China Mongolia

COUNTRY REPORT

China Mongolia

1st quarter 1996

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Summary

China, Mongolia 1st quarter 1996

March 1, 1996

China Political and economic structures Pages 3-4

Outlook: Jiang Zemin is continuing to consolidate his position at the apex of the collective leadership, but at a price. Economic policy will remain focused on keeping inflation at bay by means of continued tight credit. Enterprise reform will be slow while efforts to direct resources towards the interior will be stepped up as the Ninth Five Year-Plan comes into effect. GDP growth will slow further in 1996-97 as industrial output and investment growth are curbed by tight credit. A recovery in exports in 1997, after a slowdown in 1996, will be the main reason for slightly faster GDP growth in the latter year. But as investment starts to pick up again imports, stimulated by tariff reductions, will grow faster than exports in 1996-97. This will help reduce the current-account surplus to below $6bn in 1997. Convertibility of the renminbi on current account will not exert much downward pressure on the currency, which will depreciate against the US dollar in line with the inflation differential. Pages 5-9

The political scene: Jiang Zemin has been seeking to consolidate his position by promoting supporters, claiming the ideological high ground and asserting China’s rights with respect to Taiwan. There is jostling for various key positions, notably that of premier. A tough stand is being taken on human rights and dissent in Tibet and Mongolia. Verbal hostilities towards Taiwan have intensified and tensions with the USA remain high. The PLA troops to be stationed in Hong Kong have been identified and relations with the UK have warmed. China is attending the EU-Asian summit in Bangkok. Rail links will be re-established with Vietnam. China may become embroiled in a dispute over the Senkaku Islands, claimed by China and Japan. Pages 9-18

Economic policy: Monetary policy will remain tight in 1996, but there will be leakage. Rising government debt is costing more to finance. The renminbi will soon be made convertible. The Special Economic Zones will continue to play a role, but their privileges and exemptions, together with those of foreign invested enterprises, are to be phased out. Tariff cuts are being announced, as promised last year. Reform of the state-owned enterprises and the financial sector remains a distant goal. Pages 18-23

The economy: Growth slowed in 1995, but was still in double digits. Inflation fell, but it is still not eradicated. Fiscal reforms have yet to improve the position of the central government. Pages 23-25

Sectoral trends: It is being accepted that grain imports will have to rise, although 1995 was a bumper year. Growth in industrial value-added slowed to 13.4% in 1995. Output of state-owned enterprises grew faster than the previous year; that of collectives and the private and foreign-invested sectors grew more slowly. Township and village enterprises are increasing their share of exports.

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Steel and automobile output were stagnant in 1995. Transport statistics showed a decline. Pages 25-29

Money and finance: Financial and commodity markets are thriving. There is a lot of foreign interest in the fledgling insurance market. Monetary policy remains a blunt tool so long as the level of interest rates is distorted. An interbank market is to be established. Pages 29-32

Foreign trade, investment and debt: Although the phenomenal growth of exports slowed as the year progressed, there was a substantial trade surplus in 1995. The share of foreign-invested enterprises in total trade continues to rise, while that of the Special Economic Zones is falling. Foreign capital is still flowing in fast and China has returned to the US capital market. Pages 32-35

Mongolia Political and economic structures Pages 36-37

Outlook: The ruling MPRP is likely to win the June parliamentary election, not least because electoral reform has been ruled out. The economy, having returned to growth, is set for further improvement. Larger inflows of aid and foreign investment will help revivify moribund sectors such as construction, but problems will persist in agriculture. Page 38

Review: The winter session of the parliament saw active legislation, but there will not be an electoral reform bill, despite popular support for such a move. Education is the focus of government attention. Russia has agreed not to press the issue of Mongolia’s debt and overtures have been made to the USA and Japan. Growth in 1995 was an encouraging 6.1%, with industrial output growth strong too. The 1996 budget has been approved and the IMF has defended its anti-inflation programme. Price reform will continue. Industry is performing well; agriculture remains problematic. Exports have been boosted by large rises in exports of minerals. The donor group has made a pledge of $212m for 1996. Pages 39-52

Statistical appendices Pages 53-56

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Political structure: China

Official name: People’s Republic of China

Form of government: one-party rule

The executive: 15-member State Council elected by the National People’s Congress (NPC)

Head of state: a president (currently Jiang Zemin) is elected for a renewable five-year term by the NPC

National legislature: unicameral National People’s Congress (NPC): 2,970 delegates elected by provinces, municipalities, autonomous regions and the armed forces; elects the president and members of the State Council and the members of the Standing Committee of the NPC which meets when the NPC is not in session. All the arms of the legislature and executive sit for five-year terms

Regional assemblies and administrations: the 22 provinces, three special municipalities and five autonomous regions elect local People’s Congresses and are administered by People’s Governments

Last national elections: March 1993 (presidential and State Council)

Next elections due: by March 1998 (presidential and State Council)

National government: the Politburo (currently 20 members) of the Chinese Communist Party sets policy and controls all administrative, legal and executive appointments; its Standing Committee is the real focus of power

Main political organisation: Chinese Communist Party (CCP)

Politburo Standing Committee Jiang Zemin (general secretary); Li Peng; Qiao Shi; Li Ruihuan; Zhu Rongji; Liu Huaqing; Hu Jintao President Jiang Zemin Vice-president Rong Yiren

Premier Li Peng Vice-premiers Zhu Rongji; Zou Jiahua; Li Lanqing; Qian Qichen; Wu Bangguo; Jiang Chunyun Heads of selected state ministries and commissions State Council General Office Luo Gan Ministry of Foreign Affairs Qian Qichen National Defence Chi Haotian State Planning Commission Chen Jinhua State Economic & Trade Commission Wang Zhongyu State Commission for Restructuring Economy Li Tieying Ministry of Finance Liu Zhongli Foreign Trade & Economic Cooperation Wu Yi

Governor of the People’s Bank of China Dai Xianglong

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Economic structure: China

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a GNP at current market prices Rmb bn 2,023.6 2,403.6 3,138.0 n/a n/a Real GDP growth % 8.2 13.0 13.4 11.6 10.2 Consumer price inflationb % 3.4 6.4 14.7 24.1 17.0 Population m 1,156 1,173 1,185 n/a n/a Merchandise exports fobc $ bn 71.9 85.0 91.8 121.6 148.8 Merchandise imports cifc $ bn 63.8 80.6 104.0 115.6 132.1 Current account $ bn 13.3 6.4 –11.9 6.5 15.2 Total debt (incl undisbursed) $ bn 59.6 69.2 83.8 91.0 98.2 Reserves excl gold $ bn (year-end) 43.7 20.6 22.4 52.9 76.2d Exchange rate (av) Rmb:$ 5.3 5.5 5.8 8.6 8.3

March 1, 1996 Rmb8.32:$1

Origins of GDP 1995a % of total Components of GDP 1995a % of total Agriculture 20.5 Private consumption 51.2 Industry 49.2 Government consumption 9.1 Construction n/a Gross domestic investment 33.9 Services 30.3 Exports of goods & services 26.2 Total incl others 100.0 Imports of goods & services –20.3 Total 100.0

Principal exports 1995 $ bn Principal imports cif 1995 $ bn Textiles & textile articles 36.2 Machinery (not electric) 27.6 Clothing 21.6 Electrical machinery 19.4 Footwear 6.6 Chemicals 18.3 Electric machinery 19.0 Plastics 8.0 Chemicals & products 11.9 Textiles & textile articles 15.8 Foodstuffs & tobacco 11.2 Iron & steel 8.0 Mineral fuels 5.3 Vehicles & equipment 5.4 Mineral fuels 5.1

Main destinations of exports 1995 % of total Main origins of imports 1995 % of total Hong Kong 24.1 Japan 22.0 Japan 18.8 USA 12.2 USA 16.1 Taiwan 11.2 South Korea 4.7 South Korea 7.8 Germany 3.9 Hong Kong 6.4 Singapore 2.3 Germany 6.1 Taiwan 2.1 Russia 2.9 Netherlands 2.1 Singapore 2.6 a EIU estimates.b 1978=100: revised series. c Customs basis. d End-November.

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China

Outlook

Jiang Zemin is Although he still needs the support of powerful cohorts, and is to a worrying strengthening his hold on extent beholden to the military, the president, Jiang Zemin, is painstakingly power inching his way towards a stronger position at the core of the post-Deng leadership. He is asserting himself though the continuing anti-corruption campaign, through his espousal of a leftward-leaning ideological stance and, dis- turbingly, by an appeal to the nationalistic instincts of the people, especially of the army, which has issued increasingly strident warnings to Taiwan about its perceived moves towards independence.

The collective leadership, presided over although not dominated by Jiang Zemin, may see some personnel changes at the forthcoming annual National People’s Congress meeting in March. But there is not likely to be much change to the current policy mix unless and until Mr Jiang and his close allies manage to force agreement to a more emollient stance towards Taiwan and the USA.

Stability is fragile Despite the stability that appears to have been introduced into Chinese politics by the apparent acceptance of “Jiang Zemin at the core”, Mr Jiang still has some distance to travel before he can be considered safe in his position. He remains vulnerable to attacks from both the right and the left, and while in the absence of any credible alternative he is unlikely to be pushed aside, any change in the policy programme will be a matter of negotiation. If a powerful coalition were to argue strongly for changes Mr Jiang would find it hard to resist. At the moment this weakness is pushing him into more hardline positions on Taiwan and civil liberties on the one hand, while on the other hand he is pressing ahead with economic reforms. The contradictions may not sur- vive long and the casualty may be the more liberal aspects of the economic reforms. The central government still wishes to assert its authority more force- fully and the State Planning Commission is anxious to consolidate its influence over national investment plans. But greater control from the centre would meet some resistance in the provinces. The meeting of the National People’s Congress in March will give an indication of how determined and united around Jiang Zemin the centre has become.

The USA’s opposition to China’s membership of the World Trade Organization (WTO) will probably be overcome in 1996. But before that there will be more trade friction between the USA and China in the context of the US presidential elections. The passage of the bill to continue Most Favoured Nation (MFN) treatment for imports from China will almost certainly be difficult, but at least since 1994 this no longer brings human rights issues into the trade debate. However, continued Chinese belligerence towards Taiwan could put all easing

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of relations with the USA on hold until the leadership issues in both countries are settled.

Despite differences of Differences of opinion over the effectiveness of monetary policy between the opinion among economic governor of the People’s Bank of China (PBC, the central bank), Dai Xianglong, policy-makers— and Zhu Rongji (the deputy premier with a particular responsibility for economic matters) have been, unusually, expressed in the public arena. While the governor has made several statements about how he is developing monetary instruments to make monetary policy a more effective means of asserting macroeconomic control, the deputy premier asserts that Western-style monetary policy cannot work in China as long as the state-owned enterprises (SOEs) remain unreformed and dependent on constant injections of cash from the state banks, whatever the cost. This difference of emphasis reflects the fact that the question of how far and how fast to pursue the long-delayed project of reform of the SOEs remains unanswered. Their rising losses are a drain on the budget and they contribute to inflation because they are kept afloat partly by loans from the central bank. The dependence on the formal banking sector of SOEs, which cannot pay market-clearing rates of interest, impedes financial deepening and renders the banking sector unprofitable. The fact that state banks cannot offer a market rate of interest to the public, but instead resort to subsidy, distorts the financial sector and carries the threat of disintermediation. But the loss-making SOEs are important employers and fulfil vital welfare functions as well. Closing them down wholesale is politically out of the question.

