• In Jan-Feb 2008, CPI increased by 7.9% with food prices increased by 20.7%.
   
• Fixed assets investment grew by 24.3% in Jan-Feb 2008.
   
• The PBOC raised the reserve requirement ratio by 0.5 percentage points on 25 March 2008.
   
• Exports growth slowed to 16.8% in the first two months of 2008.
   
• Foreign debts amounted to US$373.6 billion at end of 2007 (up 15.7% from the end of 2006).
   

With the policy objective of maintaining a stable growth, the central government has taken stabilization measures aiming to moderate investment growth since 2004. 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. The growth of real GDP slowed down in the second half of 2004, resulting in a 9.5% growth for the whole year. In 2005 and 2006, the economy grew by 10.2% and 10.7% respectively. In the second quarter of 2007, real GDP growth accelerated to 11.9% after growing at 11.1% in the first quarter, but slowed to 11.5% in the third quarter and further down to 11.2% in the fourth quarter, resulting in an average of 11.4% growth for 2007.

In response to the fast GDP and investment growth, the PBOC has raised the base lending rate seven times since April 2006. Effective 15 September 2007, one year lending rate was raised from 7.02% to 7.29%. It also raised the reserve requirement ratio of banks several times since July 2006 from 7.5% to 15.5% (effective on 25 March 2008).

Fixed assets investment is one of the major driving forces of the economy. After growing by 27.6% in 2004, fixed assets investment continued to grow by 27.2% in 2005 and 24.5% in 2006. Although the government scaled down the issuance of construction bonds in recent years, fiscal expansion remains a contributing factor to China's economic growth. In 2007, fixed assets investment grew by 25.8% and slowed to 24.3% in the first two months of 2008.

Retail sales of consumer goods grew by 13.3% in 2004 and 12.9% in 2005. 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. After growing by 13.7% in 2006, retail sales increased by 16.8% in 2007 and accelerated to 20.2% in the first two months of 2008. Sales of automobiles, furniture and jewellery continued to show marked growth. The government is aiming to further stimulate consumption and raise its contribution to economic growth.

Deflationary pressure began to be reversed since 2003 and the rapid rise in food prices resulted in a 3.9% increase in the consumer price index (CPI) in 2004. In 2005 and 2006, the consumer price index went up by 1.8% and 1.5% respectively. In 2007, the consumer price index went up by 4.8% with food prices increased by 12.3%. While prices of food, housing, household appliances, medical and health care products increased, the prices of clothing, transport and telecommunications continued to decline. In the first two months of 2008, CPI went up by 7.9% with food prices increased by 20.7%.

Partly due to the state-owned enterprise reforms, urban unemployment rate rose to 4.3% at the end of 2003 and remained at 4.2% at the end of 2004 and 2005 before edging down to 4.1% at the end of 2006 and further down to 4% at the end of 2007. The Chinese government takes various measures like providing training to displaced workers and promoting development of the private sector to ease the unemployment pressure.

Added-value of industrial output (by state enterprises and large enterprises with annual sales exceeding RMB5 million) grew by 16.4% in 2005. In 2006 and 2007, added-value of industrial output grew by 16.6% and 18.5% respectively. In the first two months of 2008, added-value of industrial output grew by 15.4% with the output of heavy industries grew by 16.2% while light industries increased by 13.7%. The output of foreign invested companies grew by 13.3%.

China's non-state sector expands rapidly and experiences healthy development in recent years. The status and economic contribution of private enterprises received official recognition in the 9th National People's Congress held in March 1999. By the end of 2006, there were 4.98 million private-owned enterprises (comparing to 1.76 million at end-2000).

Money supply - the growth of M2 (broad money supply) slowed down from 21% in October 2003 to 13.9% in February 2005 before edging up to 18.9% in April 2006. The growth of M2 slowed to 16.7% in May 2007 but edged up and remained to grow by over 18% from July to November before slowing down to 16.7% in December 2007. In February 2008, the growth of M2 slowed to 17.5% after increasing by 18.9% in January.

