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CHINA ECONOMIC FACTS
With the policy objective of maintaining a stable growth, the central government has taken stabilization measures aiming to moderate investment growth. Besides raising the deposit reserve requirement ratio for banks, rectifying the land market and consolidating targeted types of investment projects, the People's Bank of China (PBOC) also raised the lending and deposit rates on 29 October 2004. One year lending rate was increased from 5.31% to 5.58%. As a result of the tightening measures, the growth of real GDP slowed down in the second half of 2004, resulting in a 9.5% growth for the whole year. In the first three quarters of 2005, the economy continued to grow by 9.4%, supported by both investment and consumption. Fixed-asset investment is one of the major driving forces of the economy. In the first two months of 2004, fixed assets investment (not including collective enterprises and individuals) surged by 53%, but slowed down to 27.6% for the whole year of 2004. Although the government scaled down the issuance of construction bonds from RMB140 billion in 2003 to RMB110 billion in 2004, fiscal expansion remains a contributing factor to China's economic growth. In 2005, the government has planned to scale down the issuance of constructiof?n bonds to RMB80 billion. Growth of fixed assets investment continued to edge up in 2005 and grew by 29.4% in September, resulting in an average growth of 27.7% for the first nine months of 2005. Retail sales of consumer goods grew by 13.3% in 2004 as compared with 9.1% in 2003. Growth in retail consumption was fundamentally supported by government policies to stimulate consumption which include provision of consumption credits and lengthened holidays. Continued growth in disposable income also contributed to the steady increase in retail sales. The government is projecting a 12.5% growth in retail sales for 2005. In the first nine months of 2005, retail sales increased by 13%. Telecommunications equipment, garments, sports and recreational articles continued to show marked growth in sales. Deflationary pressure began to be reversed since 2003. Consumer price index increased by 1.2% in 2003 mainly due to price rises in food, services items, housing, fuels and utilities. In 2004, the rapid rise in food prices contributed to the continued increase in consumer prices. However, the increase of food prices slowed from a peak of 14.6% in July to 4.9% in December. For 2004 as a whole, consumer price index on average increased by 3.9%. In the first nine months of 2005, the consumer price index increased by 2% with food prices increased by 3.3%. While prices of food, housing, cultural and entertainment activities increased, the prices of clothing, household appliances, transport and telecommunications continued to decline. The government is targeting to contain inflation within 4% in 2005. Partly due to the state-owned enterprise reforms, urban unemployment rate rose to 4.3% at the end of 2003 and edged down to 4.2% by the end of 2004. The Chinese government takes various measures like prof?viding training to displaced workers and promoting development of the private sector to ease the unemployment pressure. Urban unemployment rate is targeted to maintain below 5% in the 10th Five-year Plan period. In 2004, added-value of industrial output (by state enterprises and large enterprises with annual sales exceeding RMB5 million) grew at 16.7%. The output of heavy industries grew by 18.2% while light industries increased by 14.7%. The output of foreign invested companies grew by 18.8%. In the first nine months of 2005, added-value of industrial output grew by 16.3%, with foreign invested companies grew by 16.2% and private enterprises grew by 25.1%. 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 June 2004, there were more than 3.3 million private-owned enterprises (comparing to 1.76 million at end-2000), employing a total of more than 47 million workers (comparing to 20 million at end-2000). Money supply -?he growth of M2 (broad money supply) slowed down from 21% in October 2003 to 13.9% in February 2005 before edging up to 17.9% in September 2005. 