—policy will remain Policy towards SOE reform is therefore likely to remain cautious, with imple- broadly unchanged mentation of new measures extremely slow. Policy in other areas is fairly clear. However much the contents of the draft Ninth Five-Year Plan (1996-2000) are chopped about before its submission to the National People’s Congress in March, it is clear that increased allocations of resources to the hinterland provinces, continued credit controls and measures to create employment opportunities in rural areas will be the main elements in the plan. Regional friction, inflation and alienated unemployed workers are thought to be the biggest threats to stability (that is, the continuation in power of the Chinese Communist Party) in China. Special Economic Zones will lose some of their tax and import duty privileges but will be allowed to continue as more freewheel- ing locations for enterprise managers than elsewhere. Efforts to attract foreign investment will continue and there may need to be a compromise between the goals of the government and the realities of the international marketplace to ensure that China remains a competitive location.

Inflation will be a To nobody’s surprise, when the annual figures for inflation in 1995 were re- preoccupation leased, the year’s change in the retail price index was quoted at 14.8%, meeting the target of 15%. The annual rate of increase in the consumer price index remained higher at 17%. Both rates are widely thought to be higher in reality, and underlying inflation, after allowing for the effects of controls and subsidies, higher still. The target for inflation as measured by the retail price index for 1996 is 10%, which will no doubt be met. There are problems, however. Despite the claimed record for agricultural output in 1995, food prices, or at

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least those not subject to stringent controls in the towns and cities, are continuing to increase more rapidly than the average retail price index.

The governor of the People’s Bank of China, Dai Xianglong, has said that monetary policy in 1996 will be “appropriately strict” but added that the target ceiling for credit creation of Rmb650bn by state-owned banks was flexible and could be increased “if necessary” by up to 20%. So state-owned enterprises’ overdrafts are safe for the time being. Inflation will continue to be “controlled” by the provision of subsidised interest on savings deposits to attract funds into bonds and the banks, increasingly stringent direct controls on prices and hid- den subsidies on food and utility prices. Falling import prices as tariffs are cut in April should help. But any revenue loss from the fall in customs duties will add to the fiscal deficit, which will continue to grow in any case. A crisis in government financing during the year will probably force the government to reintroduce mandatory purchases of government bonds.

Foreign investment will Moves towards “national treatment” (see below) for foreign direct investors keep coming will continue, but not always in the direction they would like. The removal of tax privileges on imports of capital goods will go ahead, although its impact has been softened by the introduction of a grace period for large investments. On the other hand, tax treatment will move closer to that of national enterprises and pressures to move to areas and sectors being given priority by the government will be put on foreign investors as well as national companies. The result may be a falling-off in foreign direct investment, but not in the services sector where the process of liberalisation in preparation for membership of the WTO will continue. The financial sector, in particular banking and insurance, will see more foreign involvement, as will retail trade. Moves towards convertibility of the renminbi will continue, with the current account—at least for foreigners—being fully free by the end of the year.

Growth will slow a little GDP growth was officially estimated at 10.2% for 1995. This is unlikely to be more in 1996-97 matched in 1996. Despite some easing in credit restrictions for SOEs, the continuing controls on construction will mean that fixed investment growth is unlikely to bounce back to pre-1995 levels, although it will start to climb again as foreign and local investment remain buoyant. Political uncertainty, threats to the cradle-to-grave welfare system for state-owned enterprise and government employees, and subsidised interest rates for savers are all depressing growth in private consumption. The growing stocks of unsold goods are adding to the SOEs’ need for working capital to finance them, which further limits their capacity to spend on fixed investment. The rising stockpile will use up any relaxation of the credit ceilings, which in any case is supposed to be earmarked for support of priority projects in the hinterland and priority investment areas such as long-term investment in agriculture.

Industrial output growth will be rapid in some sectors, notably those with access to credit from the state-owned financial sector, from the informal credit markets or from foreign suppliers. Although efforts are now under way to raise the productivity of agriculture by means of large-scale investment, this will take time to bear fruit and real annual agricultural output growth has probably peaked for the time being at 4.5% in 1995. Higher input prices, held back in

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1995 as part of the anti-inflationary drive, will be allowed to bite in 1996 and the finance to pay higher procurement prices is scarce.

Forecast summary (% real change unless otherwise indicated) 1994a 1995b 1996c 1997c GDP 11.6 10.2 8.9 9.2 Agriculture 3.5 4.5 4.0 3.0 Industry 18.0 13.4 13.0 13.5 Services 10.0 10.0 9.0 9.0 Gross fixed investment 22.7 11.0 14.0 13.7 Exports 29.7 20.1 8.0 12.0 Imports 6.7 12.0 12.5 13.0 Consumer prices 24.1 17.0 13.0 11.5 Average exchange rate (Rmb:$) 8.6 8.3 9.0 9.5

a Actual. b EIU estimates. c EIU forecasts.

The trade surplus will Export growth will slow down sharply in 1996 as tax incentives for exporters shrink are reduced, supply constraints bite after the boom of 1994-95 and there is some fall-off in external demand, possibly from protectionism in the USA and almost certainly from uncertainty in Hong Kong and Taiwan. The next year will see an improvement on all these fronts and export volume growth is likely to be back in double figures. Imports, having been squeezed in 1994, grew by 12% in volume in 1995 and this rate of growth is likely to continue, stimulated by tariff reductions, the strength of processing trade and investment. Imports will be growing faster than exports in 1996-97. This will be partly a response to the effects of the reduction in value-added tax (VAT) refunds on exports and the April cuts in tariffs on imports. The need for increased imports of food and raw materials will also force up the import bill. Tightening up the procedures for processing trade may hit the growth of this sector. Processing trade (the processing of imported inputs for export) has become the most important sector of China’s export effort, accounting for 47% of total exports in 1995 (but with a low net contribution to inflows of foreign exchange as the average domestic value-added is only 20%) and the decision to tighten controls, in- duced by extensive abuses of the import privileges of processors, will reduce profits and lower China’s competitive advantage.

The trade surplus, which fell in the last quarter of 1995 (see below), will continue to fall in 1996-97 from $15.2bn in 1995 to $6.8bn in 1996, and further to $6.4bn in 1997. The current-account surplus will follow suit, falling from $15.2bn in 1995 to $5.5bn in 1997.

In light of continuing capital inflow in the form of direct investment and borrowing rather than portfolio investment, reserves will climb from the $75bn level reached at the end of 1995. The authorities can therefore contem- plate with composure the removal of barriers to convertibility of the renminbi. While the inflation differential with the USA will be quite large, there will be little pressure on the renminbi, which is expected to depreciate gently against the dollar, a development that will be necessary to preserve competitiveness.

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Current account ($ bn) 1994a 1995b 1996c 1997c Merchandise exports fob 102.6 125.7 135.7 157.4 Merchandise imports fob 95.3 110.5 128.9 151.0 Trade balance 7.3 15.2 6.8 6.4 Invisibles inflows 22.4 27.1 33.1 40.7 Invisbles outflows 23.1 28.0 33.9 42.5 Transfers net –0.1 0.9 0.8 0.9 Current-account balance 6.5 15.2 6.7 5.5

a Actual. b EIU estimates. c EIU forecasts.

Gross domestic product Renminbi: real exchange rate (c) % change on previous year 1990=100 12 110 China 11 Asia-Pacific (excl Japan) 100 10 Rmb:$

90 9 Rmb:DM

8 80

7 Rmb:¥ 70 6

60 1994 95(a) 96(b) 97(b)

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics. 1990 91 92 93 94 95(a) 96(b) 97(b)

Review

The political scene

Deng Xiaoping breathes on The nonagenarian Deng Xiaoping lives on, breathing by a combination of Eastern and Western medical arts that can only be guessed at. As the Chinese New Year, which was celebrated this year on February 19, drew near, rumours that Mr Deng had journeyed south to the Special Economic Zone of Zhuhai to escape the cold of the capital were denied. Mr Deng, who has not been seen publicly since he was photographed in 1994 in Shanghai, is still reported to be in good health by his children and by the top leadership, who conveyed New Year’s greetings from him and from other surviving “immortals” to the nation.

Meanwhile the president, secretary of the Chinese Communist Party (CCP) and chairman of the Military Commission, Jiang Zemin, has continued to assert his position “at the core” of the post-Deng collective leadership. His efforts to bolster his position as primus inter pares are taking place on three fronts: patron- age; political propaganda; and, more problematically, patriotism (see below).

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A rejuvenation campaign The process of appointing loyal, or at least compliant, successors to prominent positions falling vacant continues. Among the most prominent recent retirees is the governor of Guangdong, Zhu Senlin (aged 65), who will now head the local legislature. He had served in the post since 1992 when he succeeded Ye Xuanping, who had a reputation for resisting or ignoring orders from the centre that he considered to be at odds with the interests of the province. Mr Zhu was no different. During his tenure as governor the central government has repeatedly tried, apparently with only partial success, to slow the rate of growth in investment, especially at the local level, and to alter the manner in which tax revenue are collected and shared. His successor as governor, Lu Ruihua (previously a deputy governor), is apparently a loyal centralist.

Xiao Yang (aged 67), the outspoken governor of Sichuan, has left his job to oversee construction of the mammoth Three Gorges dam. Song Baorui, previously executive deputy secretary of the Sichuan provincial committee, has succeeded him. Both these men are from a more junior generation than Mr Jiang. There have been some reshuffles among the military as well: the commanders of the Nanjing, Lanzhou and Guangzhou Military Regions have all been compulsorily retired on reaching 65, apparently on the orders of Jiang Zemin (aged 69).

According to reports circulating in China, about two-thirds of the incumbent governors and cabinet ministers will be replaced before the 15th party congress in 1997. Jiang Zemin has introduced a rejuvenation programme under which officials aged over 55 will not be promoted to the post of minister or provincial governor. Officials aged over 50 will not be promoted to vice-minister or vice- governor and those aged over 45 will not be advanced to head of a ministerial department. Jiang Zemin lacks charisma; he is not personally popular; no one in his generation of leaders has the personal authority of the old revolution- aries. But he is painstakingly building up the power base and alliances necessary to safeguard his position at the pinnacle of the collective leadership.

