January 2007
Quarterly Issue No: 1/2007
NEWSLETTER
This Newsletter is distributed quarterly, free-of-charge, to clients of International Business Center (IBC), and to other parties that have requested it. It is essentially newsworthy items regarding trade in Hong Kong and China, as well as IBC specific news.
CONTENTS
US commerce chief warns new Congress may be tougher on China trade
Impact of Processing Trade Policy Change on Hong Kong Companies
World Bank: China may slow for two years
Yuen Pulls Close to Hong Kong Dollar
Sino-US ties strengthened in 2006 despite trade frictions
News From IBC
Hong Kong Holidays
Public holidays this quarter are:
1 Jan 2007 New Year's Day
17 Feb 2007 The Day Preceding Chinese New Year
19 Feb 2007 The Second Day of Chinese New Year
20 Feb 2007 The Third Day of Chinese New Year
Travel
David has a tight travel schedule this quarter, and will be in Manila, Kuala Lumpur, Beijing, London, Hanoi, Ho Chi Minh, Phnom Penh and Vladivostok
New Office Extension
IBC expanded its facilities on the 8th floor of Tsimshatsui Centre by taking additional space directly opposite its existing entrance. The additional space became effective from 1st December 2006. Our Conference Room facility, Reception Area, Secretarial Area and Pantry were also renovated at the same time. To celebrate the expansion and IBC's 20th Anniversary, we had a Cocktail Party on 1st December 2006.
Web Site
For those who do not already know, we have a web site at www.ibchk.com where you can find full details of our services.
Security Alert
David is compiling Security Alerts for private clients, which can be subscribed to for the modest fee of USD500 per annum. These reports will go out monthly by e-mail, and give business travellers notice of security issues around the world, with a particular focus on travel security issues in China, S.E. Asia and the Far East. These reports are compiled from David's numerous contacts in government agencies and the security world. For a subscription or enquiries, please contact Denise Cheung at denise@ibchk.com.
US commerce chief warns new Congress may be tougher on China trade
A Democrat-led US Congress may be tougher on trade issues with China despite early signs of cooperation with the current administration, US Commerce Secretary Carlos Gutierrez said.
The US election results indicated that Americans pushing for more open global markets may face increased challenges at home, Gutierrez said in a speech at an American Chamber of Commerce lunch in Shanghai.
"Some of the key economic issues revolve around trade deficits, American jobs and economic stability," he said.
His remarks follow concern that the Democrats' victory in midterm elections may lead to a more cautious and critical agenda in Washington on Sino-US trade issues.
Gutierrez has held meetings in Beijing with Chinese leaders, aimed at pushing for broader bilateral trade.
He said Beijing appeared willing to help the US close the widening bilateral trade gulf by increasing US exports to China.
© South China Morning Post
Impact of Processing Trade Policy Change on Hong Kong Companies
On 14 September 2006, five ministries jointly issued a circular on adjustments made to tax rebate rates for certain exports and on the expansion of the prohibited category under export processing trade (Circular No.139). Then on 29 September 2006, a supplementary circular (Circular No.145) on adjustments to tax rebate rates was issued under which export tax rebates for several product categories were removed and all the products for which export tax rebates were abolished this time round and earlier came under the prohibited category. Meanwhile, Customs stopped filing export processing trade contracts under the prohibited category.
Various government departments and some Hong Kong companies gave their views on the impact of this policy change:
1. Several thousand processing enterprises are directly affected. In Dongguan alone, about 1,000 processing factories may have to cease operation or close down. Following the issue of the circulars, customs have stopped filing export processing trade contracts under the prohibited category. Since processing factories can only engage in processing activities and are prohibited from conducting domestic sale or general trading, even if they are prepared to import raw materials and pay the import tariff that is required under normal trading, customs will not grant approval. Hence, factories that are involved in processing products under the prohibited category will effectively lose their eligibility to continue operation. According to the preliminary estimates of the Dongguan foreign trade and economic cooperation bureau, about 1,000 processing enterprises are currently engaged in the processing of products under the prohibited category. These enterprises will have to cease operation or close down when the contracts they have on hand are completed. Based on the calculation that a small- and medium-sized enterprise employs 500 workers on average, up to 500,000 workers in Dongguan alone would lose their jobs when these 1,000 processing enterprises go out of business. If the processing enterprises concerned wish to continue operation, they must be transformed into foreign-invested enterprises (FIEs), but the procedure can be time consuming. Besides, under the existing policy, machinery and equipment imports are no longer eligible for tax exemption. In other words, the enterprises concerned have to bear the double burden of tax on machinery and equipment imports as well as tax on raw materials.
2. The policy change has a strong impact on a wide range of industries. Apart from direct impact on industries producing products under the prohibited category, related downstream industries will also be affected. The expansion of the prohibited category this time covers a wide range of upstream industries, such as printing whose products (e.g. paper boxes and packaging material) are subsequently consumed by other industries. Hence, downstream industries are also affected.
