Panjaphut Building, Suriwong Road.Bangkok 10500. Tel (66 2) 236 4984/5, Fax (66 2) 2384971. Contact: Steve Joel.

PUBLISHER’S REPRESENTATIVESUSA/CANADAInterMark3 International Communications, Inc.5929 Albervan Street, Shawnee, KS 66216 USA. Tel (91 3) 248-7770, Fax (91 3) 248-7771Contact: Fred Baehner,email: [email protected]

EUROPELIVEpr, 4th Floor, 124 Victoria Street, London SW1E5LA United Kingdom. Tel (44 20) 7630-1100, Fax (44870) 121-5572, email [email protected] Contact: Ross Clarke, David Wallen.

ASIA TODAY INTERNATIONAL ONLINEThe full text of ASIA TODAY INTERNATIONAL back to July1993 is available on-line through LEXIS-NEXIS. For details,visit the LEXIS NEXIS website at www.lexis-nexis.comASIA TODAY INTERNATIONAL is available from ProquestInformation and Learning in one of the following formats:microform or electronic. For details, visit the Proquest homepage at www.umi.com or email [email protected] us at www.asiatoday.com.au

COPYRIGHT© All material in ASIA TODAYINTERNATIONAL is copyright.Reproduction in whole or in part is not permitted without written permission of the publisher.

THE CHINATEX PLAN

Volume 21, No. 4, August/September 2003

PUBLISHERBarry Pearton

EDITORFlorence Chong

CORRESPONDENTSHong Kong – K.K. Chadha, James Yapp, India – N. Hariharan, Rajendra Bajpai; Indonesia –Tom McCawley; Japan – Russell McCulloch;Malaysia – Ronnie Tan; Pakistan – M. Ziauddin;Philippines – Abby Tan; Singapore – Andrew Symon;Taiwan – Matthew Smith; Thailand – Robert Horn;Indo-China – Steve Joel.

ADVERTISING REPRESENTATIVESAUSTRALIASydney: ASIA TODAY INTERNATIONAL, Level 29Chifley Tower, 2 Chifley Square, Sydney NSW 2000.tel (61 2) 9970-6477. fax (61 2) 9913-2003. Email:[email protected] Visit www.asiatoday.com.au

Brisbane: The Media Workshop, Suite 3, 211Logan Road, Woolloongabba QLD 4102. Tel (61 7)3391-6633, Fax (61 7) 3891-5602.Contact: John McDonaldemail John [email protected]

Adelaide: HWR Media Specialists, 109Conyngham Street, Frewville SA 5063. Tel (61 8)8379-9522, Fax (61 8) 8379-9735. Contact: TereseBrandau-Stranks, email: [email protected]

Perth: Hogan Media Services, PO Box 849,Applecross, Canning Bridge WA 6153. Tel (61 8)9315-9223. Fax (61 8) 9315-9224. Contact: BrennaLearmonth. email [email protected]

OVERSEASHong Kong/China: Top Rider CommunicationsCo, Room 1205 Carnival Commercial Building, 18Java Road, North Point, Hong Kong. Tel (852) 2887-6238, Fax (852) 2578-2688. [email protected] Contact: Katharine Lee.

India: Times Response, 2nd Floor, The Times ofIndia Building, Dr D N Road, Mumbai 400 001. Tel (9122) 273-1154, 235-3574, 235-3636. Fax (91 22) 273-1145, 273-1948. Contact: Victor David Sassoon,General Manager, International Media Representation,email [email protected] Also in NewDelhi, tel (91 11) 349-2064, fax (91 11) 349-2108;Bangalore, tel (91 80) 559-7473 fax (91 80) 558-6732; Chennai, tel (91 44) 434-2121, fax (91 44)432-3636; Calcutta, tel (91 33) 248-5502, fax (91 33)220-8627.

Indonesia: PT Medianet IntiSarana, AurumBuilding, 1st Floor, Jl Ampera Raya No 37, Cilandak,Jakarta 12560. Tel (62 21) 7884-5705, Fax (62 21)7884-5704. Contact: Prilly Brahmana, email: [email protected]

ISSN 1445-4300

®

INTERNATIONAL

ASIA TODAY INTERNATIONAL AUGUST/SEPTEMBER 20036

From page 5

Member of Circulations Audit BoardAudited nett circulation, 8,424 copies per

issue (12 months to March 2003)

Chinatex's role was – and is – to import wooland cotton to feed the Chinese textile industrywhich, in turn, produces the raw materialsneeded to run its large garment-making sector.Chinatex then exports garments to China's mar-kets around the world.

But Chinatex has already moved a long wayfrom its original role. Today, it has more than30 subsidiaries and overseas enterprises, and40 manufacturing plants. The businesses coverproduction and sale of all textiles, ranging fromraw materials, yarns and fabric to ready-made garments.

Zhao has no illusion that the long-termfuture of Chinatex lies in its ability to adapt to changes in both the global and Chinese economies.

Chinatex has hired strategy consultantsRoland Berger from Germany to map out astrategic plan for the next five years. Thereview emphasises that garments will remainthe core strategic business, but the plan callsfor increased trading activities which will becomplemented by investment – especially tobuild up brand names.

"China is not known for international brandnames. We are seen as a processor rather thana maker of branded goods," Zhao says. He isseeking design capability through investmentin well-established design companies inEurope, the US and Japan.

As an example, the Chinatex subsidiary inGermany, Mode Contor Hamburg Chinatex,will engage fashion designers from Germanyand Denmark to help launch Chinatex into theworld of high fashion. Last year, Chinatexsigned an agency agreement with Tom Tailorof Germany, a company known for its casualwear, and said to be the "latest brand for theyoung in Europe and the US". Under the agree-ment, Chinatex will be responsible for produc-tion, allocation, promotion and sales of TomTailor products in China.

"We think it will be difficult to parade internationally-known brands in Chinabecause fashion comes from Europe and theUnited States," says Zhao. Chinatex willexpand into the branded goods business boththrough training of its own staff and byacquiring mid-sized brand names in Europeand Japan. Chinatex has interests in two com-panies in the US – one based in Los Angeles,the other in New York. It is continuing to lookfor acquisitions.

Over the next five years, Zhao expects theGroup to spend up to US$200 million investingto broaden its business base. "This is only arough plan," he explains. "But we hope toinvest in two kinds of operations within fiveyears or more. One is to buy some mature

Continued page 7

❝ Chinatex has alreadymoved a long wayfrom its original role. Ithas more than 30 sub-sidiaries and overseasenterprises, and 40manufacturing plants.❞

B U S I N E S S O U T L O O K : C H I N A SQUARING UP TO HK PROBLEMS


Continued page 8

businesses in China to enlarge our capability inproducing, retailing garments and finishingfabrics. The second is to buy mature busi-nesses in overseas countries, especially inEurope, the US and Hong Kong. (This willenable us) to build up our internationalname brand garments, retailing networksand design capability – for both our domes-tic and global markets."

As China's standard of living rises, Zhao seesa growing market at home. Chinatex intends tomeet China's growing demand for quality gar-ments, which will be driven by the middleclass. Chinatex will also give priority to fabrics.Its corporate aim is to become one of China's"most influential" fabric suppliers, workingclosely with dealers in key markets. It alsoseeks a higher share of the domestic market.

"We want to produce combed wool for theproduction of woollen fabrics and garments,"he says. Chinatex will also invest in factories,and already has a target acquisition in SouthChina. He says Chinatex will become a pro-ducer of woollen fabrics.

Chinatex is a key player today in the importof raw wool to China. Zhao says the compa-ny is responsible for one quarter of all woolpurchased from Australia, worth a total ofAUD1.5 billion last year. Australia has one-third of the Chinese wool market. China alsoimports wool from New Zealand, SouthAmerica and South Africa.