Ideology to the fore 1995 was hailed as a year of transition (1st quarter 1995, page 9). A year later it looks as though the transition has already taken place. The emphasis has been on unity and on the importance of politics and ideology. The campaign against corruption has continued, although, as before, it has stopped short of the gates of the leadership compound in the capital. Senior leaders, notably Jiang Zemin and Li Peng, have been making speeches about the need for purity and Jiang Zemin has been paying particular attention to the spread of ideology among the military; he visited in January the editorial offices of the army newspaper, Jiefangjun Bao, and issued directives about the importance of propaganda. At various points Mr Jiang and other senior leaders have inveighed against the “spiritual pollution”, the “flies and mosquitoes” brought in by capitalism through the windows to the outside world opened up by reforms. In a recent speech reported by the official Xinhua (New China) news agency he is quoted as saying “We must strictly ban the cultural trash poisoning the people and social atmosphere,” and “We cannot sacrifice culture and ideology merely for a short period of economic development.”

Mr Jiang has made several speeches calling for a tightening of party control of the media and has granted a monopoly on the internal dissemination of

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economically “sensitive” news to the state-controlled Xinhua. He has also announced measures to control access to the Internet. The former head of the CCP propaganda department, Deng Liqun, who was behind the campaign against “spiritual pollution” which surfaced in 1983, is now reported to be warning that the “moral decay” which market reforms have brought and the emergence of a “bourgeois moneyed class” threaten the CCP with the same fate as that of the Communist Party in the former Soviet Union. Despite this apparent tilt to the left of the political spectrum, there are signs that Jiang Zemin wishes to stake out a more central position. Rumour has it that Mr Jiang is seeking to build bridges with liberal intellectuals associated with Deng Liqun’s vanquished rival, Hu Yaobang, who lost his position as general secretary of the CCP in 1987 because of his failure to prevent fractious students from demonstrating in favour of a more open society and whose death sparked the 1989 demonstrations that preceded the Tiananmen massacre.

The army could be Jiang Despite recent promotions, Jiang Zemin’s base in the People’s Liberation Army Zemin’s Achilles’ heel (PLA) is still narrow and his support in the regions is thought to be weak. He is making every effort, reportedly with the advice of members of the Central Committee’s Policy Research Office, to enhance his influence over the PLA. But it is a slow process. He has apparently set up “core groups” of loyalists in regional administrations, provincial and municipal party committees and in the PLA and People’s Armed Police. An attempt in mid-1995 to install his supporter, General Ba Zhongtan, commander of the People’s Armed Police, in the important Central Military Commission was defeated by the commission’s vice-chairmen, according to reports in the South China Morning Post. The bellig- erent tone being taken about Taiwan, which contrasts oddly with Jiang Zemin’s measured speech on the subject at the beginning of 1995 (1st quarter 1995, page 13), is one of the signs that the leadership is being influenced by the aspirations of the military.

Zhu Rongji’s hopes for the In the run-up to the annual plenary session of the National People’s Congress, premiership due in March, jockeying for position continues. There appears to be a stalemate over the premiership. It is widely believed that Li Peng, still not fully recovered from a heart attack, would like to retire, although he does not want to go as the scapegoat for Tiananmen. Zhu Rongji would like to take over but his abrasive style, in contrast to Mr Li’s consensual approach to committee work, has apparently alienated many of China’s business élite, who are managing to block his candidacy. So with Mr Li unable to move out and Mr Zhu unable to move in the progression is blocked. It is likely that a compromise candidate will move up from the second rung. But he will not come from the group of protégés of Jiang Zemin recently promoted to high office, who are known as the Shanghai clique. One name being mentioned is Hu Jintao. Mr Hu is head of the Central Party School and in charge of party activities, ideology and the management of ethnic minorities.

The foreign minister, Qian Qichen, has received two snubs in the last few weeks. First the State Council has established a new foreign policy advisory bureau chaired by Liu Hauqiu, who, it is said, was pushed out of the foreign ministry by Mr Qian. Mr Liu, a confidant of Li Peng, has now been promoted to full minister rank and has achieved something of a coup by drawing a

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deputy foreign minister, Ma Yuzhen, until recently ambassador to London, into the advisory group. Moves are also under way to replace the weekly press briefings of foreign journalists currently carried out by the foreign ministry and replace them with briefings from a spokesman working for Mr Ma. Both moves are seen as strengthening Jiang Zemin and Li Peng’s hold over foreign policy at a time when foreign policy seems likely to become one of the dominating factors in domestic politics.

The deputy chairman of the National People’s Congress, Li Peiyao (aged 63), was killed in his home in Beijing on February 2. One of his guards was arrested as the suspected murderer; no motive was reported. Mr Li was also a deputy minister at the labour ministry and Chairman of the Revolutionary Committee of the Kuomintang.

Wei Jingsheng gets The now regular procession of show trials of dissidents continues. No sooner another long sentence had Chen Ziming, a 1989 student leader, disappeared from the spotlight in June 1995 (3rd quarter 1995, page 14) than Wei Jingsheng, regarded as China’s leading dissident, was put on trial. Mr Wei, who served 14 years for his role as a leader of the late 1970s “Democracy Wall” movement, was re-arrested, without charge, in April 1994, only six months after his release on parole in 1993. After being held incommunicado for more than 20 months he was rushed through a show trial in November, charged with seeking to overthrow the government and financing subversion. After a five-hour hearing, from which foreign reporters were barred, he was found guilty and immediately sentenced to a further 14 years in prison. An appeal against the sentence, supported by human rights groups and by many governments around the world, was quickly rejected. A Tiananmen student leader, Wang Dan, now languishing in jail without any charges having been brought against him, can expect similar treatment when he is eventually brought to trial, probably later this year.

A wave of executions The harsh treatment meted out to Wei Jingsheng is another sign of the asser- tiveness of central government authority in recent months. In the last few weeks of 1995 thousands of minor officials were shot in the back of the head for minor economic crimes. Only one showpiece execution of a relatively senior official was announced, that of an official in Shenzhen accused of taking bribes. Thus has the tide of the great corruption drive of the summer washed back from threatening the leadership and their families in Beijing.

Although for the most part the Chinese government is contemptuous of world opinion of its record on human rights, the report of a US group, Human Rights Watch Asia, Death by Default, and the associated television programme which was widely broadcast in the West, did embarrass the central government. The report was an exposé of conditions in five orphanages in south China and Shanghai, and also suggested that female children were sometimes left to die by neglect in the orphanages. The government reaction, which was to deny that there was any truth in the allegations and to take Western journalists to visit the (sanitised) Shanghai orphanage which had had a finger pointed at it by one of its now exiled doctors, did little to assuage world opinion. The programme drew attention to the fact that conditions in the orphanages are not out of line with the general experience of welfare facilities across the whole

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of rural China, and that the experiences of little girls in many areas is no better than those of the few who do find themselves in such institutions. The Chinese government has recently decided that it needs to take action to improve its international image and has reportedly decided to spend money with this in mind, especially in the USA.

China defies the Dalai The curious saga of the CCP’s right to appoint the Panchen Lama in Tibet took Lama and cracks down in another turn in December when the Chinese authorities had their nominee Mongolia anointed in Lhasa. The choice was made by more than 100 monks who were confined to a hotel for four days until they agreed to do so. This follows the nomination by the exiled Dalai Lama of his own candidate last May. The Dalai Lama’s choice disappeared soon after his nomination and is believed to be under house arrest in Beijing, where the authorities have said that the young boy, six-year-old Gedhun Choekyi Nyima, was not fit to be Panchen Lama because he had once killed a dog. China’s choice, Gyaincain Norbu, is regarded as a pretender by followers of the Dalai Lama. The intervention by the Chinese government in Tibetan religious affairs has raised tensions again in Tibet, which had been exacerbated by the discovery of Chinese spies in the Dalai Lama’s place of exile, Dharamsala, including one who had found a place in the government in exile after arriving in India in December 1994.

Rumblings of discontent among ethnic Mongolians are being reported. Demon- strations were held in the provincial capital Hohhot following the arrest of the leader of the independence-supporting Southern Mongolian Democracy Alli- ance. Late last year dozens of people were arrested. At a rally on December 30 police arrested 27 people from among 200 who were protesting against the earlier arrests. When arrested the demonstrators were carrying portraits of Mon- golia’s best-known son, Genghis Khan. There is growing discontent among ethnic Mongolians, aimed at the immigrant Han Chinese majority.

Closer to the brink with The war of nerves over Taiwan continues. The rattling of sabres can be heard Taiwan around the world. China has been uttering bellicose, if vague, threats ahead of the first democratic presidential election in Taiwan, which is to be held on March 23. There are reports of up to 400,000 Chinese troops being involved in preparations for manoeuvres in the straits between Taiwan and China, which a US aircraft carrier, Nimitz, sailed through in December “because of the weather”. The Chinese government refuses to deny that it has plans to invade Taiwan and the USA is not denying that it would come to the defence of Taiwan if that were to happen. Opinion in the West has it that China lacks the military capacity to launch a successful invasion of Taiwan, at least without sustaining heavy losses. The idea of reunification with Taiwan has widespread support in China and therefore allows the government to adopt a nationalist stance as a populist device. The Chinese are still overreacting to any move by other countries which could possibly be interpreted as a sign of recognition that Taiwan has a separate existence, even to the point of making a diplomatic issue out of the USA grant- ing a transit visa for the vice-president of Taiwan, Li Yuan-zu, to stop over in California en route to Guatemala in January. While Taiwan no longer claims the right to be the legitimate government of the whole of China it does claim the right to a separate existence, even if that stops short of full political independence. The Chinese government sees the forthcoming presidential election

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as a sign that Taiwan is coming closer to a move towards independence, de facto at least. It suspects that Lee Teng-hui is less than sincere in his anti-independence stance and it is outraged by the success of Lee Teng-hui’s diplomatic efforts to raise Taiwan’s international profile and bolster its status.

Meanwhile, Taiwan has started to take delivery of fighter planes from France and tanks from the USA and launched missile tests in the Taiwan Strait, but it is reported to have postponed military exercises planned for February and March until after the presidential election at the end of March. Armed forces have been put on a higher alert, to guard against any provocation by the “enemy”. Anxiety is running high in Taipei; the stock exchange fell 8% in the first six weeks of 1996, bringing the total fall since January 1995 to 34%. Mobile money is on the way out and the queues for visas are growing longer, especially for entry to the USA, while the price of gold is rising.

Tensions continue with There is an irony in the fact that the mainland Chinese leadership, so many of the USA whose children and grandchildren now live in the USA, still presents the USA as a hostile force. US actions are currently highly provocative. The USA continues to engage in a humiliating campaign over China’s membership of the World Trade Organization (WTO) and the non-fulfilment of China’s agreement, reached in February 1995 (1st quarter 1995, page 32), to crack down on intellectual property piracy. US politicians remain preoccupied with the trade deficit with China. US figures put the deficit at around $35bn in 1995, second only to the US deficit with Japan. China argues that this is exaggerated. The USA has included as exports from China to the USA processing and compen- sation trade involving Taiwan, Hong Kong and US businessmen, rather than Chinese enterprise owners. To the extent that such goods are shipped from China straight to the USA this is perfectly reasonable. Less so is the fact that the entrepôt trade profits made by Hong Kong and Taiwan businessmen in trans- shipping goods processed in China to the USA are also counted as Chinese exports to the USA. Chinese trade statistics show a trade surplus of only $7.4bn in 1995.

