September 2006
Quarterly Issue No: 3/2006
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
Yuan Hits Post Revaluation High
China's Real Estate Rules Tightened
Financial Strengths Add Up for Chinese Investors
China Soon to Allow Limited Liability Partnerships
Freely traded yuan to benefit HK-based firms
China's economic growth faster than experts' expectation
Furniture sector briefed on anti-dumping rules
Tariffs on Asian shoes expected from the EU
News From IBC
Hong Kong Holidays
Public holidays this quarter are:
1 July Hong Kong Special Administrative Region Establishment Day
2 Oct The day following National Day
7 Oct The day following Chinese Mid-Autumn Festival
30 Oct Chung Yeung Festival
Travel
David has a tight travel schedule this quarter, and will be in Manila, Beijing and Kuala Lumpur several times. He will also be travelling to London and Melbourne.
New Office Extension
IBC is expanding its facilities on the 8th floor of Tsimshatsui Centre by taking additional space directly opposite its existing entrance, which will give us several rooms with spectacular harbour views. The additional space will be effective from 1st October 2006. We shall relocate our Conference Room facility to the new space and will be renovating the existing office Reception and Secretarial Room at the same time. We ask our In-house clients to bear with us if they are inconvenienced by the renovation work - it will be worth while. We shall additionally be upgrading the entire telephone system at the same time to provide more and better functionality. Details will be provided to In-house clients and training provided as needed.
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.
Yuan hits post-revaluation high
The yuan reached a new high Monday on the back of expectations that last Friday's interest rate rise will attract more foreign funds to China. The dollar closed at RMB7.9656 on the over-the-counter market (OTC), down from RMB7.9745 Friday, having gone as low as RMB7.9700 during trading, its lowest OTC level since the revaluation last year. Meanwhile, bond prices dropped sharply in response to forecasts another interest rate rise is possible. The People's Bank of China raised the benchmark one-year bank-lending rate by 0.27 percentage points to 6.12%, following an identical increase in April. Rates paid on one-year deposits rose by the same amount, to 2.52%, the first deposit-rate increase since 2004. Stock prices also took a hit as a result of the interest rate hike, with the Shanghai Composite Index dropping 2% as the market opened. However, it recovered to post a 0.2% gain.
© The Wall Street Journal
China's Real Estate Rules Tightened
New rules intended to cool the real estate market by making it harder for foreigners to buy property, were approved by the State Council on Monday 24th July. According to the new regulations, foreign individuals and companies will only be able to purchase residential property for their own use or own habitation and individual buyers must use their real names when doing so. A foreign firm will need to have registered capital of at least 50% of the value of a property it is buying, provided the total investment comes to more than US$10 million. Analysts told the Financial Times that the measures would have minimal impact, one source pointing out that foreign investors already provide more than half the capital for purchases by themselves as they are unable to borrow so much money from Chinese banks. However, they did suggest that the rules could foster a climate of uncertainty among real estate investors. State Council figures show a 28% increase in foreign investment in Chinese property during the first six months of the year, much of which has been driven by expectation of further appreciation in the yuan.
© The Financial Times
Financial Strengths Add Up for Chinese Investors
With anything up to US$1.6 trillion sitting idly in banks and the world's biggest foreign exchange reserves of US$856 billion, China has decided to learn the ropes of global investing. And Hong Kong looks like the place to do it – adding a powerful new dimension to the city's role as a key international financial centre.
China announced new regulations in April setting up a long-awaited Qualified Domestic Institutional Investor (QDII) scheme, for the first time allowing corporations and individuals to send money abroad for investment purpose. Previously, corporations could only hold foreign currencies as part of their business operations.
Under new rules issued by the central People's Bank of China, banks and mutual fund houses will be allowed to put money to work abroad for their corporate and individual clients.
The old restrictions were intended to prevent big outflows of capital which could destabilise China's economy, but have also led to a huge stockpile of foreign exchange reserves and criticism about an undervalued currency and large trade surpluses from key trade partners the US and EU.
New role for HK
As China opens up, it is creating a whole new financial centre role for Hong Kong, which had been mainly a conduit for inward investment of foreign money into the mainland.
The upside for Hong Kong is huge as billions of dollars of Chinese money is finally freed to seek better returns abroad, say investment professionals.