As part of its internal restructuring, Zhao saysChinatex wool-buying operations will bestreamlined. Since 1982, the company hasoperated Chinatex (Aus) Wool Co Pty Ltd,based in Sydney, to bid for Australian wool.This company secures half of Chinatex's totalimports from Australia. The other half is han-dled by another Chinatex company, based inBeijing. From next year, says Zhao, there willbe just one company, headed by Gong Zheng-Yi, who is currently Managing Director of theSydney-based firm.

At around US$200 million a year, Zhao saysChinatex's wool business is smaller than itsUS$250-million-a-year cotton business. "Weexport cotton, but not woollen products," hesays. Cotton products range from fabrics to gar-ments to raw yarns and manchester.

Currently, Zhao says, Chinatex owns threecotton spinning and weaving factories whichhave 200,000 spindles and about 2,000 weav-ing looms. "We have capacity to producearound 15 million pieces of garments now.This makes us one of the largest manufacturers,he says. Chinatex also buys from other Chinesemanufacturers, giving it a total annual volumeof 30 million pieces.

Since 1996, Chinatex has been investing incotton farms in Australia. With its latest acqui-sitions, says Zhao, Chinatex will have a total offour farms, covering 50 sq km, located inMoree, northern NSW.

Of China's accession to WTO, Zhao says:"If we didn't join the WTO, we would notenjoy the benefits of global agreementsshared by WTO members – especially afterthe quota system for the textile trade isabandoned." Under the Agreement onTextiles and Clothing (ATC), negotiated dur-ing the Uruguay Round, WTO members areto abandon a quota system, which has dom-inated the global textile trade since the early

1960s, by 2004. By 2005, importing countries will no longer be able todiscriminate between exporters. In fact, the ATC itself will nolonger exist.

As a developing economy, Chinawas a beneficiary of the quota sys-tem, although increasingly it has lostpreferential treatment under that sys-tem. However, under plans initiatedby the European Union, least devel-oped countries continue to havepreferential access to developedmarkets. Other developed countries,including the United States and Australia, alsooffer special access to their markets for least-developed countries.

In terms of scale of economy and availabili-ty of labour, China ranks as the most competi-tive player in the garments and textiles sector.

According to the World Trade Organisation,China held 11.4 per cent of global exports tradein textiles in 2001, compared with 6.9 per centin 1990. In value, China's export trade

amounted to almost US$17 billion.China imported food worthUS$15.43 billion, or 10.9 per cent ofthe global import share.

"Until 2004, (we will not be able)to have a scientific idea about thecompetitiveness of different coun-tries – because of the quota system,"says Zhou. "But once the quota sys-tem is gone, we will have a betteridea of which countries are the mostcompetitive producers." Zhao saysChina has the advantage of having acompetent and skilled workforce.

He says the Chinese Government would liketo see China keep its position as a major playerin the global market. Certainly, he says, over thenext 10 to 20 years the sector will continue tobe an important employer of Chinese workers.

Zhao Boya:Buying one quarter of all

wool purchased fromAustralia.

From page 6

COPYRIGHT ©: All material in ASIA TODAY INTERNATIONAL iscopyright and remains the property of the publisher, East AsiaNew and Features (Australia) Pty. Limited. Reproduction inwhole or in part is not permitted without written permission ofthe publisher.

More 'freedom' for HK?

BEIJING IS EXPECTED to use avariation of the dramatic exit formu-

la it employed after bungling the SARS out-break to hopefully restore the confidence ofHong Kong people in China’s leadership,according to China analyst Jonathan Story.

Since the Tung Administrationpushed to pass a National SecurityBill, known locally as Article 23,Hong Kong has been gripped by dis-trust of and anger towards itsGovernment. The controversy hasbecome the most serious challengeto the leadership of Chief ExecutiveTung Chee-hwa.

Story says Beijing realises that ifthe Hong Kong situation is notresolved, it has the potential tobecome a major problem — withimplications for the Mainland itself. "The popu-lation (in Hong Kong) is disturbed, and, unlessmanaged properly, this will become a majorpolitical problem," Story told ASIA TODAYINTERNATIONAL. If the past is a guide, someface-saving operation will be needed."

Story, whose latest book, China: The Raceto Market, has just been released, has spe-cialised in observing the transformation ofcommand to market economies over three

decades. He believes Beijing is involved inbehind-closed-door negotiations with Tungand Hong Kong opposition leaders to seek asolution to the imbroglio.

"Over the next four weeks, I expect China tofind a face-saving way out of the crisis in HongKong," says Story, who is Professor ofInternational Political Economy at INSEAD, theleading French academic institution. Beijingwill resolve the political controversy in HongKong, he says, because it is confronted by thereality of China's inclusion in the global village.

China learned the hard way in the handlingof the SARS crisis. Its initial denial led to glob-al condemnation of government inaction.Stung by the criticism, Beijing took drasticaction, including the sacking of HealthMinister Zhang Wenkang and Beijing's mayor,Meng Xeunong. Story expects Beijing to seekan "exit" from the Hong Kong imbroglio insimilar dramatic fashion.

Asked whether Tung will bereplaced, Story says the most likelyoutcome will be to elevate Tung to amore "honorable" position, and toinstall a Secretary who will be, ineffect, the Chief Executive. He saysthe manner in which China resolvesthe Hong Kong problem will befashioned partly to reinforce itsemerging status on the internationalstage. But, more importantly, it willplay for domestic consumption.

The upshot will be a Hong Kongthat is given more freedom — but

that can come about only if there is a degree ofconfidence and trust between the Mainlandand the democratic movement in Hong Kong,says Story. "If there is a breakdown in confi-dence there will be repercussions for Beijing —and China's credibility could suffer. My hunchis that an awful lot of effort is now under wayto allow Hong Kong to live as a more open

HONG KONG will be givenmore freedom in a solutionto the current crisis whichis fashioned to both rein-force China's emergingstatus on the internationalstage and to play fordomestic consumption,according to a leading stu-dent of Chinese affairs . . .

Jonathan Story:China learned the hardway in the SARS crisis.

CHINA MUDDLING THROUGH


society." While the hard-line Article 23 willremain, some compromise will be reached thatthe people of Hong Kong can accept. Storyalso believes Hong Kong will move towardsdomestic election of a Chief Administrator in2007, as stated in the Basic Law.

His rationale is that 2007 is the year beforethe 2008 Beijing Olympics — an event that cancement China's position in the global commu-nity. In 1962, Japan hosted the Games, and thismarked a turning point for Japan — it began to"invade" the world with its products. In 1988,South Korea played Games host — an eventthat was credited for ushering in an end to mar-tial 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 inChina's handling of human right issues, leadingeventually to more transparency — a steptowards a more open society.

Since the early 1990s, direct elections havebeen held in China at village level. Story saysthese elections are very important, born outof necessity to appease agitated peasantsinfuriated with the practices and corruptionof local government officials. And Shenzhen,the first coastal economic zone, will learnfrom Hong Kong to improve local gover-nance. The fundamental glue holding Chinatogether today is its party state — and HongKong is an exception.

Chinese people do not wish to revisit thepast, says Story. Millions of Chinese havemarkedly raised their standard of living. Chinahas muddled through to get to where it is, andStory expects it will continue to muddlethrough in future, dealing with partial reforms,and hoping that millions more of its peoplewill enjoy greater prosperity.