USA China

60 30 Exports to China Imports from China cif Exports to USA Balance 25 Imports from USA cif 40 Balance

20 15

10 0

-20 0

-40 -5 1990 91 92 93 94 95(a) 1990 91 92 93 94 95

Sources: US Commerce Department; China Customs Statistics (a) First 11 months at an annual rate.

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The USA continues to veto China’s membership, even on stringent transitional terms, of the WTO and to ask China for the impossible by insisting on the rapid eradication of CD and video piracy, particularly the former. Despite efforts, with hundreds of thousands of pirate discs confiscated and record fines for some counterfeiters ($1.56m in one case, although the offended party was also Chinese), the problem persists. Just as the USA cannot, even with its much more effective enforcement agencies, enforce its own laws on drugs sales, Beijing’s writ does not run in the southern provinces where the pirate factories are. The USA could make a start by persuading other countries, including OECD countries, to stop importing counterfeit products and attempting to enforce this domestically as well, just as it plans to do in the case of imports from China of products based on an allegedly stolen US patent for specialised magnets. It could also offer technical assistance to the Chinese authorities to help them in the clampdown.

In the meantime, the threats coming out of Washington and the statements made by the US trade representative, Mickey Kantor, and his assistant in charge of the China desk, Lee Sands, only undermine the already threatened economic liberals in Beijing. In February the USA was reported to be on the brink of imposing selective sanctions because it believes that China has exported ring magnets to Pakistan. These allow the enrichment of uranium for weapons use. China denies this and threatens to impose counter-sanctions. In an election year the issue of renewal of China’s Most Favoured Nation (MFN) trading status, decoupled from the matter of human rights by the president, Bill Clinton, in June 1994 is bound to be contentious and the prospect of a substantial improvement in bilateral relations in the near future seems bleak.

The PLA eyes Hong Kong The Chinese have announced that Major-General Liu Zhenwu will command the PLA forces in Hong Kong after the 1997 handover. His élite garrison is currently being trained over the border in Shenzhen, “learning about the ways of Hong Kong and the West” and is being coached in English and Cantonese. The garrison will be paid for by the mainland government and at mainland wage levels. This raises questions about the likelihood of the PLA being forbid- den to engage in “business activities” being appreciated. No such constraints have been put on mainland firms operating in the territory. They are being pressed to expand their investments massively ahead of the handover in order to help ensure a smooth transition without a panic-driven investment collapse or flight of capital. At a meeting in Shenzhen in October the heads of 30 of the largest mainland companies operating in Hong Kong, most of which now have political commissars guiding their activities on behalf of their mainland mas- ters, were told to expand their investments. Such activities could backfire, as local businessmen see politics being put before profit, an idea unheard of in Hong Kong. Such worries have led Larry Yung, son of the vice-president of China, head of the Hong Kong operations of the Chinese government’s China International Trust and Investment Company (CITIC), and now squire of the Birch Grove estate in Sussex (once home of a British prime minister, Harold Macmillan) to warn the CCP about interfering in business affairs in Hong Kong. “The people of Hong Kong will have to stand up against such interfer- ence,” he said in an interview with the South China Morning Post in December 1995. Hong Kong’s financial markets are already beginning to display some

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concern about the medium- to long-term security of investments in what is to be the first Special Administrative Region of China. The Chinese government does not appear to realise that putting pressure on companies to put politics ahead of profits is the opposite of a reassuring signal.

Doubts about the sincerity of China’s promise that Hong Kong’s way of life would be unchanged for 50 years were reinforced by the announcement in January of the composition of the 150-strong Preparatory Committee set up to oversee Hong Kong’s reversion to Chinese rule. Colonial British businesses such as Swire and the Hongkong & Shanghai Banking Corporation (HSBC) are pointedly, if not unexpectedly, excluded, as are pro-democracy activists, especially those in the Democratic Party. The new committee includes all of the local University Grants Committee supported universities and colleges, except Professor Edward Chen, director of Lingnan College, who has possibly been too public in his support for the governor of Hong Kong, Chris Patten; so much for free speech, even before the takeover. The Chinese government has already announced that the now partly directly elected Legislative Council will not be a through train and will be disbanded on takeover. It is also inconceivable that the Preparatory Committee’s main role, to elect the successor to the governor, the new first chief executive, will be based on a free choice, uninfluenced by Beijing.

On the positive side, China has withdrawn its objection to the further development of Hong Kong’s container-handling facilities. Already the world’s largest container port, on which China is dependent for much of its trade with the rest of the world, its further development, needed to support the expansion of China’s trade, was being hampered by a Chinese veto on the participation of Jardine Matheson. The Chinese believed that Jardine had been awarded its share in the contract as a kickback for its support of Mr Patten’s reforms.

The mid-January visit of the UK foreign secretary, Malcolm Rifkind, to Beijing resulted in an “agreement to differ” on areas of dispute in Hong Kong, especially Chinese plans to dismantle the Legislative Council after their takeover. The price paid was the further sidelining of Mr Patten. Breaking protocol, Mr Rifkind issued an invitation to his Chinese counterpart, the foreign minister and vice-premier, Qian Qichen, to visit Hong Kong, an invitation which should have come from Mr Patten. Mr Qian said that he would take up the invitation when “the time was right”, without giving any indication of when this might be.

An EU-Asian summit Preparations are advanced for the forthcoming first-ever summit, in Bangkok in March, between the countries of the European Union (EU) and ten Asian countries (the seven ASEAN countries plus China, Japan and South Korea). The talks will focus on economic and political issues, although some EU countries are pressing for specific human rights violation issues to be included, especially the questions of Indonesian involvement in East Timor and conditions in Chinese orphanages. The political topics to be discussed will include the future of the crisis-ridden UN, support for the WTO, nuclear non-proliferation and cooperation in security and the settlement of regional disputes. Economic issues will include discussion of rules for financial services and the treatment of foreign investment, and seeking support for new agreements on the liberalising

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of maritime transport and telecommunications within the framework of the WTO. Great hopes are being held out for the summit, which will be followed by a series of working groups and ministerial meetings before the already agreed second summit in the first half of 1998, in London, if the UK government’s invitation is accepted. There are indications that China, among others, sees the summit and the associated negotiating as a way of balancing the dominance of the USA in international forums.

Meanwhile, China demanded in February that the EU abolish what it calls discriminatory limits on Chinese exports. The deputy director-general of the Ministry of Foreign Trade & Economic Cooperation’s European affairs department has said that some EU member countries had imposed limits on imports from China and he urged EU countries to abandon discriminatory treatment against China. In February a Chinese vice-premier, Zhu Rongji, visited Germany and the foreign trade minister, Wu Yi, travelled to the UK. China registered a trade deficit of $4.8bn with the EU in 1995, down from $6.2bn in 1994, and by the end of October 1995 EU member countries had set up 5,499 projects in China, involving $5.3bn in realised foreign capital. During Wu Yi’s visit to the UK the UK government pledged a £100m ($153.7m) low-interest loan. Chinese entrepreneurs signed trade and joint-venture deals worth $2.7bn.

Closer regional ties China continues to implement its “good neighbour” policy in regional relations. After tightening up controls on irregular, but extensive and profitable, border trade with the former Soviet union in 1995, the Chinese government is now encouraging the development of such economic links. For itself, the government has set the lead with orders for military technology and hardware from Russia. In February, in a deal worth $2bn, China signed a contract with Russia for a licence to produce Sukhoi Su-27 “Flanker” interceptors. Earlier China had bought three submarines. Closer military connections with Russia can be expected to be fostered as long as the Chinese perceive the USA as supporting “splittist tendencies” in Taiwan. Meanwhile on the southern border rapprochement with another old enemy continues. Following the 1991 “nor- malisation” of relations the Vietnamese and Chinese governments have agreed to reopen the rail link between the two countries, which has been closed since the border war in the late 1970s. Two-way border trade is now running at around $1bn a year. There are limits, however, and as the two countries still cannot agree on where the border is passengers will have to leave the train and walk across the disputed territory before continuing their journeys on a train provided by the other side. In an oblique reference to their ongoing dispute over the Paracel and Spratly Islands, Jiang Zemin and his Vietnam counterpart, Do Moi, agreed “to make due effort to maintain regional peace, stability and development".

Hoping to increase economic cooperation with its South-east Asian neigh- bours, China will invest Rmb100m ($12m) in 1996 to dredge and build ports along its main Mekong tributary, the Lancang river, which flows through Yunnan province north of Burma and Thailand before joining the Mekong. A 25-fold increase in freight and a 100-fold increase in passenger traffic are forecast by 2000.

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More disputed islands The decision, announced by Japan, that it will enforce a 200-nautical-mile exclusive economic zone (EEZ) on ratification of the UN Convention of the Law of the Sea, has the potential to spark off territorial disputes with both South Korea and China. China (and Taiwan) claim the Senkaku Islands as the Diaoyutai, although Japan regards the islands as not subject to dispute. South Korea’s response was to announce its own EEZ, and fisheries agreements involving the three countries will need to be revised or negotiated. Illegal fishing by the Chinese is a concern shared by Japan and South Korea. Beijing is expected to ratify the sea-zone convention later this year.

The convention obliges signatory countries to respect a 200-nautical-mile exclusive economic zone off a country’s coasts. Within its zone a country has the exclusive right to exploit natural resources and establish artificial islands. In establishing the 200-mile zone, Tokyo intends to use the various disputed islands as baseline points, from where the exclusive zone actually begins. How- ever, Seoul plans to do the same for Takeshima. Beijing, in addition to claiming the Senkaku Islands, also insists that its territory stretches to the borders of the continental shelf.

A Chinese oil exploration ship entered waters near the disputed Senkaku Islands in the East China Sea in early February and appeared to have conducted trial drilling for oil, according to the Japanese news agency Kyodo. The discovery of oil resources would almost certainly trigger a major diplomatic row between Japan and China.

Economic policy

Policy will remain tight In the light of the still fast growth in GDP in 1995 (fuelled as ever by rapid investment and this time by exports as well), the large trade surplus and the still excessively fast growth of lending, the authorities have made it clear that, on paper at least, monetary and fiscal policy will remain tight this year. This means that those enterprises which are unable to demonstrate that they have either economic or political clout will find it difficult to obtain funds from either the formal or the informal banking sector. Efforts to restrain inflation, which was held down to 17% in 1995 from 24.1% in 1994 (national consumer prices), will remain the key priority.