“A natural target for all that money is Hong Kong. That's the first place that people in China think about. They are not going to put it in Japan and Singapore is too far away,” said Brook McConnell, President of mutual fund house South Ocean Management.
The fact that China has allowed QDII to happen may in part be due to its confidence in Hong Kong's financial system, says Mr McConnell. “It has institutions that China can rely on. They are flush with cash and they are solid,” he said.
“I think it is mutually beneficial to both sides and its going to last for a long time. It's going to be very exciting in the next 10 years.”
The amount of capital flows from China to Hong Kong and other developed financial markets may be slow at first but should pick up speed as Beijing gets more confidence in the QDII system.
“I think it is just the tip of a real big iceberg,” said Mr McConnell.
Long term benefits
About US$2 billion QDII money may be invested in Hong Kong stocks this year but should rise to about US$9 billion by 2010, according to Deutsche Bank research.
“Hong Kong's stock exchange will likely be a long-term winner of strong capital inflows from China,” Deutsche says.
The announcement of regulations setting the framework for a QDII scheme is just the latest in a series of such reform steps in the last few months.
The Chinese cabinet, the State Council, has already approved regulations for the country's US$25 billion National Social Security Fund to invest overseas. Insurance giants China Life and Ping An have also been given quotas.
“I foresee more and more investment activities will be done through Hong Kong,” said Y.K. Chan a fund manager with Phillip Asset Management. “Hong Kong, at least in the foreseeable future, will be one of the most important centres to learn international rules and practices.”
China now has the world's fourth biggest economy after the US, Japan and Germany and needs to find ways for corporate and individual investors to find bigger returns as it shifts focus from exports to domestic consumption.
Deposits in Chinese banks earn just 2.25 per cent a year, five-year government bonds yield just 2.1 per cent and China's domestic stock markets have only just recovered in the last few months from an eight-year low.
Better rewards
Investors in Hong Kong assets have been better rewarded. Bank deposits in the city can earn 3 per cent or higher, five-year government bonds yield 4.3 per cent and the stock market has just hit five-year highs, though some blue chip stocks are still offering attractive dividend yields of above 4 per cent.
The reforms also mean that Chinese investors will for the first time be able to buy shares in some of the country's biggest and best companies which are listed in Hong Kong but not domestically. Among such names are dominant cell phone player China Mobile, oil giant PetroChina and China Construction Bank, the country's third biggest lender.
Of course, some of China's investment money will go further afield into asset classes such as US treasury bonds or European stocks. But once again Hong Kong, which boasts a wealth of fund management talent, can play an important intermediary role.
Hong Kong's sound legal system and freedom of capital flows have meant it has long offered a wide array of global investment products. The new rules mean the banks and fund houses offering those products just gained a new potential market of 1.3 billion people.
© Hong Kong Trade Development Council
China Soon to Allow Limited Liability Partnerships
China is currently reviewing the draft of the revised Partnership Enterprise Law, marking the first round of revision since the law was promulgated in 1997 and covering new rules on doing business in China in the form of partnership. Currently, Hong Kong companies are prohibited from establishing independently-run operations and must team up with mainland partners in certain business sectors (especially key industries). Hence, Hong Kong companies should take note of these imminent changes.
According to Zhu Shaoping, direct of the National People's Congress financial and economic committee bills office, the present round of revisions submitted for deliberation primarily contains changes in the following areas: two new forms of partnership, namely limited partnership (LP) and limited liability partnership (LLP) are introduced, and legal persons can take part in partnerships.
According to Zhu, the existing Partnership Enterprise Law was formulated at a time when the planned economy was shifting gear to the market economy and partnership was only narrowly defined as general partnership. As time changes, the old law can no longer cope with the current needs for building an innovative nation and promoting private investment. One of the major considerations for revising the Partnership Enterprise Law is to introduce LP as a new enterprise for, paving the way for attracting venture capital and promoting the input of technology and innovation.
An LP is a form of enterprise that allows partners assuming limited liability to join on the basis of one or more partners assuming unlimited liability.