China has to manage itself as it opens itsmarket, says Story. One lesson came with themassive April 1999 demonstrations by theFalungong cult, which used mobile phones torally its members. Market reform has con-tributed to promoting conditions for a moregarrulous society. At the same time, themonopoly of the party State is shrinking.China's leadership wants to succeed — and hasdone so, so far.

Political changes will be gradual, says Story,because China will not go for the Big Bang —the way Society leader Mikhail Gorbachevintroduced glasnost (openness) under pere-stroika, a programme of economic, politicaland social restructuring.

Story says events in Indonesia in 1998,although Indonesia was not a communistcountry, shocked China. "Indonesia is a 'patri-monial society' that was forced into rapidchanges in the wake of the 1997 financial

From page 7

23 years ofAward-winningServices to Asia

Reliability and Service.A great Five Star tradition.

(a wholly-owned COSCO Group Company)

Sydney: Tel (02) 9373 9588 Fax (02) 9299 7988

Melbourne: Tel (03) 9258 2600 Fax (03) 9614 6260

Brisbane: Tel (07) 3215 1100 Fax (07) 3220 0234

Fremantle: Tel (08) 9336 4238 Fax (08) 9336 4231

Adelaide: Burns Philp Shipping Tel (08) 8447 5655 Fax (08) 8341 1827

Ship COSCO for Five Star Service

O C E A N I A

Shippers in the know ship COSCO– for Five Star Customer Service!

Five Star Shipping and Agency Company Pty Ltd

FREIGHT RATE HOTLINE 1800 000 686

Continued page 9

❝ I anticipate subtlechanges in (theChinese) Governmentbetween now and theOlympics, and thisdoes not exclude political changes❞

crisis. The speed of political and economicreforms has set Indonesia back, he says (thestandard of living has fallen to a post-1997level). "The interesting question is how farIndonesia can go now."

He expects China to be more pro-active ingeopolitical issues, and says the most criticalissue today is North Korea. On its own, andwith limited resources, Beijing realises that ithas to work with other nations, most notablythe United States. He says relations withWashington warmed considerably when former president Jiang Zemin called GeorgeW Bush the day after the September 11 attackon New York and Washington.

As the last surviving Communist state, Chinadoes not have a model on which to go for-ward. It has come too far to turn back to pre-1978, when China embarked on its open doorpolicies. Story says the Chinese will have tolearn by experimentation. Its approach to mar-ket and political reform has been exploratory.This explains why huge diversity of practiceacross China exists.

B U S I N E S S O U T L O O K BEIJING PRESSURED TO REVALUE


From page 8

Continued page 10

S&P puts Hong Kongratings on watch

WHATEVER the political outcomeof protests in Hong Kong, sover-

eign ratings will depend on theGovernment's ability to tackle fiscal overrunssuccessfully, while pursuing a coherentmacro-economic mix, Standard & Poor's saidin a statement. The ratings will also dependon Hong Kong maintaining its fiscal, economic and financial autonomy.

The ratings agency said major public mis-givings include the Government's inability tocorrectly identify problems, co-ordinate ordesign policies consistently and transparently,and articulate a coherent strategy.

"Going forward, the Administration will haveto adapt to and accommodate this political cul-ture, which calls for more open governanceand public debate," S&P said, adding that thisyear's budget deficit was likely to widen tomore than 7 per cent of GDP because of theSARS outbreak. "Better governance in future,as perceived by the public and investors, mightboost confidence and help sustain a recovery."

S&P said current political developmentremains fluid. "Without sufficient support inthe legislature, the Government would belargely ineffective, and this would lead to aworse policy environment. Alternatively, amore reduced role could be envisaged for(Chief Executive Tung Chee-hwa) in order tomollify the public.

"If Mr Tung steps down, which is likely tooccur only with the nod from Beijing, policyuncertainty could be alleviated by a Beijing-sanctioned successor plan, or at least aninterim Government that depends on theexisting bureaucracy," S & P said.

HK banks to trade yuan■ CHINA is reportedly considering allowingHong Kong lenders to provide personal yuanbanking services to Hong Kong residents in anextension of the new Closer EconomicPartnership Arrangement with Hong Kong.

'Risky' to float the yuanA REPORT from MorganStanley's Chief Economist,Stephen Roach, urgesChina to resist pressure fora revaluation. It says Japanhas led the way in China-bashing over the past year. . .

BEIJING HAS AGAIN come underpressure to revalue its currency fol-

lowing recent devaluation of the US dollar.Critics argue that the weaken US currency hasgiven China an unfair competitive edge in theglobal market. The currency is unofficiallypegged at around 8.30 renmibi to a dollar.

Stephen Roach, Chief Economist withMorgan Stanley in New York, was in China inJuly and firmly believes Beijing should not bowto pressure. “Assuming the dollar has a gooddeal further to go on the downside, as I sus-pect — perhaps as much as 20 per cent overthe next couple of years — most believe thatChina’s current competitive advantage willbecome all the more pronounced,” he writes ina recent report, The Scapegoating of China.

Roach says the Chinese are acutely sensitiveto global opinion, and are quite concerned atthis obvious shift in sentiment. “AlthoughChinese officials remain unwavering in theircommitment to the renminbi’s peg, I was askedrepeatedly for my thoughts on how to handlethis delicate issue. I urged the Chinese to staythe course — to leave their RMB policyunchanged,” he says.

China does not compete on the basis of anundervalued currency, he adds. It competesmainly in terms of labour costs, technology,quality control, infrastructure and reform. Hebelieves that if China was to revalue the RMBupward by 10 per cent, its exports would suf-fer only minimal loss of market share.

Until China completely reforms its capitalmarkets, it would be premature and risky tofloat its currency, says Roach. “That’s a criticallesson of the Asian financial crisis that an impa-tient world should not lose sight of when put-ting pressure on China.”

The general perception is that China is grab-bing the world’s exports market. Roach (andmany other prominent economists espousethe same view) argues that Chinese sub-sidiaries of global multinationals — andChinese joint ventures with industrial-worldpartners — accounted for 65 per of China’stotal exports from 1994 to 2003. In that time,China’s annual exports soared from US$121 bil-lion to US$365.4 billion.

Roach is scathing of those countries whichare critical of China’s currency policy.“Unwilling to accept responsibility for theirown shortcomings, the wealthy economies ofthe industrial world are making China a scape-goat for their weak recoveries,” he says. “That’sespecially true of Japan, which has led the way

in China-bashing over the past year.” Roach points out that the Japanese yen aver-

aged close to 300 yen against the US dollar inthe 1970s and about 220 yen in the 1980s —compared to the 115-120 range today. “Itstrikes me as extremely hypocritical for Japanto criticise China for emulating a strategy thatwas central to its own development model,” hesays. “Putting pressure on China to revalue itscurrency is a poor excuse for Japan’s inabilityor unwillingness to reform.”

He is equally critical of the motives ofWashington. America’s largest trade deficit isnow with China — a US$103 billion shortfall in2002, and on track to exceed that amount in2003. Roach argues that trade deficits shouldnot come as a surprise for a savings-short USeconomy. “If America weren’t trading withChina, those deficits would have to occur withother nations — Canada, Mexico, other Latineconomies, Japan, or possibly even Europe. Ifthe United States wants to reduce its tradedeficit, it must come to grips with more funda-mental problems of its own — namely, a rapidly-vanishing national savings rate,” he says.

One-off lift likely■ ABN AMRO says Chinese authorities will tryto keep the US$/RMB exchange rate steady asfar as possible, and that when they do let theRMB appreciate, it is likely to be a one-offmove of 15-20 per cent. The bank says there isnow US$151 billion in foreign currencydeposits in banks in China. If the Bank ofChina announced overnight a widening of theexchange rate band or allowed a gradualappreciation, China corporates and individualswould be unlikely to continue keeping theirmoney in US$.