Despite the continuance of “austerity”, which has been in force since overheat- ing was identified as a serious problem in mid-1993, there will, as before, be considerable policy leakage. This will come from that part of the industrial sector which lies beyond the direct influence of the central government and the formal financial sector. Large numbers of collective enterprises, especially those with foreign funding at the township and village level, will find ready access to working capital from the banking sector and the grey lending market, allowing them to expand output. The state itself is another potential source of policy leakage and of inflationary rises in the money supply. The official, public deficit has been held down so that direct government borrowing from the central bank has been less than 1% of GDP and falling over the last few years. Since 1994 the central government has refrained from financing its deficit by such borrowing from the People’s Bank of China (PBC, the central bank). But the World Bank

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has pointed out that this does not tell the whole story; a wider definition of public borrowing, the consolidated government deficit (CGD), includes the official deficit (restated to conform with international norms; ie not including debt financing as revenue and counting direct subsidies as expenditure) and the policy lending of the central bank. The latter is dominated by lending for investment by state-owned enterprises. The size of the CGD has been rising in recent years; the World Bank estimates that it reached 8.9% of GDP in 1993 and it is not likely to have fallen since. It is susceptible to upward pressure from two sources. First, as state-owned enterprises (SOEs) face a harder budget constraint, those which are large but burdened by large welfare responsibilities or a distorted price structure are liable to become more dependent on government subsidy. Second, as a result of decentralisation, many of the decisions to subsi- dise individual SOEs are taken at a local level and with local considerations in mind. Local governments are also well placed to bring suasion to bear on local banking officials to press their case for additional credits to be granted, thus rendering annual national credit plans ineffectual as a way of limiting the rise in borrowing.

The cost of the One result of the rising CGD has been increasing domestic debt. Since 1983 government deficit is China has posted a budget deficit every year except for 1985. It has issued a total rising of Rmb470bn ($56.6bn) in Treasury bonds to meet its annual deficit and roll over existing debts. As of September, Rmb330bn in bonds were outstanding. In 1995 a record Rmb153bn was issued, of which Rmb75.7bn was used to redeem bonds falling due.

This year’s issue will be higher. Rmb110bn will need to be issued to meet bond redemptions and the official budget deficit is expected to be no smaller than in 1995, which was budgeted at Rmb151bn (2nd quarter 1995, page 17). Unoffi- cial estimates suggest that the 1996 issue will be Rmb180bn-190bn. There are plans to issue short-term instruments as well, to deepen the financial market.

In March 1994 the central bank, fearing a disintermediation crisis, reintroduced an interest rate subsidy on personal, fixed bank deposits and Treasury bills of three years and above to protect investors against inflation. The subsidy, which is paid at maturity on top of the fixed rate, rose from 1.19% in March 1994 to a high of 13.2% in December 1995. It was set at 11.3% for March 1996. Paying the subsidies represents a large additional burden for the state. In theory, they should be phased out provided that inflation continues to move down.

Investors willing to bet that the subsidy will be phased out can buy the Rmb5.33bn of three-year bonds being offered by the Ministry of Railways and China Petrochemical Corporation, both of which issues carry a 15% coupon without subsidy. Official sources are predicting that inflation will be kept below 10% this year and will fall further thereafter, bringing down the interest rate subsidy with it.

More disclosure for In an attempt to impose more transparency on companies listing on the companies listing in Shanghai stock exchange, and which hope to attract foreign investors, the Shanghai authorities have introduced a rule requiring them to account for the allocation of funds raised in share issues in the annual reports. They must also report any

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variations on announced plans which would affect more than 30% of the funds raised.

Funds are being Ahead of the formal introduction of the Ninth Five-Year Plan (1996-2000), the channelled inland government has begun moves to achieve one of its main objectives: the diver- sion of resources into inland provinces. In its bid to the Asian Development Bank for 1996, of the ten projects proposed, four would be in the hinterland. These four include two in Sichuan: a new expressway in Chongqing and a rail link between Daxian and Wanxian. The other two are an expressway between Jiujiang and Jingdezhen in Jiangxi Province and a hydroelectric power plant in Guizhou Province.

Convertibility of the Zhu Rongji told reporters in an interview with a German newspaper during his renminbi will come soon trip to Germany in February, that China will make the renminbi partially convertible later this year. He said that the “partial” nature of the move would cover current-account transactions, allowing foreign investors to convert profits made in renminbi into foreign currency at Chinese banks and to transfer them abroad. He also said that further customs duty cuts, in addition to those already announced, will be introduced later this year. The State Council has announced new regulations codifying foreign investors’ rights to repatriate profits, divi- dends and interest. However, they will still be expected to balance their inflows and outflows of foreign exchange and they will continue to be subject to an annual audit of their foreign exchange transactions.

Special Economic Zones In the summer of 1992 the World Bank submitted a report to the Chinese will still play a role— government calling for the removal of tax and other incentives in the five Special Economic Zones (SEZs) not available elsewhere in the economy. It called for a level playing field for national and foreign investors. It recognised that the SEZs could, and should, continue in their role as economic laboratories. Since that report was circulated the issue has been one of the hot topics in economic policy circles. Many of the contradictions inherent in the transformation of a huge socialist planned economy into a socialist market economy are present in the debate. The politics have been complicated by the fact that some of the main beneficiaries of the privileges in the SEZs have been enterprises owned by central and provincial government ministries and depart- ments, especially the Ministry of Foreign Trade & Economic Cooperation and the Ministry of Communications.

—but not as before The discriminatory policy offering tax and other incentives to invest in the SEZs will continue to be withdrawn (foreign exchange privileges went some time ago) and level playing fields will be introduced. No more SEZs will be established and the existing zones will not be allowed to convert themselves into free ports; Hong Kong and Macau will operate as China’s two free ports, supported by Shenzhen and Zhuhai. The SEZs will remain special, however, in that they will continue to be expected to serve as economic laboratories for the reform and opening-up process. The areas for experimentation are expected to be national treatment for foreign enterprises (an experiment which has already begun in Shenzhen, see below), reducing the role of government and making the running in developing commerce, trade, finance and insurance. However,

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early in 1996 the State Council, in a statement issued by its Office of the Leading Group for Special Economic Zones, made it clear that the SEZs would not have a monopoly on these experiments. For example, foreign banks will first be allowed to deal in renminbi in Pudong, the development zone adjoin- ing Shanghai, and only later in the SEZs; and foreign insurance companies were first allowed to sell policies in Shanghai and Guangzhou.

The government has also made it clear that as well as taking the lead in introducing national treatment it also expects Shenzhen to be the pioneer in introducing much-needed new management practices into China’s ports; to establish an internationally oriented banking system which will learn from, but not compete with, Hong Kong; and, worryingly, to concentrate on the development of high-tech industry with government and state bank support (worryingly because the market has already indicated that Shenzhen is not a competitive location for such industry). The compromise is well meant but probably doomed to failure. The SEZs, which played a crucial role in the early days of the reform process, were creations of distortionary policies and without these policies their special status will disappear in a more market-oriented economy. The numbers of empty factories, offices and commodity houses in Shenzhen in particular can be expected to increase as investments and investors move to more attractive locations.

As part of the new policy of supporting regional development, Beijing, while refusing inland provinces the right to establish SEZs of their own, will probably have tariff and quota concessions on border trade reintroduced. The concessions, removed in 1995, allowed border traders a 50% deduction of tariffs on imported and taxes on exported products and allowed barter trade to take place without quota.

The position on foreign In January the government clarified its position with respect to the announced direct investment is extension of national treatment to foreign investors. It has confirmed that clarified duty-free imports of capital equipment by such investors will be abolished. It does not, however, expect this to have much long-run effect on investment Foreign direct investment flows as tariffs on many items are expected to be reduced by 30% in 1996 $ bn (although the list of which items will be covered is still awaited). In a speech in

40 Total $133.8bn Germany in February, Zhu Rongji announced that firms which gain approval

35 for their investments by April 1 will be able to bring in their capital equipment duty-free as long as they arrive in China by the end of 1996. This concession 30 will be extended for firms which are planning to invest more than $30m. They 25 will have a grace period of two years, if their proposals are approved by April 1. 20 The phase-out of the duty concession is expected to lead to a surge of invest- 15 ment proposals in the first few months of 1996.

10 The government hopes for an inflow of around $30bn of foreign direct invest- 5 ment in 1996, which would bring the total in place up to $164bn. The $38bn 0 of realised investment in 1995 was up 11.65% on the 1994 figure. The total 1979-83 84-92 93 94 95 foreign direct investment approved since 1978 is $398bn, although by the end Sources: China Statistical Yearbook; press reports. of 1995 just over one-third of this had actually materialised.

Tariff cuts are being The details of the 4,000 tariff cuts announced by the president, Jiang Zemin, at announced the Asia-Pacific Economic Cooperation (APEC) summit in Tokyo last November

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(4th quarter 1995, page 32) are being announced on a piecemeal basis. The cuts, to become effective on April 1, are part of the strategy China is following to support its application for membership of the World Trade Organization (WTO). Although it has given up its bid for founder member status it would still like to join, even if only to get away from the need for political battle each year with the USA over continued Most Favoured Nation (MFN) status in the US market. There are 6,000 items in China’s tariff schedule, so the 4,962 cuts being announced represents a significant general tariff cut. Managers of beleaguered SOEs will be watching anxiously to see if they are on the list, or if cuts in their protection are heavy or slight. Samples of the cuts announced so far include: wallpaper from 20% to 15%; combed cashmere from 30% to 15%; polythene packing ropes from 70% to 30%; polyester filament from 40% to 20%; cotton shirts from 60% to 40%; synthetic shirts from 80% to 45%; coloured float glass from 30% to 25%; car safety glass from 40% to 30%; steam boilers from 25% to 18%; and auxiliary boiler parts from 50% to 18%.

Meanwhile, existing tariffs brought in a record Rmb69.9bn in 1995, 12.3% up on 1994. Much of the increase was accounted for by a clampdown on smuggling and tighter control over phoney tax-free imports for processing enterprises. Anti-smuggling activities netted Rmb8.2bn in 1995, according to customs officials and tighter controls over processing enterprises another Rmb7.45bn. The revenue-reducing effect of the recently announced tariff cuts will be to some extent balanced by the withdrawal of duty-free import concessions for foreign-funded enterprises.

Reform of the state-owned The State Commission for Restructuring the Economy (SCRE) has announced enterprise sector the results of a survey carried out in 1995 of 1,100 state-owned enterprises (SOEs). Yet again a government body has come up with the conclusion that exactly one third of all SOEs are operating at a loss. On the basis of the survey the SCRE estimates total losses by SOEs in 1995 amounted to Rmb50bn ($6bn). The average debt-to-asset ratios among the surveyed firms was 80% and 95% of all working capital came from the state banks as “loans”. Managers of the firms blamed the usual reasons for the losses: bloated payrolls and welfare obliga- tions for workers, their families and retirees.On reforms, 31% recommended bankruptcy while 65% preferred management-job-saving mergers, spin-offs or public auctions. While the government fairly consistently quotes one-third of SOEs as operating on a loss-making basis, other industry watchers regularly come up with higher figures. Fan Gang, deputy director of the prestigious Institute of Economics of the Chinese Academy of Social Sciences, who is a specialist in this area, believes that 70% of the country’s SOEs are operating in the red, 40% of them with chronic deficits. He also puts a figure on the extent of surplus labour: 18% of the 90 million workers in the sector. Professor Fan, as reported by Reuters, believes that the government, when it does finally bite the bullet, will support the 1,000 most important SOEs (not yet identified) through a reform process and let the rest sink or swim.