3. Direct cost of raw material imports will go up by 30%. While the enterprises affected may continue their operation by transforming into FIEs, they will still be subject to import tariffs and VAT amounting to about 30% of the import value when they import products under the prohibited category. Besides, their exports will no longer be eligible for tax rebate.
4. Some of the FIEs which have imported machinery and equipment duty-free previously will be required to pay back the exempted taxes. This will likely cause cash flow problem for the FIEs concerned.
Under the old policy, certain FIEs enjoyed exemption of tariff and import-related taxes when importing machinery and equipment as part of their capital increase exercise provided that the machinery and equipment concerned are not used for producing products for domestic sale. Many of these FIEs are printing companies which have invested huge sums on imported machinery and equipment. But under the new policy, they have to pay the previously exempted tariff and import-related taxes before they can continue with production.
5. While the policy change primarily targets high pollution, high energy consumption and resource consumption industries, new- and high-tech industries are also affected. Items which have been re-classified under the prohibited category this time include quite a number of raw materials consumed by new- and high-tech industries. According to Dongguan city authorities, a Japanese-invested auto parts processing enterprise in Dalangshan township primarily uses alloys to produce steering gear. The company is one of only two in the world that utilise similar world-class advanced technology. Since its establishment in Dongguan in 1994, the enterprise has invested HK$100 million in the 30,000 sqm processing factory. However, under the new policy, the raw materials imported by the factory will be classified under the prohibited category and the enterprise will have to cease production. The owner is understood to be considering withdrawing from China and moving the processing plant to Thailand.
Although electronics is not one of the targeted industries, it is also directly affected by the policy change because many electronics factories import their packaging and filling materials which are among the affected products.
© Hong Kong Trade Development Council
World Bank: China may slow for two years
China's economy may slow over the next two years but should remain strong, according to a World Bank report. The country is still expected to drive East Asia's growth with expectations of strong investment and robust consumer spending. Although a slowdown in the US could hurt economies in the region that are dependent on exports, healthy demand from within should offset the loss from without. The report, Global Economic Prospects 2007: Managing the Next Wave of Globalization, says China's economy is expected to grow 9.6% in 2007 and 8.7% in 2008, down from this year's 10.4%.
© The Wall Street Journal
Yuen Pulls Close to Hong Kong Dollar
The yuan strengthened against the U.S. dollar to near the psychologically important level of parity with the value of Hong Kong's dollar, continuing the Chinese currency's slow but steady appreciation.
Recent currency movements put the yuan, for the first time, within the same trading range as the Hong Kong dollar, whose value is allowed to fluctuate inside a tiny band between HK$7.75 and HK$7.85 to the U.S. dollar. The development came ahead of a planned visit to Beijing in mid-December by U.S. cabinet officials led by Treasury Secretary Henry Paulson, during which China's exchange-rate policy is expected to be a major topic.
Despite the gains, strong growth in China's stockpile of hard currency-now more than $1 trillion-is considered by many critics as evidence that the yuan's gains have been too slow to have an impact on China's soaring trade surplus with the U.S. and other countries.
Critics say Beijing's interference in its exchange-rate mechanism keeps the yuan artificially undervalued, making China's exports less expensive than they should be.
The yuan also benefited from a fall globally in the U.S. dollar, traders say. Indeed, concerns about China's plans for its currency reserves helped fuel that decline internationally after Wu Xiaoling, a deputy governor of China's central bank, was quoted as saying there is growing "depreciating risk" for dollar-denominated assets held by central banks in East Asia as a result of weakness in the U.S. dollar. Markets are on constant alert for any sign China is losing its appetite to accumulate dollars as a reserve currency.
Separately, the People's Bank of China appeared to signal that it would allow more cash to enter the local yuan money market, a possible precursor to allowing the yuan to strengthen further. Usually, the central bank aims to remove money from the market as an alternative way to reduce the risk of inflation, other than letting the yuan strengthen. The cash flows into the market because the exporters who power China's huge trade surplus must buy local currency with the dollars they earn overseas.
© The Wall Street Journal Briefing
Robust FDI inflows, more regional operational underscore Hong Kong's attraction to overseas and Mainland investors
Sustained high levels of inward investment and another record number of regional operations fortify Hong Kong's position as a top choice for international, Mainland and Taiwan companies. The results also highlight Hong Kong's role as a two-way platform for overseas investors accessing the Mainland and rest of the region – and for Mainland companies looking toward regional and global expansion.
Hong Kong continues to be the preferred base for international companies to oversee their regional operations. The number of regional operations and local offices in Hong Kong operated by overseas and Mainland companies reached its high-ever level this year.
As at 1 June 2006, there were 1,228 regional headquarters (RHQs) and 2,617 regional offices (ROs) – 3845 regional operations – of companies incorporated outside Hong Kong. These results come from the 2006 Annual Survey of Companies in Hong Kong Representing Parent Companies Located Outside Hong Kong conducted by the Census and Statistics Department. The total of 3,845 regional operations compares with 3,798 as at 1 June 2005.