This type of partnership has several advantages. First, as a partnership enterprise, no corporate income tax has to be paid and the investors concerned will not be subject to double taxation. Second, investment risk can be reduced as some of the investors and investing institutions concerned may assume limited liability. For those partners who assume unlimited liability, this type of partnership offers the capital enlargement effect as they may raise a massive amount of capital based on a relatively small sum backed by good reputation. In other words, it offers the benefits of low operating cost and high efficiency.
LP is an internationally adopted form of enterprise especially suited to investment in the form of venture capital. Partners with limited liability are usually the major venture capital contributors. They only assume limited liability for their share of capital and are not involved in the management and operation of the venture capital funds. Meanwhile, general partners are responsible for managing the venture capital. They are entrusted with the management of the partnership enterprise because of their higher management capability. They may make a smaller capital contribution but assume unlimited liability. The parties concerned enter into an agreement which clearly sets out the contractual rights and obligations of the respective parties. As a form of enterprise, LP offers various advantages over limited company for venture capital investments, including the operation scale of the capital, the level of professionalism in investing, and the cost of management.
In fact, the issue of LP was discussed during the legislative process of the existing Partnership Enterprise Law. In the year following the formulation of the Partnership Enterprise Law, a group spearheaded by the chairman of China Democratic National Construction Association Cheng Siwei tabled a proposal at the CPPCC (Chinese People's Political Consultative Conference) annual meeting to promote venture capital with full force.
Subsequently, some local authorities experimented with venture capital investment in the form of LP but limited progress was made because LP was note covered in the law.
According to Zhu, more than 250 venture capital firms are currently operating in China involving over Rmb50 billion worth of venture capital funds. These funds are being invested in 3,000-4,000 projects where the investment amount accounts for about one-third of the total capitalization. The relatively low ratio is attributable to the absence of free flow of capital into and out of China.
Although the introduction of LP is the right move, law professor Gan Peizhing of Peking University who participated in drafting the existing Partnership Enterprise Law cautioned that, “LP also involves high risks because partners with limited liability are not involved in management and they have to take into consideration the credentials and trustworthiness of their partners with unlimited liability, as well as supervision and control over them”
“Legal persons participating in partnerships is an issue that warrants prudence,” said Gan. This is because legal person shareholders cannot exert control over partners with unlimited liability, and in-between there is also the presence of the management staff of the legal person. Hence, in many countries and regions the law will require the consent of all or the majority of shareholders for admitting legal person partners.
While the existing Partnership Enterprise Law consists of 78 articles under nine chapters, the revised draft law adds 26 new articles, deletes two articles and combines four articles to form 11 chapters with a total of 100 articles. Major revisions include:
The draft contains a new chapter on “Special Provisions on Limited Partnership” which sets out the right and obligations of the partners with limited liability, how the affairs of the limited partnership are to be managed, as well as special rules governing limited partnership as opposed to general partnership.
The draft also contains a new chapter on “Special Provision on Limited Liability Partnership” which covers the definition of limited liability partnership, the responsibilities of professional services providers, and the professional risk fund etc.
The draft provides for the participation of legal persons in partnerships. Wholly state-owned enterprises and listed companies should participate in partnership via their subsidiaries or other holding companies.
© Hong Kong Trade Development Council
Freely traded yuan to benefit HK-based firms
Hong Kong is moving closer towards integrating its economy with China – a process which is helping to lay the foundation for the city's long-term future.
Soon, Hong Kong companies and foreign firms based in Hong Kong will be able to settle bills for imports from China in the mainland's currency the renminbi (RMB) or yuan.
In addition, Chinese financial institutions will be allowed to issue bonds in Hong Kong denominated in yuan. The moves were announced as Hong Kong celebrated the ninth anniversary of its handover to China.
“This is a major policy initiated by the Central Government in support of the consolidation and development of Hong Kong's status an internationally financial centre,” said Hong Kong's Chief Executive Donald Tsang.
The State Council in Beijing is putting the finishing touches to the legal framework for the initiatives before they get underway.
Cost Saving
The payment of imports in yuan will be particularly useful for companies based in Hong Kong which are already receiving revenues in the currency, allowing them to save on foreign exchange costs.
“A lot of people in Hong Kong already accept yuan notes and coins, and this makes the yuan more useful in Hong Kong if you want to retain yuan here,” said Paul Tang, Chief Economist of Hong Kong – based Bank of East Asia.