Changes on financial A milestone was passed in December when the China Minsheng Bank opened markets its doors for business. This is the first non-governmental shareholding commercial bank to be established in China. Its shareholders are mainly private and collective enterprises; together they hold 80% of the Rmb1.4bn capital

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stock. As well as representing a new departure in the development of the ownership structure of the banking industry, the bank will also be the first to target itself primarily at customers in the non-SOE enterprise sector. Such enterprises are now the fastest-growing sector of the economy.

Although the government has said that foreign banks in Pudong will be the first in China to be allowed to conduct business in renminbi the deputy gover- nor of the PBC, Di Weiping, has suggested that the date for the introduction of this experiment may still be some time off. Speaking at a conference in Beijing, Mr Di said in November 1995 that the PBC did not have a sufficiently well- developed management and financial supervision capability to be able to cope with the complexities of regulating foreign banks engaged in local currency business. At the end of 1995 there were 117 branches of foreign banks, five joint-venture banks, five wholly foreign-owned banks, five foreign-funded finance companies and one joint-venture investment bank operating in China. Their activities are currently restricted to foreign currency business in 24 cities.

A monopoly for Xinhua In a move seen, on the most benign interpretation, as motivated by a concern to protect infant financial markets, the State Council in January gave the state-controlled Xinhua news agency the monopoly over the domestic dissemination of economic information within China. There have been complaints that “aggressive” reporting by foreign news agencies such as Reuters has destab- ilised China’s sensitive emerging financial markets. As well as being able to censor information flows to the markets, Xinhua will also be able to charge foreign agencies fees for the compulsory use of its services. The move is a blow to the confidence of foreign investors, who depend on the free flow of accurate and up-to-date (and unbiased) information. Rather than protect China’s emerging markets, it may stifle them at birth. The move also gives ammunition to those in the international community who argue that China is not yet ready to take on the responsibilities of full membership of the WTO. Moves to control public access to the Internet, not just to restrict access to pornography, but also to restrict the spread of broadly defined information which would “hinder public order”, also take China further back down the road to 1984. Internet users have been ordered to register with the police and attempts to install ways of filtering out banned information on servers are being made.

The economy

Growth stays in double Despite the continuing austerity policies, which had some impact on the over- digits all growth of domestic demand, GDP growth remained in double digits in 1995. China does not yet publish a breakdown of GDP by demand, but EIU estimates suggest that the growth rate of private consumption, investment and exports was slower in 1995 than 1994. Imports, while growing much more rapidly than in 1994, when they were squeezed, nevertheless lagged behind exports by a wide margin.

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Growth in gross domestic product (real % change on previous year) 1994 1995 Private consumption 7.0 6.7 Gross domestic investment 22.7 11.0 Exports 29.7 20.1 Imports 6.7 12.0 GDP 11.6 10.2 Sources: EIU and official estimates.

Inflation slows, but not Much has been made of the slowdown in the rate of inflation that took place, enough mainly as a result of administrative measures (ie price controls), during 1995. The measures started to bite during the second half of the year, when as the table below shows, point-on-point retail price inflation fell to single digits in the last two months, bringing the annual rate to 14.8% (retail) and 17% (consumer prices).

There were differences in the rates of inflation between regions, however. Retail price inflation was lower than 15% in 11 provinces and three cities which have provincial level rank—Beijing, Shanghai and Tianjin—in 1995, but higher than 16% in ten provinces and autonomous regions. Floods, drought and remiss behaviour or lack of cooperation on the part of local officials have been blamed for the higher rates recorded in the ten areas.

Strenuous efforts to control monetary policy, strictly limit the number of new construction projects, increase the supply of agricultural goods and control rice and vegetable prices will remain the key to price control in 1996, and heads of local governments will continue to be held responsible for curbing inflation in their respective regions.

Meanwhile, any further moves in the direction of price reform such as the decision by the Beijing city government to double prices of underground and bus tickets from January 1 will fuel inflation once more.

Inflation, 1995 (% change on year-earlier period) Consumer price index Retail price index Jan 24.1 21.2 Feb 22.4 19.7 Mar 21.3 18.7 Apr 20.7 18.0 May 20.3 17.6 Jun 18.2 16.0 Jul 16.7 14.6 Aug 14.5 12.3 Sep 13.2 11.4 Oct 12.1 10.3 Nov 11.2 9.2 Dec 10.1 8.3 Annual 17.0 14.8 Source: China Daily.

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Change in total industrial value- Recent economic highlights added (preliminary figures; Rmb bn unless otherwise indicated; current prices) Rmb bn at constant prices % real change on Total Rmb211.1bn Jan-Dec 1995 year-earlier period GDP 5,770 10.2 SOES 91.8 Net agricultural value-added 1,100 4.5 Gross industrial value-added 1,786 13.4 . 22.8 Investment in fixed assets 1,900 11.0 Collectives 69.4 Actual foreign investment ($ bn) 38.08 11.6 Other (a) 50.7 .of 46.6 which: Taxes paid by enterprises 538.4 18.3 village 46.6 Cash in circulation (end-period) n/a 14.0 M1 money (end-period; Rmb trn) 2.4 16.8 M2 money (end-period; Rmb trn) 6.08 29.5 (a) Incl private and foreign invested enterprises. Source: State Statistical Bureau. Retail sales 2,000 10.0 Consumer price index 14.8 n/a Exports fob ($ bn) 148.77 22.9 Imports cif ($ bn) 132.08 14.2 Foreign exchange reserves ($ bn; end-Dec) 73.5 38.9 Sources: China Daily; China Economic News; Reuters; EIU.

Private holdings of Private holdings of foreign exchange in bank accounts increased again in 1995. foreign exchange rise The Bank of China alone saw an increase of $1.2bn, which brought the total in again private accounts at the bank to $23.7bn. The Bank of China estimates that it accounts for about 60% of total private holdings of foreign exchange in bank accounts, so that the estimated figure for the country is approaching $40bn. These large holdings reduce the need for the banks to borrow abroad to finance foreign exchange lending. The People’s Construction Bank of China reduced its foreign borrowing in 1995 to $700m, down from $1.8bn in 1994. The growth in private holdings of foreign exchange partly explains this fall. The other explana- tion for the drop is the government‘s campaign to get state-owned enterprises to finance their imports from their own foreign exchange holdings.

Fiscal reforms are not yet The reforms to the fiscal system are still failing to meet their two main targets: working reducing government dependence on the sale of bonds to cover the budget deficit; and raising the share of tax revenue going to the centre. At a conference in Beijing in December Zhu Rongji complained that while the central Treasury saw a 15.1% rise in revenue in the first 11 months of 1995, local government revenue grew 29.9% on average. By then only Rmb510bn ($68.6bn), or 89.8% of the budgeted target of Rmb569.2bn, in tax revenue had been collected, according to the Ministry of Finance. One continuing problem was the value- added tax (VAT) refund scheme under which VAT payments on imports are refunded on goods used in the production of exports. Zhu Rongji said that the scheme was “rife with corruption”. In an attempt to reduce the incentive for corruption China has cut the rebate from 17% to 14%, and has said that from January 1 it would reduce the general rate to 9%, the rate for essential goods to 6% and the rate for agricultural products and coal to 3%. By the end of the November, tax experts forecast that outstanding VAT refund invoices exceeded the refund budget by 43%, or Rmb75bn.

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Agriculture

Growth versus China is coming to terms with the fact that it cannot sustain its current rate of self-sufficiency industry- and services-based economic growth as well as maintain food self- sufficiency. The amount of food that it will need to import is subject to considerable debate as there are many problems with current data for land use and yields. But it is certain to remain substantial; according to customs data, gross imports of grain were some 20m tons in 1995 (of which wheat imports were nearly 12m tons), more than double the 1994 figure. While efforts are continuing to improve agricultural productivity, reduce the loss of arable land and extend the boundaries of cultivation, the government is also seeking to lock itself into contracts for food on an increasingly tight world market. A regular buyer of Australian wheat on an annual contract basis in the 1960s and 1970s, China has recently again contracted with Australia for the supply of 3m tons of wheat in the period 1996-98.

A record harvest in 1995 Agriculture grew at a healthy pace in 1995, thanks in part to strenuous efforts to persuade the peasantry to plant grain and to procure it from them. There have been no reports, as in previous years, of the widespread use of IOUs as a means of payment for state-procured grain. The government announced that the total grain harvest in 1995 reached a record 460m tons, despite the droughts and floods during the spring and summer, which ruined crops on millions of hectares. The government puts the achievement down to increased use of pesticides and fertilisers and to bringing marginal lands into production.

Industry and construction

Another year of strong China’s industrial value-added grew by 13.4% in 1995, down from growth of growth 17.5% in 1994. Overall, state-owned enterprises (SOEs) grew faster in 1995; by 9.5% compared with 6.8% in 1994. The growth in output of collective enterprises slowed to 14.7% from 21.4% in 1994. The output of private and foreign- funded enterprises of various kinds (including many joint ventures involving SOES or collectives) continued to outpace that of the public sector. But the increase they recorded, at 18%, was a significant fall from the 27.7% growth rate they achieved in 1994.

Industrial performance, 1995

Rmb bn % change on previous year State-owned enterprises 1,058 9.5 Collective enterprises 542 14.7 Non-state enterprises 332 18.0 All industrya 1,786 13.4 Memorandum items Heavy industry 1,033 11.5 Light industry 754 16.0

a Totals do not add in original.

Source: EIU.

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Township and village The stars of Chinese industry, the township and village enterprises (TVEs), are enterprises are getting getting bigger. Their number fell by 320,000 in 1995 to a still large 24.63 mil- larger lion. No doubt this fall was helped by the credit squeeze in which SOEs were favoured. However, the output of the survivors continued to boom. It reportedly rose by a real 30% on 1994 to Rmb1,023trn, accounting for 19.3% of China’s total GDP. TVEs remain at the forefront of the export effort, exporting goods worth $53bn in 1995, or 36% of China’s total exports last year. They contributed to the opening-up process by attracting foreign investment, 24,900 TVEs signing joint-venture agreements worth $1.9bn in foreign investment in 1995.

Taxes paid by industry Between them, according to preliminary data issued by the State Adminis- rise— tration of Taxation, units in the industrial sector paid a combined Rmb538.4bn in industrial and commercial tax in 1995, up 18.3% on the total for 1994. Of the total, value-added and consumption taxes accounted for Rmb319.1bn.

—as does unemployment Urban unemployment figues rose to 2.9%, or 4.8 million people, at the end of September. But the actual figure is much higher, as those who do not register (including the large migrant labour force) and SOE workers who receive no pay are not included. Economists have also estimated that paid but surplus labour in the SOEs accounts for a further 20 million people. No one knows how many of the rural population are unemployed, but to the current generally accepted estimate of 80 million must be added the 137 million who Professor Li Yining of Beijing University estimates, as quoted by the South China Morning Post in January, will join the rural labour force by 2000 but will be unable to find jobs.