The United States topped the list of countries/territories with companies having regional operations (RHQs+ROs) in Hong Kong, with 889. Nest was Japan, with 731 companies, the UK, with 337 and the Mainland of China, with 268. The major lines of business of these operations included wholesale, retail and import/export trade; business services; finance and banking; and transport and related services.
At the same time, Hong Kong consolidated its position as Asia's second largest destination for foreign direct investment (FDI) and ranked 6th globally, according to the “World Investment Report 2006”, released in October by the United Nations Conference on Trade and Development (UNCTAD). The city increased its world ranking from 6th to 3rd in the Inward FDI Performance and Potential Index and again ranked 1st globally in the Outward FDI Performance Index. Hong Kong also has the largest FDI inward stock in Asia Pacific, with US$532.96 billion.
Following a strong performance in 2004 (US$34 billion), FDI flows to Hong Kong in 2005 were even higher, reaching US$35.9 billion. The only larger recipient of FDI in Asia was the Mainland with a whopping US$72.4 billion. Hong Kong was followed by Singapore (US$2.1 billion), South Korea (US$7.2 billion) and India (US$6.6 billion).
For the first half of 2006, inward FDI to Hong Kong has already reached US$20.66 billion – compared with US$19.83 billion for the same period in 2005 and more than most economies receive from an entire year.
In response to the two reports, the Director-General of Investment Promotion at Invest Hong Kong, Mike Rowse, said: “We are pleased with the overall results, which show that international and Mainland businesses continue to invest in our city and prefer managing their regional operations from Hong Kong. The results of the survey of regional operations and local offices suggest that Hong Kong's traditional advantages – including a low and simple tax system. Free flow of information, corruption free government and absence of exchange controls – are the most important reasons for overseas and Mainland investors choosing Hong Kong.
“Beyond the numbers, many of these companies bring new skills, products and services and job opportunities that contribute substantially to our economic development and competitiveness. However, we cannot be complacent. We are well aware of the keen competition for investment in the region, and the need to continue to improve the business environment in Hong Kong to retain our leading position,” he added.
© InvestHK
Sino-US ties strengthened in 2006 despite trade frictions
BEIJING, Dec.17 - Landmark trade talks between China and the United States concluded in Beijing on Friday, reflecting the increased interaction between the two countries this year, albeit against a backdrop of trade frictions.
"China and the United States have never been closer in their understanding of what form their diplomatic relationship should take," said Tao Wenzhao, a research fellow in American Studies of the Chinese Academy of Social Sciences.
Chinese President Hu Jintao made his intentions clear during his state visit to the United States in April. "Sharing extensive and important common strategic interests, our nations should be not only stakeholders, but also constructive cooperators," Hu said at the time. In response, U.S. President George Bush acknowledged that the Sino-U.S. trade relationship had "become even stronger".
Several inaugural events served to strengthen relations between China and the United States in 2006.
The administrator of National Aeronautics and Space Administration of the United States Michael Griffin visited China to boost Sino-U.S. space cooperation this September, the highest-ranking U.S. space official to visit China in the last 12 years.
Two months later, the navies of China and the United States held their first ever joint search-and-rescue exercise on the South China Sea.
New records have also been set in the economic sector. China is now the United States' third largest trading partner and its fastest-growing exports market. In the first ten months of this year, the trade volume between the two countries reached nearly 214.52 billion U.S. dollars, with U.S. exports to China up by 23.8 percent, the first step towards reducing the huge trade imbalance between the two countries.
The two countries also conducted dialogue to try and deal with international issues, particularly after the Democratic People's Republic of Korea's nuclear test.
The Bush administration also reiterated their adherence to the one-China policy and their opposition to Taiwan independence.
"China and the U.S. are building a two-way relationship based on common interests," said Yuan Peng, a U.S. studies expert with Beijing University.
"Many exchanges have occurred in scientific, cultural and military fields which showed that Sino-U.S. ties are developing soundly, something which used to be achieved only through top-level exchanges," Yuan said.
However, trade frictions have hindered the strengthening of relations between the two countries.
China's soaring exports have sparked trade rows over a number of Chinese products including textiles, shoes, televisions and auto parts. The Ministry of Commerce said 23 countries and regions, including the United States, launched 70 anti-dumping and anti-subsidy investigations against China in the first three quarters of the year.
But Yuan was keen to play down the impact of the disagreements. "Looking at the whole picture of the improvement of the Sino-U.S. ties, trade friction is natural," he said.
The victory by the Democrats in the U.S. mid-term elections in November provoked some commentators to cast doubts over the future development of China-U.S. relations.
But Chinese Premier Wen Jiabao quelled the concerns, telling visiting U.S. Secretary of Commerce Carlos Gutierrez that he realized the development of China-U.S. relations had always been "the consensus of the Democrats and Republicans of the United States as well as the two peoples".
A direct flight from Beijing to Washington will be inaugurated in 2007 and it is highly symbolic. Next year marks the 35th anniversary of Richard Nixon's ice-breaking visit to China, and reaching further consensus on trade issues will be crucial for both nations.
© People's Daily
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