Banks in Hong Kong have already been allowed to take yuan deposits even though Beijing does not allow the currency to be freely traded like other unites such as the US dollar and the Hong Kong dollar. There is now about 22.9 billion yuan (US$2.9 billion) sitting in deposit accounts in Hong Kong, Mr. Tang said.
The issuance of yuan – denominated bonds by mainland institutions will be a boon to the banks, giving them a means of usefully investing the yuan they are holding as deposits.
The two new steps follow hard on the heels of an announcement in April that China will set up a qualified domestic institutional investor (QDII) scheme allowing corporations and individuals to send money abroad for the first time. Hong Kong is expected to be a prime beneficiary of the billions of yuan which are expected to eventually flow out of China under the QDII seeking higher investment returns than are available domestically. Hong Kong has the status of a Special Administrative Region within China, preserving the economic freedom it enjoyed as a British colony until 1997.
World freest economy
Hong Kong has consistently won the title of the freest economy in the world in annual surveys by the Cato Institute, a US-based public policy research foundation. Without compromising that freedom, Hong Kong has been slowly integrating its economy with that of fast-growing China, which is moving away from a central command model towards a free market.
The policy initiatives are allowing companies based in Hong Kong, including foreign-invested enterprises, to enjoy the city's free flows of capital and information and the rule of law, while getting special access to China.
Hong Kong and China introduce their Closer Economic Partnership Arrangement (CEPA) in 2003 which gives companies in Hong Kong privileges when doing business in the mainland. Each year since, new concessions have been added to CEPA.
CEPA has also allowed Chinese individuals to visit Hong Kong, reforming requirements they be in group tours. The result has been 13 million mainlanders coming to Hong Kong under the individual Visitors Scheme, giving a substantial boost to the city's retail and tourism sectors.
CEPA will still be helping Hong Kong even after China opens up its markets to foreign businesses later this year as part of its pact to join the WTO. China may go a few steps further in its concessions to Hong Kong companies than foreign companies will receive under the WTO agreement, said Bank of East Asia's Mr. Tang.
The efforts to integrate with China have played a part in helping Hong Kong rebound strongly from its restructuring in the wake of the Asian financial crisis of 1997-98. The city's economy grew at a stunning 8.2 per cent in the first quarter this year compared to the same period in 2005. That was even faster than the 7.3 per cent pace in 2005.
The buzz is back
“In a reflating economy the feel-good factor comes back. There is that buzz back in Hong Kong again,” said Tim Condon an economist with Dutch Bank ING.
The moves made so far towards integration have already had a major impact on the Hong Kong economy but the biggest benefits may lie ahead as systems are slowly put in place for the yuan to become more freely traded in Hong Kong.
“More and more Chinese yuan will circulate in Hong Kong. If you want to have legitimate economic activity then you want to put it in a formal financial infrastructure,” Mr. Tang said.
“Hong Kong wants to position itself not just as an international financial center but as services center for China.”
© Hong Kong Trade Development Council
China's economic growth faster than experts' expectation
During the first half of this year, China's GDP growth has kept at 10%. At this growth rate, economic growth for the whole year could reach the highest percentage points since 1994, quite different from the prediction by experts who said earlier that China's economy would begin to drop this year. Regarding this deviation, economists from the International Relations Research Institute explained that the deviation was caused by negligence of the globalization impact on the Chinese market.
After China joined the World Trade Organization, Chinese market has become an integral part of the world market as a whole and Chinese economy has showed its feature as an open economy. During this globalization process, major production factors such as foreign capital, raw materials, spare parts, manufacturing equipment, personnel, technology and information flow to China has all increased in an all-round way. This, when combined with China's cheap land, labor resources, hydropower and electricity, and other related infrastructure, has produced unprecedented economic vitality. Developed countries have begun to shift to China those industries that have lost, or almost lost, their competitive edge in their homeland, and such shift will make them gain an even larger competitive advantage in China
Such competitive advantage is manifested and upgraded with mobility. It will not only ass impetus to China's economic reform and make such reform display more open characteristics, more importantly it will contribute to the fact that Chinese economic development trends cannot be explained simply with one or more traditional theories. It might be said that the new features of Chinese economy have knocked traditional theories out of their bottom.