"The People's Bank of China is now buyingUS$600 million every day to keep the currencysteady," ABN AMRO says, adding that two fac-tors are holding back the decision to allow theRMB to appreciate. The Chinese government isstill concerned about deflation - it will want tosee higher inflation before giving up the unof-ficial peg; and there is no guarantee that thespeculative capital inflow would disppear aftera 15-20 per cent appreciation.

China to captureelectronics growth

CHINA IS EXPECTED to capture77 per cent of an estimated US$60

billion increase in electronics manufacturingin emerging markets by 2005, says a newreport from the International FinanceCorporation.

China's share of global production will thenexceed that of Western Europe. Engineeringand design will also move to emerging mar-kets – with labour costs up to 80 per centlower than developed regions, says the IFC.

The study by IFC and management

highest level of growththrough 2005.

■ China will continue tohold commanding positionsin key value chain elementssuch as assembly, displays,and semiconductors, as itevolves into the hub of electronics manufacturing.By 2005, 45 per cent of allhigh volume assembly willoccur in China.

■ The Asia Pacific region,particularly China, currently dominates elec-tronics manufacturing in emerging markets:

— 83 per cent of electronic displays manu-factured in emerging markets are produced inthe Asia Pacific region, with 44 per cent fromChina;

— For connectors and cables, 78 per cent ofthe emerging markets' output is from the AsiaPacific region, including 66 per cent fromChina; and

— Eastern Europe and Latin Americaaccount for 25 per cent and 16 per cent,respectively, of battery production in emerg-ing markets.

■ By sector, production growth will be ledby computers and peripherals, with an esti-mated $47 billion increase between 2001and 2005, followed by consumer electronics($20 billion), handheld devices ($16 billion),automotive electronics, and telecom (both$11 billion).

B U S I N E S S O U T L O O K ELECTRONICS - WHERE THE GROWTH IS

Continued page 11


consulting firm Booz Allen Hamilton, foundthat electronics production activity in emergingmarkets will nearly double, from US$65 billionin 2001 to US$125 billion by 2005 – and willaccount for 43 per cent of total worldwidemanufacturing growth. More than three-fourths (77 per cent) of the growth in devel-oping countries will be in China, with Chinaincreasing its share of global electronics pro-duction from eight to 14 per cent, a growthrate twice as fast as any other country.

The study estimates that electronics pro-duction in China will be a US$80 billionbusiness by 2005. Emerging market growthoutside of China will be primarily in otherdeveloping Southeast Asian countries,Eastern Europe and Mexico.

Gains in developing countries will not belimited to manufacturing. Higher-value serv-ices such as engineering and design func-tions will increasingly migrate to developingnations over the next few years, althoughthis transition will trail the more rapid shiftin production.

India and Russia in particular have an abun-dance of highly-skilled labour, with labourcosts up to 80 per cent lower than in thedeveloped world.

The SARS epidemic has raised concernabout economic growth in China and otheremerging markets. However, a follow-up tothe original survey found that most respon-dents expect SARS to have a very limited andonly temporary effect on the shift of electron-ics production towards developing markets.

According to 22 per centof senior executives sur-veyed, SARS should have noimpact on the movement ofelectronics manufacturing toChina, 64 per cent expectonly a slight temporaryimpact, and only 14 percent expect it to have evena moderate impact on thistrend. None of the respon-dents expect SARS to have asignificant impact on thelong-term growth of electronics production indeveloping markets.

"This dramatic increase in production clear-ly demonstrates the growing strength ofemerging markets," said Dick Ranken, directorof IFC's Global Manufacturing and ServicesDepartment. "In fact, a main driver of thistrend is the rising importance of economiessuch as China as end-user markets for theseproducts, which increases their competitiveadvantage in the manufacturing process."

"Emerging markets offer cost savings thatare critical for survival in today's hyper-com-petitive environment," said Barry Jaruzelski,Booz Allen Vice President. "Large multina-tional corporations are leading the drive toemerging markets - and taking their smallersuppliers with them."

The report highlights several other majorfindings:

■ In emerging markets, final assembly, dis-plays, and semiconductors will provide the

From page 9

❝ Emerging marketsoffer cost savings thatare critical for survivalin today's hyper-com-petitive environment.Large multinationalsare leading the driveto emerging markets.❞

ASEAN revisits regional energy gridsASEAN is again movingtowards a cross-border gasand electricity grid. It hasapproved a Master Plan forpower inter-connection,but emergence of commongas and power marketswhere energy is traded issome way off . . .

SINGAPORE: A more integrated,co-operative approach to meeting

energy demand is slowly emerging amongSoutheast Asian countries.

Following progress in removal of tariffbarriers to trade in goods under the ASEANFree Trade Agreement (AFTA), attention isbeing given to promotion of cross-bordergas and power supply to more efficientlymeet energy demand. In July, the 10 ASEANmember states approved a comprehensiveMaster Plan for power interconnection. Theplan proposes 11 main new transmissioninterconnections between countries, to bebuilt by 2020. It complements a plan forinter-country gas transmission connections,

which ASEAN ministers agreed to last year.Currently, there are three cross-border

power transmission lines - from Laos toThailand, supplying hydro power toThailand; and two-way interconnectionsbetween Thailand and peninsular Malaysia,and Malaysia and Singapore. There are alsocross-border gas pipelines in operation, tak-ing gas from Myanmar to Thailand, frompeninsular Malaysia to Singapore and fromIndonesia to Singapore.

The ministers endorsed the power plan dur-ing a meeting at Langawi Island, Malaysia, onJuly 3. In a statement issued after the meeting,they welcomed progress made in the Trans-ASEAN gas pipeline and the ASEAN powergrid projects and said they “look forward toworking collectively to provide greater stabil-ity and security of energy supply in theASEAN region”. Strong private sector partici-pation in the gas and power interconnectionprojects is necessary, they say. Ministers rec-ommended development of an enablingframework to ensure construction is carriedout on a commercial basis.

The power plan broadly divides the regioninto two. There is a “west system”, featuringnew interconnections within the Mekongregion - Cambodia, Laos, Myanmar, Thailandand Vietnam - and also between Thailand andpeninsular Malaysia; Malaysia and Sumatra inIndonesia; peninsular Malaysia and Singapore;Singapore and Batam in Indonesia; andSingapore and Sumatara. Thailand is put for-

ward as a hub for the west system. Power fromthe Mekong region, much of it hydro-producedfrom Laos and Myanmar, would be transmittedor “wheeled” through Thailand to countries tothe south — providing the tariff is competitiveto the production cost of the gas and coal-firedpower plants in the south.

An “east system” proposes interconnectionsbetween the different countries on Borneoisland - Brunei, the Malaysian states of Sabahand Sarawak, and Indonesian Kalimantan. Along-distance submarine interconnection withthe Philippines and the Borneo system wasfound not to be economically viable in theperiod to 2020. Similarly a once-mooted sub-marine link between Borneo and peninsularMalaysia was not considered viable.

Earlier, Malaysia had proposed that theplanned Bakun hydro dam project in Sarawakcould supply the peninsula and possibly thePhilippines as it would generate far morepower than the relatively small economy ofSarawak would need. This dam has long beencontroversial because of feared environmentaldamage to the Rejang river system and itsimpact on local communities. A smaller damproject is now contemplated.

The power study was carried out by theHeads of ASEAN Power Utilities (Hapua). Thegas plan was developed by the ASEANCouncil on Petroleum, which representsnational oil companies.