Beginning 21 July 2005, China reformed the Renminbi (RMB) exchange rate regime by moving into a managed floating exchange rate system with reference to a basket of currencies, and the exchange rate of RMB was re-valued to 8.11 per US dollar on 21 July 2005. Effective 21 May 2007, the floating band of RMB against the US dollar is enlarged from 0.3% to 0.5% around the central parity published by the People's Bank of China on each working day.

China's foreign exchange reserves reached US$1,647.1 billion by the end of February 2008, the largest in the world. Foreign debts amounted to US$373.6 billion at end of 2007 (up 15.7% from the end of 2006), of which 41.1% was medium- or long-term debts and 58.9% was short-term debts.

In 2006, the number of overseas tourists grew by 3.9% to 125 million, and foreign exchange earning increased by 15.9% to US$33.9 billion. In 2007, the number of overseas tourist increased by 5.6% to 132 million. According to the World Tourism Organization, China remained the 4th most popular tourist-destination (behind France, Spain and the US) in the world in 2006.

Foreign Trade and Investment

In 2006, China's external trade reached US$1,761 billion, ranked the third in the global economy. In 2007, exports grew by 25.7% while imports increased by 20.8%, resulting in a trade surplus of US$262.2 billion.

Export-processing trade continued to be the major form of external trade. In 2006, exports and imports related to processing trade grew at 22.6% and 17.4% respectively. Export-processing trade accounted for 52.7% of China's total exports in 2006 and dropped slightly to 51% in 2007. In 2007, exports and imports related to processing trade grew at 21% and 14.6% respectively. In the first two months of 2008, exports and imports related to processing trade increased by 14% and 13.6% respectively.

In 2007, exports of machinery, electrical and electronic products grew rapidly at 27.7%, while other light consumer goods also showed impressive performance, for example, exports of garment grew by 23.1%, footwear up 16%. In the first two months of 2008, exports of machinery, electrical and electronic products grew by 18.7% while garments and footwear increased by 6.3% and 3.5% respectively.

In 2006, China's top ten trading partners were the US, Japan, Hong Kong, South Korea, Taiwan region, Germany, Russia, Singapore, Malaysia and the Netherlands. China's trade with these ten economies together amounted to US$1,303 billion, i.e. 60% of China's total external trade in 2007.

In 2006, exports of foreign-invested enterprises (FIEs) increased by 26.9% while imports grew by 22%. In 2007, FIEs' exports increased by 23.4%, accounting for 57.1% of China's total exports, and imports increased by 18.4%, representing 58.5% of China's total imports.

In 2007, the number of newly approved foreign-invested projects (non-financial sectors) declined by 8.7% to 37,871, while utilized foreign direct investment increased by 13.6% to US$74.8 billion. By the end of 2007, China approved a cumulative of 632,286 foreign investment projects, with actual utilized overseas FDI amounting to US$760 billion. The leading sources of investment included Hong Kong, Japan, the US, Taiwan, Singapore and South Korea.

By the end of 2006, the cumulative FDI made by Chinese enterprises (non-financial sectors) in overseas markets amounted to US$75 billion. In 2006, the amount of FDI made by Chinese enterprises was US$17.6 billion, an increase of 43.8%. Hong Kong is the largest recipient of capital from Chinese enterprises, accounting for 56.3% of the total outward FDI up to 2006. Business services (mainly investment holdings), wholesale and retail, mining and manufacturing are the leading sectors (non-financial sectors) of China's outward FDI.

Trade and Investment Policies

As a move to liberalize trade, China has continued to reduce administrative barriers to trade by increasingly switching to the use of tariffs and exchange rates adjustments. Beginning January 2008, one category of import commodities is still subjected to licensing controls (including 10 8-digit product codes), down from 5 in 2004 and 8 in 2003. Since its WTO accession, China has basically fulfilled its tariff reduction commitment. The average tariff rate remains at 9.8% beginning 2008, progressively down from 15.3% in 2001. For exports, beginning from January 2008, there are 48 categories of export products subjected to licensing controls.

The Chinese government has gradually liberalized its foreign trading system. According to the amended Foreign Trade Law which went into effect from July 2004, all types of enterprises, including private enterprises, can register for the trading right. Individual Chinese are also allowed to conduct foreign trade under the amended Foreign Trade Law.

