Country Risk Report - CHINA


COUNTRY RISK INDICATOR

Rating:

DB3a

Meaning:

Creditworthy

Explanation:

Sufficient capacity to meet outstanding payment liabilities

USUAL TERMS

TRANSFER SITUATION

Minimum Terms:

SD

Local Delays:

0-2 months

Recommended Terms:

L/C

FX/Bank Delays:

1-2 months

Usual Terms:

60-90 days

Import Delays

9-6 months

 

Taiwan's success in brokering an accord with the US over WTO entry has shifted attention back to China: Taiwanese membership is contingent on Chinese entry. However, China has only reached agmt with 9 of its 36 trading partners on the issue, and key stumbling blocks remain over finance, agriculture liberalisation and ending state monopolies over the distribution of products.

 

FX reserves dropped marginally to US$140.5bn at end-Jun. from US$140.9bn at end-May. The central bank explains the discrepancy between the flat FX figure and the c/a surplus in terms of a lengthening of payment terms (FX is recorded on a cash basis, but exports are recorded on an accrual basis). More probably, exporters are paying down FX liabilities to hedge against a possible yuan devaluation


EXCHANGE RATES:

US$: 8.28

UKŁ: 13.94

DM: 4.91

Yen (x 100): 6.32


ECONOMIC INDICATORS

EXPORT CREDIT AGENCIES

1995

1996

1997e

  1998f

1999f

GDP growth, %*

10.50

9.70

  8.80

  7.00

6.00

US Eximbank

Cover available for public-sector risk

Inflation (CPI), %

16.90

  8.30

  2.80

-0.20

 4.00

NCM

ST cover available

Fiscal balance, % GDP

-1.00

 -0.80

 -0.70

 -1.00

 -1.00

ECGD

MT cover available within market limits

C/A balance, % GDP

0.20

0.90

3.30

1.50

0.50

TI

ST cover available

DSR, %

9.70

8.70

9.00

8.00

7.00

 

RISK FACTOR

As a massive continental economy that has the ability to trade with itself, China has a greater natural immunity to the contagion sweeping Asia than smaller, more open economies. True, external trade as a percentage of GDP rose to 34.9% in '97 (compared with 22.1% in '87), this ratio is far less than that of, say, Thailand at 72.6% in '97. Further, FDI flows, while massive in absolute terms - China received US$44.2bn in FDI in '97 - are not that great relative to the size of the economy (US$917.7bn in '97), especially once mainland investment that has been recycled abroad to secure tax concessions is excluded.

Separately, although China's inflation rate has been higher than that of its trading partners in recent yrs, leading to a real exchange rate appreciation, the country's cost-base started at a very low level. For example, wages in the non-agricultural sector averaged US$63.30 per mth in Q1 '98, still far lower than in South Korea, Malaysia and Thailand; for this reason, Chinese exports have been holding up well. Indeed, exports grew 5.5% y/y in the 1st 8 mths of '98 to produce a trade surplus of US$31.3bn for the yr to date. At the same time, China continues to be a magnet for FDI: for the Jan.-Aug. period, actual foreign investment was US$31.3bn, only marginally down from the same (pre-Asia crisis) period in '97, when investment was arriving in record amounts.

In addition, while D&B has generally been very sceptical of the govt's efforts to achieve an 8.0% real GDP growth target for '98, there are signs that a massive boost to infrastructure spending and a US$32.5bn bank recapitalisation bond issue aimed at getting the banking sector to lend again are having the desired effect. Indeed, in H1 '98, China achieved a respectable real GDP growth rate of 7.0% y/y. Moreover, with the money supply picking up - M2 growth is now close to its 16% target - fears of further deflation may be receding (although the CPI fell by 1.4% y/y in Aug).

Unfortunately, the economic bottoming has its downside. In short, Premier Zhu Rongji stated earlier in the yr that the govt's goal was to achieve high economic growth in order to facilitate banking and SOE reform. In the event, the Communist Party leadership now appears intent on scaling back meaningful banking and SOE reform in order to maintain high economic growth. Nonetheless, such a policy switch is not without its merits. With the global economy so fragile at present, the external environment is hardly conducive to bold structural reform. Better to wait until the emerging markets contagion has come to an end, even if this means that critical issues, such as the inefficient use of capital throughout the Chinese economy, are not addressed for the time being.

Separately, although China's inflation rate has been higher than that of its trading partners in recent yrs, leading to a real exchange rate appreciation, the country's cost-base started at a very low level. For example, wages in the non-agricultural sector averaged US$63.30 per mth in Q1 '98, still far lower than in South Korea, Malaysia and Thailand; for this reason, Chinese exports have been holding up well. Indeed, exports grew 5.5% y/y in the 1st 8 mths of '98 to produce a trade surplus of US$31.3bn for the yr to date. At the same time, China continues to be a magnet for FDI: for the Jan.-Aug. period, actual foreign investment was US$31.3bn, only marginally down from the same (pre-Asia crisis) period in '97, when investment was arriving in record amounts.