The Hapua co-ordinator for the power

From ANDREW SYMONASIA TODAY INTERNATIONAL Correspondent

Continued page 13

ASEAN'S ENERGY BID


study, Prutichai Chonglertyanichkul,Assistant Director of System Planning at theElectricity Generating Authority of Thailand,said interconnection could result in signifi-cant savings. “Each country does not need toinstall as much power generation. You canreduce the reserve margin each country wouldotherwise need if it pursues self-sufficiency,”he said. “If you stand alone, when the systemis not meeting full demand, then you may haveto stand down some power plants becausedemand is not sufficient. If systems are inter-connected, then this can be avoided as powerplants can still operate by transferring power toanother country.”

There were also environmental benefits. “Ifyou stand alone, you will need more powerplants, producing more carbon dioxide emis-sions and so on,” he said. Politically, the powerinterconnections would encourage closer rela-tions between countries. But concerns oversupply security could still make it difficult forcountries to commit too much of their powersupply needs to generators in neighbouringcountries, Prutichai added.

Some propose that ASEAN members shouldenter into an energy treaty that could guaranteethat member countries would not interrupt sup-ply, similar to the law governing cross bordersupply in Europe.

More cross-border links, however, do notmean rapid emergence of common gas andpower markets where energy is traded — as isthe case to various degrees in North America,Europe, Australia and New Zealand. Policies inSoutheast Asian countries vary significantly.Some states, such as Malaysia, are not preparedto entirely liberalise gas and power supplyindustries for fear of shortages and price spikes,as occurred in California.

Only Singapore has a power pool market.The Philippines plans to establish one, whileThailand has reversed its earlier intention toinstitute a power market. Private power supplythrough independent generators selling underlong-term contacts, if not in power-pooling sys-tems, is supported throughout the region nev-ertheless, especially as State-owned powercompanies alone are not able to finance all theneeded generation plant.

From page 10

Bank Mandiri IPOmay set trend in investor sentimentFrom TOM MCCAWLEYASIA TODAY INTERNATIONAL Correspondent

'OMANDIRI' in Bahasa Indonesia,the national language, means inde-

pendent. On July 14, Bank Mandiri, Indonesia’slargest State-owned bank by assets, took amajor step towards its own independence. Itmade a strong debut on the Jakarta StockExchange, following on initial public offeringearlier in July.

Despite a small bomb blast at the Parliament,Bank Mandiri shares rose 26 per cent as for-eigners who had missed the earlier IPO rushedto buy. It was a proud day for officials who

CHINA - INDIA - INDONESIA - JAPAN - MALAYSIA

MYANMAR - SINGAPORE - THAILAND - VIETNAM

Having Difficulty

Establishing Your Business

in an Overseas Market?International Business Network (IBN) are specialists in: offshore business development; international trade; country-specific marketing strategies; local representation,advice and assistance.

IBN has successfully assisted over 700 companies worldwideto establish and accelerate their Overseas BusinessDevelopment in Asia through our Business ProcessOutsourcing (BPO) services.

Our principal BPO services include:● In-country representation by professionally qualified local industry specialists● Country specific promotion and marketing● Business planning & establishment services● Primary market research● Feasibility studies● Market analysis● Competitor analysis● Product sourcing & supply● International franchise development and support services● International market research and target market evaluation● Investment feasibility studies● Partner identification, selection and facilitation● Business acquisition & consultation services● Distribution network establishment & development

IBN's ancillary BPO services include:● Brand positioning● Company profiling● Country and industry briefs● Due diligence● Work permits and visa services● Immigration counselling

INTERNATIONAL BUSINESSNETWORK PTY LTD

INTERNATIONAL CORPORATE CONSULTANTSSTRATEGICALLY POSITIONED IN 15 KEY BUSINESS

CENTRES THROUGHOUT ASIA. (33 BUSINESS CENTRES WORLDWIDE)

For confidential obligation free enquiriesplease contact our Head Office in Sydney on

Tel: +61 2 9281 5455 Fax: +61 2 9281 5405Toll Free: 1300 726 333

Email: [email protected]: www.internationalbiznet.com

®

GLOBAL ORGAN I Z ERS O F I N S T I T U T I ONA L

F I N ANCE & I N V ES TMEN T CONFERENCES

conference topics developed with

Frank J. Fabozzi

For information on sponsorshipopportunities, Please contact Cheryl Fallickat +1- 212-901-0531

KOREAN ABS/MBS CONFIRMED SPONSORS INCLUDE:

The Second Annual

Korean ABS/MBS September 29, 2003The Westin Chosun • Seoul, South Korea

The Second Annual

Korean ABS/MBS September 29, 2003The Westin Chosun • Seoul, South Korea

TITANIUM

PLATINUM

GOLD

SILVER

BRONZE

information management network

For More Information, Please Visit:

www.imn.org/a454/atm/Email: [email protected]: +1-212-768-2800 Ext. 1Fax: +1-212-768-2484

THE LATEST DEVELOPMENTS IN THE KOREANABS/MBS MARKETS

RATING AGENCY PERSPECTIVES ON THEKOREAN ABS/MBS MARKET

KOREAN ABS NEW MARKET DEVELOPMENTSAND ASSET CLASSES

TAX AND ACCOUNTING ISSUES

ISSUER AND INVESTOR PERSPECTIVES ONTHE KOREAN MARKET

CROSS BORDER SECURITIZATIONTRANSACTIONS

LEGAL ISSUES WITH CROSS BORDER MBS

APPLICATION OF SWAPS FOR THE KOREANABS MARKET

USING SECURITIZATION TO IMPROVE ASSETLIABILITY MANAGEMENT AND FLEXIBILITY:INTERNATIONAL MBS COMES IN THEKOREAN MARKET

INVESTMENT OPPORTUNITIES USING CDOs

NON-PERFORMING LOANS

K-REITS

ACTIVITY IN OTHER ASIAN SECTORS

JOIN US AND YOUR INDUSTRY COLLEAGUES TO DISCUSS:

B U S I N E S S O U T L O O K TOURISM SHAPES UP AFTER SARS


From page 10

■ Business Travel, page 30.

remember when Bank Mandiri, just four yearsago, was created from four failed state banks,their assets pooled and bad loans written off.Mandiri was fortified by the Indonesian BankRestructuring Agency (IBRA), with bonds thatstill make up most of its assets.

Now, the successful IPO is a strong sign thatinternational sentiment is shifting not only forIndonesian stocks, but for the wider economy.

The launch was carefully timed to coincidewith rising confidence in the market. So far, theJakarta Stock Exchange is up by more than 25per cent this year. Indonesia is likely to gradu-ate from the US$5 billion InternationalMonetary Fund loan programme at the end of2003. It's officials have praised the macro-eco-nomic management of the government ofMegawati Sukarnoputri.

In a bid to stimulate investment, BankIndonesia has lowered its interest rates to theirlowest levels in nine years. Indonesia’s once-battered currency, the rupiah, is up by 20 percent this year. The good macro-economic newshas helped persuade investors that BankMandiri is a good buy. In late June, the gov-ernment increased the size of the offering from15 to 20 per cent due to strong demand, main-ly from overseas investors. In fact, mostinvestor demand came from outside Indonesia.At the end of book-building in late June, for-eign investors accounted for 80 per cent of theissue. Two-thirds came from institutions, whichare traditionally unwilling to commit majorfunds to Indonesia. Indonesia recently soldstakes in Bank Niaga (to Malaysia’s CommerceAsset Holdings Bhd), an in Bank Danamon (toTemasek Holdings of Singapore, the Singaporegovernment's investment wing).