China's rates of VAT rebate for exports comprise five levels, i.e., 5%, 9%, 11%, 13% and 17%. On 1 July 2007, China adjusted the VAT rebate rates for certain exports, including the removal of export VAT rebates for 553 types of high energy consumption, high pollution and resource-type products, and the reduction of VAT rebates for 2,268 types of products which can easily trigger trade conflicts, including bags and luggage, clothing, footwear and headgear, umbrellas, furniture, watches and clocks and toys.

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 three 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.

A new version of the "Catalogue for the Guidance of Foreign Investment Industries" came into effect on 1 December 2007. Foreign-invested projects under the categories of "encouraged" will enjoy tariff-free imports of machinery and equipment for their own use and the import value-added tax will also be exempted.

In addition, the central government has also introduced tariff-free and VAT-exemption imports of capital equipment for projects within the hi-tech and priority sectors such as energy, agriculture, transport, infrastructure, production of raw materials, and tertiary industries, as well as in the pillar industries. These moves are targeted to attract high-quality overseas investment, introduce high technologies and know-how to rationalize the country's industrial structure.

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.

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 of Hong Kong origin from 1 January 2004. On services sectors, the mainland began from 1 January 2004, further liberalised (comparing to WTO commitment or current requirements) 18 services sectors for Hong Kong companies on entering the mainland market.

On 27 August 2004, phase 2 of CEPA (CEPA II) was announced. Perpetuating liberalizations 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.

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. 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. On 27 June 2006, 15 more liberalisation measures spreading across ten services areas were announced and the number of products with agreed CEPA rules of origin increased to 1,407.

On 29 June 2007, CEPA IV was announced. Beginning on 1 January 2008, the mainland introduced 40 liberalisation measures in 28 service areas, including 11 new services areas. The number of products with agreed CEPA rules of origin stood at 1,502 at the beginning of 2008.

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 17% of the Mainland's foreign trade were handled via Hong Kong. The figure will be higher if transshipment of goods to and from the Mainland via Hong Kong is also included. According to the HKSAR government statistics, in 2007, 62% of re-exports were of China origin and 49% were destined for the Chinese mainland.

Hong Kong's Direct Investment in the Chinese Mainland

Sources:China Monthly Statistics

Hong Kong is the largest source of overseas direct investment in the Chinese Mainland. By the end of 2007, among all the overseas-funded projects registered in the Chinese Mainland, 45.2% were tied to Hong Kong interests. Utilized capital inflow from Hong Kong amounted to US$307.5 billion, accounting for 40.4% 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$2,024.3 billion at end-2006 (up from HK$1,271.9 billion in 2005), accounting for 35% of the stock of inward direct investment. As of December 2007, 439 Mainland companies were listed in Hong Kong, comprising H-share, red-chip and private companies with total market capitalization of US$1,544 billion, 58% of the market total.

Hong Kong's Trade with the Chinese Mainland *

Hong Kong was the Mainland's third largest trading partner (after the US and Japan) in 2007. According to China's Customs Statistics, bilateral trade between the Mainland and Hong Kong amounted to US$197.2 billion (9% of the Mainland's total external trade) in 2007. Of which exports from the Chinese Mainland to Hong Kong grew to US$184.4 billion, making Hong Kong the second largest export market after the US.

The Mainland has been Hong Kong's largest trading partner since 1985. Share of the Mainland in Hong Kong's global trade jumped from 9.3% in 1978 to 47.5% in 2007. The Chinese Mainland was Hong Kong's largest import source accounting for 46% of Hong Kong's total imports, and the largest export market accounting for 48.7% of Hong Kong's total exports in 2007.

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 2007, 34.5% of Hong Kong's total exports (of which 47.3% of Hong Kong domestic exports and 34.1% of re-exports) to the Chinese Mainland were related to outward processing activities. Meanwhile, 58.6% of Hong Kong's imports from the Mainland and 78.4% of Hong Kong's re-exports of the Mainland origin to all countries other than China were related to outward processing.

Hong Kong's Trade with the Chinese Mainland