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. The daily trading rate of the US dollar against the RMB is allowed to float within a band of 0.3% around the central parity published by the People's Bank of China on each working day. China's foreign exchange reserves reached US$769 billion by the end of September 2005, the second largest after Japan. Foreign debts amounted to US$266.2 billion at end of June 2005 (up 7.5% from the end of 2004), of which 46.9% was medium- or long-term debts and 53.1% was short-term debts. In 2004, the number of overseas tourists increased by 18.9% to 109 million with foreign exchange earnings grew by 47.9% to US$25.7 billion. In Jan-Sep 2005, the number of overseas tourists grew by 12.2% to 89.6 million, and foreign exchange earning increased by 18.2% to US$22 billion. According to the World Tourism Organization, China was the 4th most popular tourist-destination (behind France, Spain and the US) in the world in 2004. In 2004, China's external trade reached US$1,155 billion, ranked the third in the global economy. In 2004, exports grew much faster at 35.4% while imports increased by 36%. In Jan-Sep 2005, exports continued to grow rapidly by 31.3% while imports increased by 16%, resulting in a trade surplus of US$68.3 billion. Export-processing trade continued to be the major form of external trade. In 2004, exports and imports related to processing trade grew at 35.7% and 36.1% respectively. Export-processing accountef?d for 55.3% of China's total exports in 2004. In 2004, exports of machinery, electrical and electronic products continued to grow rapidly at 43.8% (US$247.8 billion), while other light consumer goods also showed impressive performance, for example, exports of garment grew by 19.7%(US$54.8 billion), footwear up 17.4%(US$15.2 billion). In the first nine months of 2005, exports of machinery, electrical and electronic products grew by 30.7% while garments and footwear increased by 22.4% and 26% respectively. China's top ten trading partners were the US, Japan, Hong Kong, South Korea, Taiwan region, Germany, Singapore, Malaysia, the Netherlands and Russia. China's trade with these ten economies together amounted to US$768 billion, i.e. 66% of China's total external trade in 2004. In 2004, exports of foreign-invested enterprises (FIEs) increased by 40.9% to US$338.6 billion, accounting for 57% of the national total. For the same period, FIEs' imports grew by 40% to US$324.6 billion, representing 57.8% of China's total. Foreign direct investment (FDI) continued to grow in 2004. The number of newly approved foreign-invested projects increased by 6.3% to 43,664, while contracted and utilized foreign direct investment increased by 33.4% and 13.3% to US$153.5 billion and US$60.6 billion respectively. In Jan-Sep 2005, contracted foreign direct investment increased by 21.8% while utilized foreign direct investment dropped slightly by 2.1%. By the end of 2004, China approved a cumulative of 508,941 foreign investment projects, with contracted and actual utilized overseas FDI amounting to US$1,096.6 billion and US$562.1 billion. The leading sources of invf?estment included Hong Kong, Japan, the US, Taiwan, Singapore and South Korea. China has been the largest recipient of foreign direct investment within all developing countries for the seven consecutive years since 1993. By the end of 2004, 5,163 Chinese enterprises (non-financial sectors) have made FDI in overseas markets, with the cumulative investment amounted to US$44.8 billion. In 2004, the amount of FDI made by Chinese enterprises was US$5.5 billion. Hong Kong is the largest recipient of capital from Chinese enterprises, accounting for 68% of the total outward FDI up to 2004. Business services (mainly investment holdings), wholesale and retail, mining and manufacturing are the leading sectors of China's outward FDI. 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. As at January 2005, the categories of import commodities subject to licensing controls were reduced to 3 (including 83 8-digit product codes), down from 5 in 2004 and 8 in 2003. The average tariff rates was further reduced to 9.9% in 2005 from 10.4% in 2004, progressively down from 15.3% in 2001. For exports, beginning from January 2005, the categf?ories of export products subjected to licensing controls were cut to 47. In addition, China has introduced a bidding system for export commodities quota to manage the exports of 20 categories of commodities. The Chinese government has gradually abolished the state monopoly of foreign trade and liberalize 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 Starting from 1 January 2004, China's rates of VAT rebate for exports are lowered by an average of 3 percentage points. The new rates of rebates will