Bank Mandiri is attractive for several reasons.It is the largest stock in the banking sector afterBank Negara Indonesia and Bank Central Asia,counting among the top 10 capitalised stockson the exchange. At current prices, BankMandiri's publicly available stock is wortharound US$400 million. Mandiri is relativelycheap - priced at 1.06 times its book valuecompared to 1.5 for Bank Danamon, anothermajor bank.

Importantly, Mandiri has growth potential. Itis a major platform for entry into a market of210 million people. The bank has assets ofsome Rp260 trillion ($31.65 billion). As ofMarch 31, Mandiri had 700 branches, withsome eight million customers.

Local analysts claim Mandiri's share price willkeep rising. In mid-July, the bank was added tothe influential Morgan Stanley CapitalInternational Standard Indices. The move islikely to boost confidence in the stock as over-seas funds often use the MSCI as a benchmarkfor decision-making.

Concerns remain over the quality of BankMandiri’s assets. Most of the bank’s incomecome from bonds issued when the bank wasrecapitalised in the Asian crisis of 1997-98. Thebank is also finding it difficult to loan as cor-porate defaults remain at a high level.

The Government's low interest policy alsoposes risks for Mandiri. If the bank does notresume large-scale corporate lending this year,earnings could be damaged. After the successof the Mandiri launch, the government is likelyto push ahead with an IPO in another majorState-owned bank, Bank Rakyat Indonesia.

Advisories 'self-defeating'ISSUING travel advisoriesagainst countries hit byterrorism plays into thehands of those who want to disrupt business,says Richard Gordon,Philippines TourismSecretary and currentChairman of the PacificArea Travel Association . . .

THE PHILIPPINES suffered anoth-er setback on July 27 when para-mil-

itary groups “hijacked” a downtown officeblock in Manila. To Richard Gordon, the manwho is working doubly hard to restore confi-dence in his country’s tourism industry, it isyet another public relations nightmare.

Bad news, it seems, never ends. And whatGordon, the Philippines Tourism Secretary,fears most is “stigmatisation” that comes fromsuch incidents.

During a visit to Australia to help rebuildthe image of the Philippines as a tourist desti-nation, Gordon was at pains to stress that thePhilippines has more than 7,000 islands, andthat incidents in Manila or in Minandao shouldnot tarnish the rest of the country.

Recurrence of terrorist acts is like a roller-coaster ride for those in charge of tourism.Gordon says there has been a paradigm shiftin global terrorism, with terrorists graduatingfrom hijacking planes to using theplanes themselves as weapons.

“The world has to put on a bravefront in dealing with terrorism. Wehave to learn to cope,” he says.Countries have taken precautions,but they must also realise that issu-ing travel advisories against coun-tries hit by terrorists is self-defeat-ing, in a sense playing into thehands of those who want to disruptbusiness and tourism.

Following an agreement reachedat an Asian tourism Ministerial meet-ing this year, Southeast Asian countries haveagreed to share intelligence and information.

Gordon, who is also Chairman for 2003-4 ofthe Pacific Area Travel Association (PATA) andconcurrently World Tourism OrganisationCommissioner for East Asia, says the outbreakof SARS led to concerned countries advisingtheir own citizens to avoid travelling to affect-ed areas. This provided a sobering experiencefor countries like Canada, which for the firsttime realised the flow-on impact of traveladvisories — which affect not only thetourism and transportation sectors but rippleout to insurance companies and the widerbusiness community as visitors cancel trips.

Gordon says he does not argue against theuse of travel advisories, but governmentsneed to be “smarter in issuing them”. He saysthey ought to be region-specific. He also saysthe world did not issue travel advisories

against Japan after the Sarin gas incident inTokyo, or the United States after September 11terrorist attacks on New York and Washingtonin 2001.

But the global tourism industry is resilient,says Gordon. It has started to recover from theimpact of SARS, which is estimated to havecost some US$11 billion (AUD17 billion) ininternational tourism revenue in the two worstmonths of the outbreak. SARS affected themajor travel hubs of the region — Singapore,Hong Kong, Taiwan and China.

Intra-Asia travel is a major contributor totourism in the region. Of the 132 million visitsto Asian destinations last year, Gordon says 84million were intra-Asia travel. Asia is theworld’s second-largest market after the US.

This is why the financial costs of SARS werehigher than those of September 11 or theOctober 18 2002 Bali bombing. Gordon says itwill take six months for the industry to recov-er from the fall-out of SARS. Airline capacity isincreasing, and regional initiatives are now inplace, offering attractive deals for long-haulvisitors to Asia.

It is crucial, Gordon says, that the industryregains the confidence of travellers.

As well, he says, Southeast Asian countrieshave undertaken a key initiative in offeringspecial airfare and hotel packages to lurelong-haul travellers back to the region.Regional airlines and hotels are participatingin these special fares and room rates toencourage long-haul tourists to visit multipledestinations. Travellers pay US$120 extra foreach sector, for example from Manila to Hong

Kong, or Hong Kong to Singapore,with five-star hotels charging fromUS$70 a night.

Domestically, Gordon has made“long weekends” official policy inthe Philippines, ensuring that publicholidays which fall during the weekare moved to the Friday or Monday.The only day that cannot be movedis Labour Day. “We do this in con-sultation with business,” he says. “Aslong as we tell them in advance, theysupport the idea.” He says the longweekends have resulted in a 20 per

cent rise in domestic tourism. “This is good forour transportation industry, hotels and resorts.”

Last year tourism generated US$82 billionworldwide. Long-term growth is projected at5.5 per cent, although growth dropped to 4.3per cent last year.

Tourism is the positive face of globalisation,Gordon says. It is one sector that can produceimmediate benefits to the people of a countrythat opens its doors to the world. The mostimportant thing is that those involved in theindustry do not have to have college degrees.He says tourism have been credited with raisingthe standard of living of millions of people inpoor countries. Not only is tourism a key gen-erator of foreign exchange to Asia. With Chinaand India being part of Asia,the region is potentially the largest single market for global tourism.

Richard Gordon:Governments need tobe smarter in issuing

advisories.


A S I A P U L S E THE INFORMATION HEARTBEAT OF ASIA

© Asia Pulse Pte Ltd.Each day Asia Pulse creates up to 250 items of news, businessopportunities, expert commentary and industry profiles. Asia Pulse isa unique joint venture involving the resources of Asia’s major newsand information groups.

Contact: Asia Pulse Production CentrePhone: (612) 9322 8634Fax: (612) 9322 8639http://www.asiapulse.comEmail: [email protected]

The information heartbeat of AsiaASIA PULSE is a joint venture involving the resourcesof (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) - PhilippinesNews Agency (Philippines); (PPI) - Pakistan PressInternational (Pakistan); (PTI) - The Press Trust of IndiaLtd (India); (Yonhap) - Yonhap News Agency (Korea);(VNA) - Vietnam News Agency (Vietnam); and (XIC) -Xinhua Information Centre (China).

TRIAL RUN ON THREE GORGESYICHANG — The first power generator ofChina’s Three Gorges Project, the largest ofits kind in the world, has been connected tothe power grid to begin generating electrici-ty. Yang Qing, vice-general manager of theChina Yangtze River Three Gorges ProjectDevelopment Corporation, said the generat-ing unit will supply 12.9 million kwh per dayto the Central China and East China PowerGrids. The unit will have to pass a 30-daytrial operation period before beginning com-mercial production in mid-August.

SAMSUNG SALES UP IN INDIANEW DELHI — Samsung India has posted a70 per cent increase in sales turnover toRs12,150 million (US$262.9 million) for thesix months ending June 30, 2003. Flat televi-sion sales grew 275 per cent to 150,000 units,and there was a 116 per cent increase incolour television sales at 690,000 units.Refigerator sales were up by 55 per cent at180,000 units, washing machines up 70 percent, and microwave and airconditioners up82 per cent and 81 per cent respectively forthe half.