Steel output stagnates— Steel output is estimated to have reached 94m tons in 1995, up 1.5% on 1994. Plans for 1996 call for total production of 98m tons. Rolled steel would account for 88m tons below the forecast consumption of 96m tons. Last year China exported 6m tons of rolled steel and imported 13.5m tons.

—as does that of After virtually doubling from 713,000 units in 1991 to 1.4 million in 1994, the automobiles rate of growth of vehicle production slowed down in 1995. In the first nine months of 1995 vehicle output stood at 1.1 million units. The slowdown was in the output of jeeps, trucks and chassis, while output of passenger cars continued to grow at around 15% year on year, with 227,900 units being produced in the period. Lawful imports of cars in the first seven months of 1995 fell by 46% to 12,667, many of which remain unsold. Truck imports fell by 77% to 8,462 units. The figures reflect the import substitution policy which protects the growing domestic industry, the continued high volume of smuggled vehicles and the credit squeeze, which has affected industrial enterprises dispropor- tionately. At the forefront of production of passenger cars is Volkswagen (VW), with plants in Shanghai and Changchun. VW was the first foreign production plant in China, signing up for a joint-venture plant in Shanghai in 1984. Early output of the plant supplied the taxi company in Shanghai established by the then mayor, Zhu Rongji. Mr Zhu has continued to support the plant, which is now a major employer in Shanghai. Production at the Shanghai plant is now running at 160,000 units a year while the plant in Changchun produces 40,000 Jettas, City Golfs and Audis. With plans to produce 300,000 units in Shanghai by the end of the century and 360,000 in Changchun, VW is well ahead of its

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nearest rivals, PSA Peugeot-Citroën and Chrysler. Having been successful in developing local components manufacturing, and persuading leading foreign producers to set up in China, VW now has a 90% local content. Meanwhile, the UK and Chinese governments have signed an accord which they hope will lead to greater cooperation between the UK and Chinese automotive industries. One aim is to encourage a greater flow of foreign direct investment from the UK in this sector, to follow the lead given by Lucas Industries, which has already established a number of manufacturing joint ventures.

The ten largest industrial Towards the end of the year the State Statistical Bureau published its list of the enterprises 500 largest industrial enterprises, as measured by the total profits earned and taxes paid by the companies. There are few surprises in the list. The top ten is led by the Daqing Petroleum Administrative Bureau and includes the three major steel works, the three leading power groups, the two automobile plants and Yuxi Cigarette Factory. Of the top 500 enterprises no fewer than 76 are cigarette plants; which explains why Western tobacco companies would like to break into this sector, currently a state monopoly (and, with cotton and silk- worm cultivation, one of the only three agricultural activities still subject to state planning and control). B.A.T of the UK has recently endowed a professor- ship at the EU-China Management School at Jiaotong University in Shanghai. Shanghai Pepsi creeps in at 498th on the list.

China’s ten largest industrial enterprises, 1994 (Rmb m) Pre-tax annual profit Daqing Petroleum Administrative Bureau 19,908 Yuxi Cigarette Factory 14,670 East China Power Group 10,102 Baoshan Iron and Steel Corp 7,941 Capital Iron and Steel General Corp 7,108 Shanghai Automobile Industry General Co 6,836 Anshan Iron and Steel Corp 4,908 China No 1 Automobile Group 4,540 North China Power Group 3,978 China Huazhong Power Group 3,821 Source: China Economic News, December 25, 1995.

Transport and communications

Transports of decline Transport was one of the few sectors of the economy to show a decline in 1995. Despite the growth in the transport infrastructure, total freight handled last year fell by 1.1% to stand at 2.7bn tons. Freight handled by both road and water fell while carriage by rail and air was up, the latter by 22%. Fewer people were travelling, and they were travelling shorter distances. Total passenger volume was also down, at 4.89 billion people, dropping 1.4% from 1994; overall passenger turnover was down 2.6% at 622 billion person-km. Air travel bucked the trend, experiencing a 26.8% increase in the number of passengers carried to 51.2 million. Major coastal ports handled 736m tons of cargo in 1995, up 7.7% on the year.

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Transport figures, 1995

% change on previous year Total freight volume (bn tons) 2.69 –1.1 of which: rail 1.59 1.6 road 0.47 –8.3 water 0.62 –1.5 air 0.10 21.8 Passenger traffic (m) Total 4,850 –1.4 of which: rail 1,020 –5.5 road (bus) 3,630 –0.2 water 140 –8.0 air 51 26.8 Source: China Daily Business Weekly.

Investment in aviation The shift to air transport for both freight and passenger traffic is stretching the will rise aviation infrastructure. Recognising this the government has slated more than Rmb9bn ($1.1bn) for investment in airport infrastructure and technology renovation this year, up 30% from the figure for 1994. Top priority will go the much-needed expansion of the Capital Airport in Beijing, but dozens of regional airports across the country will also benefit.

Money and finance

Financial markets are China’s financial markets appear to have survived the turbulence of the first thriving half of the year. Although the financial futures markets remain closed the remaining markets saw a 66% increase in turnover to a staggering Rmb9.9trn ($1.2trn). Although the figures are distorted by the financial futures trade in the early months of the year, the Shanghai commodity exchanges (Shanghai Commodity Exchange, Shanghai Metal Exchange, Shanghai Cereal and Oil Exchange) accounted for most of the total turnover. Turnover on these three exchanges rose 71% in 1996 to reach Rmb2.6trn, of which 75% was accounted for by the popular plywood, natural glue and polyvinyl contracts. At one point during the year one plywood contract had an amount outstanding in open contract equal to more than the country’s annual plywood consumption; the government forced the closure of the contract. Speculative funds moved on to the rubber contract in Guangzhou.

Securities houses in One result of the Shanghai securities markets’ shambles of 1995 (2nd quarter Shanghai will merge 1995, page 34) is likely to be the merger of some of the largest securities houses in Shanghai. Under the plan, “suggested” by the central government, Shanghai International Securities, blamed along with Liaoning Guofa for the trading irregularities which led to the closure of the Shanghai bond futures market of the Shanghai Stock Exchange in May 1995, will merge with Shanghai Finance Securities, Shanghai Pudong Development Securities and Shanghai International Trust and Investment Corporation to form a new securities house called Shanghai New Securities.

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Those put off investing in securities markets by the scams of 1995 or the drifting down of prices in the two stock exchanges, and who are too far away to indulge in the newly introduced horse racing in south China, can now enjoy the West’s latest obsession. A national scratch-card lottery has been introduced, starting in January 1996. A French company, Française de Jeux, which has formed a joint venture with Beijing Zhongcai Printing Company to run the lottery, expects sales in 1996 to run to 600 million cards; this is probably an underestimate.

The insurance market is The difficulty of weaning China off the “iron rice bowl” is indicated by the low still tiny $2 per head spent each year on life insurance (compared with $3,457 per head in Japan). Most state workers, in government and state-owned enterprises (SOEs), continue to be looked after by their work units in their old age. The poorer rural population will remain beyond the reach of welfare services for the foreseeable future. However, even this low figure is turned, by the magnitude of Chinese numbers, into a premium income of $2.4bn. With the world spend per head at $56, with reforms of SOEs on the horizon and with the continued monetisation of rural areas, the potential for growth is enormous. Insurance companies from OECD countries are queuing up behind the two already in China (New York-based AIG and Japan’s Tokyo Marine and Fire Insurance) for a piece of the action. Manulife of Canada was awarded a licence in 1995, as was insurance broker Sedgwick of the UK (the first foreign broker to be awarded one).

Chubb (which is not yet selling policies) has just endowed the Chubb School of Insurance Studies and the Shanghai University of Finance and Economics with a donation of $1m. The government has announced that two new contracts have been awarded, although the identities of the two companies have not yet been announced. On her recent visit to London Wu Yi, minister of foreign trade and economic cooperation, said that another contract was being contemplated and she tantalisingly said that she hoped that a European firm would win it. Domestic firms are not going to give up their cabbage patch without a fight and foreign applicants should know that they are required to pass on 20% of the insurance they write to Chinese reinsurance companies. The state-owned People’s Insurance Corporation of China (PICC), now being restructured into a holding company with several specialised arms, is expected to be the main beneficiary of this.

Control of the money The governor of the People’s Bank of China (PBC, the central bank), Dai supply Xianglong, has put the “success” in containing inflation in 1995 down to the success in controlling the growth of the money supply in 1995. This seems strange when it is remembered that M1 grew by 16.8% in 1995 and M2 by a huge 29.5%. The governor uses as his test of appropriate tightness whether or not the rate of growth of M1 is greater or lower than the combined rates of growth of GDP and prices. With the former at 10.2% in 1995 and inflation at 14.8%, giving a combined 25% for the year, this target was met last year for the first time since 1991.

What saved the governor’s bacon in 1995 was the continued high propensity to save in China. Despite sales of government bonds exceeding Rmb150bn in 1995, new deposits by individuals in Chinese banks rose by Rmb800bn,

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bringing the total to something in excess of Rmb3trn. Most of this (80%) is accounted for by urban residents but rural savings are also growing, with savings through the Post Bureau, the favoured vehicle for rural savers, standing at Rmb162bn at the end of 1995. Post office savings now account for 5.3% of national savings, up from 2.3% in 1990. The growth in savings is not all benign, however, and it contains a time bomb. As deposits of three years or more, as well as three year bonds, are inflation proofed (see below) the share of inflows of savings needed just to service past inflows is rising

There are still problems However, leaving aside the question of the accuracy of the official inflation with monetary policy figures (which are scorned by the urban population), the picture is not as bright as the price data suggest. The problem is that monetary policy has to meet too many objectives within what is still a primitive institutional structure. Now that the government cannot run an overdraft with the PBC it has to sell bonds to meet its growing budget deficit, which is enlarged by the need to finance the repayment of and interest on previous borrowings. Of the Rmb186bn-190bn bonds the government plans to sell in 1996, as much as Rmb120bn will be needed simply to cover the interest and repayments. With fiscal reforms failing to increase central government revenue by much, the nine-year succession of budget deficits seems set to continue and with it the dependency of the government on a spiralling issue of bonds.

Interest rates have to stay To sell the increased flow of bonds the government has to raise interest rates. It high has done this in a roundabout way by guaranteeing the real value of the capital invested in three-year bonds. It does this by adding an “inflation subsidy” to the coupon. The subsidy is set a rate sufficient to ensure that combined with the interest payments the bondholders are repaid the real value of their original investment on maturity. State banks also offer a similar subsidy on fixed-term deposits of three years or more. The latest three-year Treasury bonds, issued in November, have a coupon of 14%, 1.76% above the rate for three-year bank deposits, and also carry an inflation subsidy. With the continued credit squeeze limiting the availability of bank loans to finance capital spending, corporations have to match bank interest rates in order to sell their bonds.