comprise five levels, i.e., 5%, 8%, 11%, 13% and 17%. Products that were previously entitled to 17% rebates include clothing, electrical appliance and electronic products, transport vehicles, instruments and meters are lowered to 13%. Beginning November 2004, the rates of VAT rebate for certain information technology items, such as integrated circuits, are raised to 17% from 13%. In a bid to encourage overseas investment in the central and western regions, beginning from September 1996, local authorities of the central and western provinces were empowered to give approval to overseas-funded projects with total investment capital under US$30 million, up from the previous amount of US$10 million. Since the Chinese government started to implement a strategy of developing the western region in late 1999, more preferential treatments are extended to foreign investment in inland provinces and regions. Upon expiration of the preferential tax polices, foreign-invested enterprises may enjoy 50% reduction of corporate income tax for another thf?ree years. On 31 October 2000, the Chinese government officially amended the Laws on Wholly Foreign-owned Enterprises and Sino-foreign Cooperative Joint Ventures to comply with the WTO accession requirements. At the Fourth Session of the Ninth National People's Congress, 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. Besides, they are no longer required to file their production and operation plans to relevant authorities. Workers and staff members of EJVs can establish trade union organizations to carry out activities to safeguard their legal rights and interests. As a WTO member, China has to extend "National Treatment" to all FIEs. While certain preferential tax treatments enjoyed by FIEs will be eventually phased out, China has brought into lines the fees and charges between domestic enterprises and FIEs. A new version of the "Catalogue for the Guidance of Foreign Investment Industries" came into effect on 1 January 2005. 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. The catalogue also reflected China's WTO commitment by specifying the liberalization schedule of foreign ownership of different sectors. 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 tertiaf?ry 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. At the end of 1999, the State Administration of Taxation and Ministry of Finance jointly issued the "Circular on Tax Collection Regarding the Implementation of the Decision Made by the State Council on Strengthening Technology Innovation and High Technology Development". According to the circular, equipment imported for the production of goods listed in the "State Catalogue of New Technology Products" and supporting technology, accessories and parts are exempted from customs duties and VAT on imports. For the import of advanced technology listed in the "State Catalogue of New and High Technology Products", software fees payable outside China are exempted from customs duties and VAT on imports. All foreign-invested export-processing enterprises are required to pay VAT on imported raw materials, parts and components. Upon exports, the amount of VAT paid will be used to offset the VAT payable for the part of domestic sale goods. Excess will be rebated ("exemption, deduction and rebate"). Starting from 1 October 1999, a new export processing trade management system is implemented. Under the new system, enterprises engaged in processing trade are required to pay a deposit when importing 11 major categories of commodities, which are classified as "restricted products". At the same time, all enterprises involved in outward processing trade will be classified into four categories of A, B, C, and D on the basis of their law-abiding records and business results. Enterprises classified as "C" are required to pay a deposit when importing raw materials, while enterprises classified asf? "D" will be suspended from outward processing trade business. China officially became a WTO member on 11 December 2001. Under China's WTO accession agreement, China made substantial market access commitments covering the agricultural, industrial and services sectors:
To
ensure the US access to the Chinese market and facilitate
China's WTO membership, the US government, on 10 October
2000, officially passed a bill to grant the Permanent
Normal Trade Relations (PNTR) status to China. That means
the US will no longer renew China's NTR status on an annual
basis when China is a full member of WTO.