J-POWER OPTS FOR WIND POWERTOKYO — Electric Power Development Co.,known as J-Power, plans in 2004 to buildJapan’s largest wind power generation plantin Fukushima Prefecture, investing 10 billionyen (US$84.35 million) to install about 30wind power generators with a combined out-put of 60,000kw, enough to supply about36,000 households with electricity for a year.J-Power plans to sell the entire output toTokyo Electric Power Co., starting in 2005.

SINGAPORE’S GDP DOWN SINGAPORE — Singapore’s gross domesticproduct [GDP] contracted 4.3 per cent year-on-year in real terms in the secondquarter of 2003, according to advance government estimates. On an annualisedquarter-on-quarter basis, real GDP fell by11.8 per cent, compared with growth of 1.2per cent in the previous quarter. GDPgrowth in the second quarter was predictably weak as a result of the weakglobal environment and the SARS outbreak.

NO TAIWAN CEILING FOR FTTSTAIPEI — Qualified foreign institutionalinvestors will no longer be subject to a ceilingof US$3 billion on their investments. Also goneis a requirement that money pledged by for-eign investors in the local stock market must bebrought into Taiwan within two years.However, the investors’ licenses to buy and sellstock on the local bourse will be suspended ifthey fail to funnel any money into the marketwithin three years of obtaining permission.

HK RECOVERING FROM SARSHONG KONG — Air traffic figures for Juneat Hong Kong International Airport showedlife slowly returning to normal for the localaviation industry. The effect of SARS was stillapparent, with June total passenger trafficfigure down 57.2 per cent compared with thesame month last year, but it was an improve-ment on May, when passenger traffic wasdown 79.9 per cent from the same month last year.

PIRELLI INVESTING IN INDONESIAJAKARTA — Pirelli has announced plans toestablish a tyre factory in Indonesia with aninvestment of US$100 million and a productioncapacity of 5,000 pieces per day. The factorywill concentrate on tyres for four-wheeledvehicles and light trucks.

GM TO EXPAND IN INDIAMUMBAI — General Motors Corporation willinvest Rs6,000 million (US$129.7 million) in itsIndian subsidiary during the current fiscalyear. The parent company has received clear-ance to invest up to Rs13,800 million inGeneral Motors India for new products anddevelopment purposes.

INSURANCE COVER UP IN CHINABEIJING — The combined premiums ofChinese and foreign insurance companies inChina topped 212.61 billion yuan (US$25.7billion) in the first half of this year, up 32 percent year-on-year. Total payments for the six-month period were 26.7 billion (US$3.23 bil-lion), five billion yuan more than last year.The outbreak of SARS stimulated domesticdemand for insurance.

TOYOTA JV IN GUANGZHOUNAGOYA — Toyota Motor Corp. aims to startjoint production of passenger cars with China’sGuangzhou Automobile Group Co. by 2005.The two plan to establish an equally-ownedjoint venture this year and to invest slightlymore than 30 billion yen (US$254 million) tobuild a factory. Initially, 30,000 units of theCamry will be produced each year. By boostingits presence in southern China, where many ofthe wealthy live, Toyota hopes to obtain a 10per cent share of the Chinese market by 2010.

US BUYING BIG FROM VIETNAMHANOI — The US is Vietnam’s top importerand the British Virgin Islands is pouring mostmoney into the country, according to half-yeargovernment statistics. Growing at 183 per cent,US sales accounted for one-fifth of Vietnam’stotal export turnover in the first six months ofthe year followed by Indonesia, Portugal andSouth Africa, with growth of 114, 83 and 75 percent, respectively. Deputy Trade Minister, MaiVan Dau, attributed the performance to all-outefforts from the government and businesses topromote trade and tap new markets.

CONSUMERS CLOSING WALLETSSEOUL — Consumer confidence declined toan all-time low in June due to concerns overthe moribund economy and sluggish growth,the National Statistical Office (NSO) said. Thereport showed that, regardless of the size ofmonthly income, people will spend less in thecoming months than they did in the past.

TELECOMS BIDS IN PAKISTANISLAMABAD — The government hasannounced the opening of its fixed-line tele-phone sector to private investors after abolish-ing the monopoly of the state-run PakistanTelecommunication Company Limited [PTCL]earlier this year. “Licences will be issued to pri-vate operators for a period of 20 years,” saidFederal Minister for Information TechnologyAwais Leghari, adding that licences will beissued to private companies for fixed-telephonyin Pakistan through a transparent process withopen bids.

THAI AIRWAYS TO OFFER SHARESBANGKOK — Thai Airways International saidit will seek to raise 15 billion baht (US$360 mil-lion) through a share offering in November byissuing 300 million new shares to the public.Thai Airways plans to cut government owner-ship to 70 per cent from 93 per cent by sellingthe shares, the Bangkok Post said. The airlinemade a net profit of 8.3 billion baht in the firstsix months of the current financial year.

PANVA GAS EXPANDS IN CHINACHENGDU — The Hong Kong-based PanvaGas Holdings Limited plans to invest HK$3billion (US$389 million) exploring gasresources in Sichuan Province, southwestChina, within the next two to three years.Sources with the Hong Kong company said it will step into the Sichuan gas marketby taking over gas companies in theprovince and establishing joint ventures.Panva Gas has set up more than 20 jointventures on the Chinese mainland since1997., for a total investment of HK$1 billion(US$130 million), and has taken over threegas companies in Sichuan.

B U S I N E S S O U T L O O K WHERE ECONOMIES ARE HEADING


Continued page 16

Asian construction slowdown on wayTHE construction sector inSingapore and Hong Kongis expected to contractsignificantly in 2003, com-punded by the impact ofSARS, according to a newBIS Shrapnel report . . .

BECAUSE OF slower-than-expectedglobal economic recovery, particular-

ly in the US, and the SARS impact, growth inthe construction sector in East and SoutheastAsia is expected to contract in 2003, accordingto BIS Shrapnel.

Writing in the BIS Shrapnel research seriesBuilding and Construction Asia Pacific, 2002to 2005, co-authors Adeline Wong and JasonAnderson suggest that the construction sectorin Singapore and Hong Kong will contract sig-nificantly in 2003, compounded by the impactof SARS. The co-authors expect the SARS out-break to fracture a previously fragile recoveryin these economies.

Meanwhile, construction activity in SouthKorea and the Philippines is expected to moveinto a downswing in 2003, with activity inChina, Indonesia, Malaysia, Taiwan andThailand to experience moderate growth.

The paper forecasts construction in mostAsian countries to achieve some recovery in2004 and 2005, setting the stage for strongergrowth in the second half of the decade.

China: The residential and non-residentialbuilding sector in China is expected to remainsteady in 2003, before growth gathers momen-tum in 2004 and 2005 underpinned by strongunderlying demand for affordable housing, andfor commercial and industrial property amidfurther market deregulation in 2005.

Total building completions in Beijing andShanghai are forecast to increase by 2-5 percent in 2003. Completions are, however,expected to fall back in 2004, mainly as aresult of a stock build-up and a recent ban onconstruction loans to developers of high-endresidential units.

By 2005, construction growth is expectedacross all four cities — Beijing, Shanghai,Guangzhou and Shenzhen — with Beijingrecording strongest growth. Growth in Beijingover the three years to 2007 will be under-pinned by building activity undertaken tospruce up the city for the 2008 OlympicGames, and also by Olympic Games-relatedbuilding projects.