Since June 2004 when the US Federal Reserves raised its interest rates slightly several times, Japan, the United States and European countries have tightened their monetary policy. Meanwhile, prices of energy resources have risen and there is inflation in global economy. Under this situation, China has become a good market for companies of developed countries to divert their policy risks. The low cost in Chinese market, being an effective means to curb inflation, has begun to attract a large number of overseas enterprises to flow into China, which in turn has contributed greatly to the high economic growth in the country.
When foreign enterprises flow into China, they not only boost domestic trade, but they also bring tremendous change to the production and consumption structure, as well as new concepts to China. It is evident that without paying enough attention to the effect of globalization on the Chinese market, it will be impossible to predict the future development trend of the Chinese economy.
© Chinanews
Furniture sector briefed on anti-dumping rules
The European furniture industry may soon lodge a complaint with the European Commission, alleging upholstered sofas and chairs made in the Mainland are being dumped in the European Union market, the Trade & Industry Department warns.
The department held a special briefing on July 31 for local furniture traders to explain the EU's anti-dumping rules and procedures.
The European Commission is the EU's executive arm. If the complaint is lodged, the EU may also request anti-dumping proceedings begin against those furniture imports.
Although the anti-dumping case is not directly against Hong Kong products, some local companies with investment in the Mainland may be affected, the department said.
According to the EU's regulation, once an anti-dumping investigation is initiated, affected companies that fail to respond in time may be subject to the highest applicable anti-dumping duty rate if dumping should be established.
Trade & Industry Department officers explained the requirements of the EU's anti-dumping proceedings, to help affected companies prepare for a response to and participation in the possible investigations.
Regulations, procedures explained
The officers explained the EU's anti-dumping regulation and answered question on procedural and related matters concerning the anti-dumping action.
They also provided contact information for the Guangdong authority that handles overseas anti-dumping actions against Mainland products.
The Government will continue to keep a close watch on the case and any possible anti-dumping action against goods of Hong Kong or Mainland origin.
© Hong Kong's Information Services Department
Tariffs on Asian shoes expected from the EU
PARIS The European Union trade commissioner, Peter Mandelson, will propose tariffs on Chinese and Vietnamese shoes this week in a last-ditch attempt to help footwear manufacturers in Southern Europe who are suffering from Asian competition.
But the measures, which would last for five year, could still fail because governments in Northern Europe largely oppose duties on Chinese imports. Importers and retailers also oppose the duties on the grounds that they are protectionist and ultimately harm European consumers by raising prices.
Mandelson himself is a free trader who would like to see trade relations with China flourish rather than become bogged down in trade wars. But Mandelson also is under pressure to go forward with the measures after EU investigators found evidence that Vietnamese and Chinese manufacturers are using low-cost financing, tax breaks and land-rent incentives to create unfair competition and skew the market for footwear in their favor.
“We have tried to find the middle ground,” said Peter Power, a spokesman for Mandelson. “If that middle ground can't be found it won't be for lack of effort on the part of European Commission – it just means that middle ground can't be found.”
Mandelson will recommend tariffs of 10 percent on imports of leather shoes from Vietnam and 16.4 percent on imports of leather shoes from China at a meeting of the European Commission on Wednesday, according to a person with knowledge of the proposal. The person spoke on the condition of anonymity because the commission had not yet officially considered the proposals.
Mandelson's fellow European commissioners are expected to give the proposal a green light on Wednesday. But European governments still must vote on the measures before they go into force.
Ministers are expected to decide the issue before Oct. 6, the date on which provisional measures that Mandelson imposed in March are due to expire.
But if EU governments fail to resolve their split, the measures could fail – allowing unlimited imports of cheap shoes into Europe without tariff protection.
Over the summer a majority of countries, including Sweden, advised against imposing shoe duties of the sort Mandelson is to propose on Wednesday. But countries including Italy also rejected a different proposal that would have meant tariffs only began when imports exceeded certain quotas.
Horst Widmann, the president of the European Federation of Sporting Goods Industries, which represents manufacturers like Adidas and Nike that import shoes from Asia, said he still hoped governments “will vote down the measures.”
Widmann said that, at the very least, children's shoes should be excluded and that the tariffs should be lowered.
© International Herald Tribune
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