Economic Relations with Hong Kong The Chinese mainland and Hong Kong signed the Closer Economic Partnership Arrangement (CEPA) on 29 June 2003 and the implementation details on 29 September 2003. Under CEPA, the mainland began to apply zero tariff to 374 import items (based on the 2004-edition of Mainland tariff codes) of Hong Kong origin from 1 January 2004. Not later than 1 January 2006, the mainland will apply zero tariff to other import items of Hong Kong origin. On services sectors, the mainland began from 1 January 2004 (October 2003 for value-added telecommunication services), further liberalised (comparing to WTO commitment or current requirements) 18 services sectors (including management consulting, convention services, advertising, accounting services, real estate and construction, medical and dental, distribution services, logistics, freight forwarding agency services, storage and warehousing services, transport services, tourism services, audiovisual services, legal services, banking, securities, insurance and value-added telecommunication services) for Hong Kong companies on entering the mainland market. On 27 August 2004, phase 2 of CEPA (CEPA II) was announced. Perpetuating liberalizaf?tions in the first phase of CEPA, CEPA II provides zero tariff for 713 additional Hong Kong origin products, and enlarged market access for 11 beneficiary service sectors stated in the first phase of CEPA and 8 new services sectors of Hong Kong. The 8 new beneficiary service sectors are patent agency, trade mark agency, airport services, cultural entertainment, information technology, job referral agency, job intermediary, and professional technicians. On 18 October 2005, phase 3 of CEPA (CEPA III) was announced. Under CEPA III, the mainland agrees to give all products of Hong Kong origin tariff free treatment. Hong Kong and the mainland have agreed on the rules of origin for 1,369 products. For products which have no agreed CEPA rules of origin at present, Hong Kong will initiate discussions with the mainland twice a year upon requests by local manufacturers. Regarding trade in services, there are 23 liberalisation measures under CEPA III, covering ten areas. Hong Kong is so far the most important entrepot of the Chinese Mainland. If re-exports to and from the Chinese Mainland are included, about 22% of the Mainland's foreign trade were handled via Hong Kong. The figure will even be higher if transshipment of goods to and from the Mainland via Hong Kong is also included. According to the HKSAR government statistics, in 2004, 60% of re-exports were of China origin and 45% were destined for the Chinese mainland.
Hong Kong is the largest source of overseas direct investment in the Chinese Mainland. By the end of 2004, among all the overseas-funded projects registered in the Chinese Mainland, 47% were tied to Hong Kong interests. Contracf?ted and utilized capital inflow from Hong Kong amounted to US$464.7 billion and US$241.6 billion, accounting for 42.4% and 43% of the national total. On the other hand, Chinese Mainland is one of the leading sources of inward investment in Hong Kong. Based on the Hong Kong statistics, the Mainland's cumulative direct investment in Hong Kong were HK$770.1 billion at end-2003, accounting for 26% of the stock of inward direct investment. According to market estimation, there are over 2,000 Mainland-backed enterprises registered in Hong Kong, with total asset exceeding US$220 billion. Over 100 Mainland and state-owned enterprises were listed on the Stock Exchange of Hong Kong and the Growth Enterprise Market (GEM). Hong Kong's Trade with the Chinese Mainland * Hong Kong was the Mainland's third largest trading partner (after Japan and the US) in the first nine months of 2005. According to China's Customs Statistics, bilateral trade between the Mainland and Hong Kong amounted to US$94.7 billion (9.2% of the Mainland's total external trade) in Jan-Sep 2005. Of which exports from the Chinese Mainland to Hong Kong grew to US$85.6 billion, making Hong Kong the second largest export market after the US. The Mainland has been Hong Kong's largef?st trading partner since 1985. Share of the Mainland in Hong Kong's global trade jumped from 9.3% in 1978 to 44.9% in the first nine months of 2005. The Chinese Mainland was Hong Kong's largest import source accounting for 44.9% of Hong Kong's total imports, and the largest export market accounting for 44.9% of Hong Kong's total exports in the first nine months of 2005. Hong Kong's trade with the Chinese Mainland is to a large extent related to outward processing activities. More than 80% of Hong Kong manufacturers have established production facilities in the Mainland, which have boosted outward processing activities and Hong Kong's re-export growth. In 2004, 43.5% of Hong Kong's total exports (of which 65.7% of Hong Kong's domestic exports and 42.5% of re-exports) to the Chinese Mainland were related to outward processing activities. Meanwhile, 72% of Hong Kong's imports from the Mainland and 79.3% of Hong Kong's re-exports of the Mainland origin to all countries other than China were related to outward processing.
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