Hong Kong: The construction sector isexpected to continue into its fifth year ofdownturn in 2003 and is not expected to bot-tom out until 2004, when gross value of con-struction work performed will to be 33 per centbelow its 1998 record peak. The protracteddownturn is ascribed mainly to the depressedresidential property sector. A rebound of threeper cent in aggregate construction value is fore-cast for 2005, principally due to a recovery inthe residential construction market.

Indonesia: The rebound in Indonesia’sconstruction sector is expected to continueover the next three years, but growth is forecastto be lower than during the previous threeyears. Total completion value in 2005 will stillbe 30 per cent below the levels of the mid-1990s. Stronger growth is expected from theretail building sector in response to tighteningprime retail space supply.

Malaysia: Despite a persistent supplyoverhang across the property sector, the con-struction sector in Malaysia is expected tocontinue to average annual growth of two percent over the three years to 2005. The sectorwill be sustained mainly by infrastructure, lowto medium-cost housing and institutionalbuilding projects. The commercial and indus-trial building sector will remain constrained byhigh vacancy levels.

Philippines: Construction sector growth isexpected to contract nine per cent in 2003, dueto a significant decline in non-residential build-ing activity as retail building activity falls backfrom an exceptionally high level in 2002. Thesector is forecast to rebound moderately in2004 and 2005, backed by steady, solid growthin residential and retail building, and infra-structure projects.

Singapore: Construction demand inSingapore is expected to contract 22 per cent in2003 because of a significant downswing innon-residential building and subdued residen-tial and civil engineering activity. The reboundforecast for 2004 is from a low base, mainlybacked by residential redevelopment and retrofitting activity as well as retail and officerefurbishments. New building activity is expect-ed to gather some strength in 2005, in responseto an economic recovery.

South Korea: Residential building activity

is expected to move into a two-year steepdownturn in 2003 and 2004, due to excesshousing stock. Overall construction demand isexpected to decline by six per cent in 2003 andremain subdued in 2004. However, a resumption of growth in building activity isforecast for 2005, backed by a pick-up indemand for residential, commercial and indus-trial property.

Taiwan: Taiwan’s construction sector isexpected to stabilise in 2003, backed by a fiveper cent rebound in the civil engineering con-struction sector. Growth is forecast to resumein 2004 and 2005 at an annual average of 11per cent. Residential and non-residentialbuilding sector growth is, however, off a low-base. The residential building sector is expect-ed to continue to be constrained by a chronicexcess in housing supply. However, a turn-around in non-residential building activity willbe supported by a pick-up in demand foroffice and factory buildings through strongereconomic growth and rising direct trade withmainland China.

Thailand: Over the 2003-2005 forecastperiod, construction sector growth is expect-ed to strengthen, supported by a continuedrebound in the residential building sectorand a turnaround in the non-residential andcivil engineering sectors. Residential build-ing activity has been boosted by a pick-up innew housing demand. Over the forecastperiod, the residential building sector will beaided further by the Government’s aim tobuild 600,000 low-cost units over the 2003-2007 period. The non-residential buildingsector will be underpinned by retail, hoteland industrial building activity amidstrengthening business confidence.

Visit www.bis.com.au

pick up; excess capacity is lingering; business-es are having to offer steep discounts to shiftproduction; inflation is falling to 1 per cent paor below in America and the eurozone; whilethe deflation that Japan has been experiencingfor the past four years is getting worse.

What if central banks cut interest rates allthe way to zero and activity still doesn't revup? That's the really frightening question.Inflation could fall to zero, and then becomedeflation — sustained. Real interest rateswould rise. Falling prices and falling demandcould feed off and reinforce each other. Wecould be staring at a situation that resembledat best Japan since its bubble burst in 1990 -or at worst, the Great Depression.

Fortunately, this doesn't look likely. Thedrags of war, high oil prices and SARS are start-ing to fade. Thanks to the recent world share-market rally and decline in long bond rates,financial conditions - the cost of capital - haveeased considerably. (Though the recent bondselloff will have to be watched.)

A lot of post-bubble balance sheet adjustmenthas already been undertaken - deleveraging,

FOR 18 MONTHS now, the worldeconomy has been showing several

signs of getting back onto its feet after the 2000dot.com crash and subsequent 2000-01 slow-down, only to stumble back every time intovery weak growth.

In the March quarter, GDP was dead flat inthe eurozone, and growth only 0.6 per cent pain Japan and 1.9 per cent pa in America. In thecurrent June quarter, Asia, excluding Japan, isslumping, because of SARS, the eurozone con-tinues to tread water, and Japan looks as if it'sshrinking again.

Pessimists are saying the worst isn't over.The Bank of Japan has cut its interest rate tozero. The Federal Reserve has cut interestrates 550 basis points over the past 2 1/2 yearsto 1 per cent. And the Japanese and Americangovernments have also been energeticallypriming the fiscal pumps through spendingboosts and tax cuts.

Yet despite this, economies are failing to

By ROGER DONNELLY, Chief Economist,Export Finance and Insurance Corporation

Real recovery this time?

From page 15

BUSINESS OUTLOOK


recapitalisation, write-off of excess capacity. Andthere is much monetary and fiscal stimulus stillto come out of the pipeline - including from therecent US$350b American tax cut.

Besides, if worse comes to worst, centralbankers led by the US Federal Reserve haveprofessed themselves ready to do all it takes toward of deflation - including buying long-datedgovernment bonds and extending credit directto business - all a far cry from their dazzled-by-the-headlights inaction in the 1930s.

So yes, we believe the stars are finally com-ing into line for a recovery. We are currentlycalling a return to trend growth of about 3 1/2pre cent for the world economy by end-2003 orearly 2004. No vigorous rebound - there isn'tthe pent-up demand. Still, these would be con-ditions conducive to a gradual pick-up inexports after their downtrend this past twoyears. One snag could be the US dollar correc-tion currently under way. This has the potentialto push Japan and the eurozone into recessionby undermining their export and import-com-peting industries - unless the authorities inthose areas manage to stimulate more domes-tic demand-led growth.

In addition, the counterpart of further USdollar weakness could be further A$ strength.That would be a headwind for exporters to bat-tle as they patiently wait for their overseas mar-kets to leave the doldrums. It needn't work thatway - markets may soon judge that it's time topile back into US dollar assets again, given theway America continues to outgrow the euro-zone and Japan. But for all that, US dollardepreciation is a stress worth subjecting yourbusiness plan to. Another stress worth thinkingabout is a further slide in activity in Japan,which is looking very weak.

Thankfully, the expansionary impulses final-ly seem to be overcoming the drags. Soalthough there have been a lot of false starts,this time a recovery could be on for real, evenif it is a little weak and accompanied by astronger Australian dollar.

Malaysia to lift it’sdomestic spending

MALAYSIA could be Asia's nextdomestic consumption story, accord-

ing a report by ABN AMRO. It says Malaysia isstriving to transform its economy from one thatis largely agriculture/mining and manufactur-ing-based to one that is competitive in down-stream support services.

"Medium-term, the real excitement withMalaysia lies in the possibility of a spurt in con-sumption turning to sustained structuraldomestic demand," the report says. "Malaysiastands out because its surplus savings are thelargest in Asia and its demographics arguablythe most attractive."

ABN AMRO says both Malaysia's andSingapore's corporate earnings and absoluteshare prices have, in the past, been closelyinfluenced by global growth cycles. "This timeround, a weak US$ and continued robustdemand for resources/commodities are provid-ing somewhat of a saving grace for both coun-tries. We are expecting a moderate recovery inboth economies and corporate earnings over the second half."

Documents

REMAKING CHINATEX Today_Aug03_1.pdf · President BJ Habibie undertook the Big Bang — the decentralisation of power to Indonesia's regions. It was a bold gamble by Habibie to quell