Crowding out? Government dependency on bonds sales to finance its spending limits its ability to use monetary policy for macroeconomic stabilisation, thus crowding out and thereby raising the cost of borrowing by SOEs and other corporations. As SOEs are not allowed to go bankrupt, however, they are forced to borrow from the banks in order to cover current expenditure while capital expenditure is constrained. In an interview in January Zhu Rongji noted that China has only just set out on the road to market economy which current capitalist economies have been travelling along for hundreds of years. He concluded that while “the interest rate has been proved very useful and efficient in the USA” as enterprises take the interest set by the Federal Reserve Board as an important signal which they take into account when making their plans, this is not the case in China “because the transformation of China’s SOEs has not been successfully realised” and their activities are not interest sensitive. All roads lead back to the SOEs; their unreformed state justifies, in Mr Zhu’s view, the

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continuation of quantitative controls over credit otherwise the money supply would get out of hand and “inflation would follow suit”.

An interbank market is to Some 40% of SOEs were counted as loss-making in 1995 and therefore depend- be established ent on bank finance to stay in business; bad debts, which grew by Rmb150bn ($18bn) in 1995, account for around 20% of outstanding assets of the four state banks. It might be argued that interest rates cannot play a real role in such a system, in other words, that conventional monetary policy has no part to play in maintaining macroeconomic stability. Dai Xianglong would not agree.

He announced at a press conference in January the introduction of a regulated interbank money market from the beginning of 1996 and plans to introduce open-market operations in April. A major aim of the introduction of these two money-market instruments is to move away from centrally set interest rates to rates which reflect market forces. With the real cost of borrowing to firms which cannot repay loans being effectively zero, the introduction of such sophisticated money-market techniques is to a large extent irrelevant. Until the government bites the bullet of SOE reform and makes their operation more market determined, the maintenance of macroeconomic stability, and the achievement of the 10% target for inflation in 1996, will continue to depend on credit rationing, subsidies and price controls. The target ceiling for bank credit in 1995 was Rmb570bn; the actual amount of credit extended was Rmb630bn. For 1996 the target is Rmb650bn.

As the government has announced that the bill for the controversial Three Gorges dam is now expected to run to Rmb8.2bn. As well as being the world’s largest dam, the project is likely to be the cause of a large issue of government bonds. It is not favoured by international lenders because of its environmental and social impacts and a concern for safety features.

Foreign trade, investment and debt

A large trade surplus, It was noted in several 1995 Country Reports that the incentive to over-report thanks to buoyant exports exports and under-report imports that is built into the current taxation system was intensified during 1995 by the reductions in the rate of rebate on value- added tax (VAT) for exports which came into effect from July 1995. This contributed to a surge in export growth in the first half of the year which slowed considerably in the second half, but still left exports 23% above their 1994 value. Import growth was much slower and much less volatile, at 14.2% for the year as a whole. The result was an fob/cif trade surplus of $16.7bn.

A breakdown of trade by main commodity and main trading partner for the years 1992-95 can be found in Appendix 2 of this report. This shows that China’s exports remain dominated by textiles and clothing. Clothing alone contributed 14.4% of 1995 export revenue. Electric machinery is another important category. Imports of machinery, electrical and non-electrical, were the largest categories in 1995. Chemicals imports rose by a wide margin, partly reflecting the need to import fertilisers. Hong Kong remained the most important export destination, followed by Japan and the USA, while Japan was the major source of imports.

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Quarterly trade patterns ($ bn) 1994 1995 % change Exports 1 Qtr 19.1 30.9 61.99 2 Qtr 29.3 38.8 32.42 3 Qtr 31.0 37.2 20.01 4 Qtr 41.6 41.8 0.38 Total 121.6 148.8 22.90 Imports 1 Qtr 20.4 23.9 16.96 2 Qtr 28.8 32.7 13.99 3 Qtr 28.9 34.0 17.76 4 Qtr 37.6 41.5 10.26 Total 115.6 132.1 14.24 Source: China’s Customs Statistics 1995 12.

Foreign-invested Foreign-invested enterprises’ (FIEs) contribution to total trade continues to rise: enterprises’ share of trade FIEs posted a 25% increase in trade in 1995. At $110bn their combined exports continues to rise ($63bn) and imports ($47bn) accounted for 39% of the national total. Their share of national exports was 32%, up from 29% in 1994, while their share of imports was a hefty 48%, up from 46% in 1994. Many of these imports finish up as exports after processing in Chinese factories; linkages with the rest of the economy are not strong and domestic value-added is low; estimates by the World Bank suggest that the import content of exports based on processing activity is as much as 80%. It will be interesting to see what the effect of the abolition of duty-free access to equipment and machinery for FIEs will be if and when it takes place this year.

SEZ exports are stagnating The trade stars of the 1980s, the Special Economic Zones (SEZs), continue to wane. Shenzhen, Shantou, Zhuhai, Xiamen and Hainan saw their total two- way trade flows growing at a meagre (for China) 6.5% in 1995. Whether they can sustain even this modest rate when their trade privileges are withdrawn as expected during 1996 is questionable.

Smugglers widen their The People’s Daily carried a report in January about a new twist to the activities range of smugglers in China. In addition to the traditional products handled by smugglers, such as electrical and electronic goods, alcoholic drinks, cigarettes and drugs, Chinese smugglers are now turning their attention to commodities in short supply in China. Our last report (4th quarter 1995, page 34) drew attention to the global consequences of China’s crackdown on smuggling of chemical products. Now the People’s Daily reports that customs officials have confiscated 604,000 tons of sugar (valued at $247m), 185,500 tons of vegetable oil ($117m) and 235,000 tons of textile raw materials ($121m). Together with the 108,000 tons of confiscated industrial chemicals ($69m), the four items accounted for 60% of the paper’s estimate for total smuggled goods in 1995.

Foreign investment is still Foreign direct investment continues to flow in. Preliminary figures indicate flowing in that foreign funds actually used in direct investment in 1995 amounted to $38bn, up 12% on 1994. This brings the total utilised since foreign direct investment was first allowed after the reforms began in 1978 up to $134bn.

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Contracted investment in 1995 was also up, by 11% at $90bn, although the continued trend towards larger investments is reflected in a 22% decline in the number of projects contracted. Average contracted investment per project rose from $1.77m in 1994 to $2.45m in 1995. Although the details are not yet available, a Ministry of Foreign Trade and Economic Cooperation (MOFTEC) spokesperson claims that much new investment has been successfully directed to the new priority areas in infrastructure, energy and transportation and towards the interior of China. MOFTEC is also confident that the removal of tax exemptions for capital goods imports in 1996 (see Economic policy) will not affect the inflow of foreign direct investment. Some of the growth of contracted investment has been attributed to enterprises accelerating their investment plans in anticipation of the removal of the exemptions. If so, a falling away in the rate of growth of new investment during 1996 can be expected.

The retail sector One area in which foreign direct investment in China is expected to grow is the retail sector. Opened to foreigners only in 1992, queues are forming to develop the immature consumer market. Initially large-scale foreign funded developments of shopping centres and department stores are limited to 24 ventures in 11 cities and SEZs. The first in was Yaohan of Japan, which has links with China International Trust and Investment Corporation (CITIC), and which formed a joint venture with Shanghai’s Number One Department Store to build a giant store in Shanghai’s Pudong area. These large developments need approval from the State Council, which carries with it various import privileges. In addition to Yaohan, Seibu and Isetan of Japan have also received the State Council’s blessing, along with a handful of companies from Hong Kong, Singapore and Malaysia.

In 1995 the government announced plans for two new experiments in foreign- funded retailing: a chain of discount supermarkets in Beijing and Shanghai; and a general retail chain in these two cities. This has attracted the attention of Western retail chains. Among those hoping to establish a position are Marks and Spencer of the UK, which has already opened a representative office in Shanghai, Wal-Mart of the USA and Makro of the Netherlands, with several other Japanese, French and German companies hoping for a piece of the action. The UK food retailers, Tesco and Sainsbury, are also sniffing the air. The giants of the retail trade will be following the smaller chains which have quickly established themselves (not needing State Council approval, only the approval of local governments, and therefore without the full range of import privileges) and their brand names across China, from ubiquitous fast food outlets such as Kentucky Fried Chicken, Pizza Hut and McDonalds, to clothes retailers such as Giordano of Hong Kong and Jeans West of Australia. Although retail sales by joint-venture enterprises have been growing rapidly, to reach almost 2% of total retail sales in 1994, the scope for new retailing ventures is still enormous. The day is not far off when Chinese high streets will look the same as those in Tunbridge Wells, Iowa City and Adelaide.

EIU Country Report 1st quarter 1996 © The Economist Intelligence Unit Limited 1996 China 35

China returns to the US China returned to the US fund market after a gap of two years. It raised $400m capital market in New York in January in a deal put together by Merrill Lynch and J P Morgan. 5 Of the total, $300m were raised by the sale of seven-year bonds with a 6 /8% coupon, issued at 99.68 to yield 6.684% to maturity. The other $100 Yankee bonds were 100-year non-callable with a coupon of 9%, and sold at 98.622 to yield 9.125. The yield on the seven-year issue was a 113 basis points spread over the seven-year US Treasury bond, and carries an investment rating of A3/BBB (A3 by Moody’s and BBB by Standard & Poor).The 100-year bond is 299 basis points over the yield on the 30-year Treasury bond. The re-entry to the Yankee market reflects an improvement in upgrading of China’s credit rating as an international borrower.

OECD countries compete Competition among OECD countries for a piece of the action in the Chinese to lend to China market reached a new pitch when Germany announced in February that it was lending China DM780m ($538m) to help finance the building of the Guang- zhou Metro Phase One, begun in 1993. This is being financed chiefly through direct local investment and foreign government loans. Germany hopes that the loan, on highly favourable terms with a 40-year repayment period, including an interest-free grace period of 15 years and a nominal interest charge of only 0.75% thereafter, will help tilt the balance in favour of German companies Siemens and AEG which are competing with Canadian group Bombardier for the contract. Meanwhile, in the UK the Export Credits Guarantee Department (ECGD) has announced that China is now its biggest customer. The ECGD underwrote £237.5m ($158m) of new business in China in 1994/95, mostly in the power and metals sectors.

EIU Country Report 1st quarter 1996 © The Economist Intelligence Unit Limited 1996 36 Mongolia

Political structure: Mongolia

Official name: Mongolia

Form of state: Republic

The executive: cabinet made up of members of the majority ruling party, the Mongolian People’s Revolutionary Party (MPRP)

Head of state: president, Punsalmaagiin Ochirbat

National legislature: the State Great Khural and the Little Khural were abolished under the constitution of February 1992 and replaced by a single-chamber parliament, the State Great Khural, which has 76 members, of whom 70 are members of the MPRP

Last national elections: June 28, 1992 (State Great Khural); June 6, 1993 (presidential)

Next national elections: June 1996 (legislative); June 1997 (presidential)

Main political organisations: Mongolian People’s Revolutionary Party (MPRP), Mongolian National Democratic Party (MNDP), Mongolian Social Democratic Party (MSDP)

Chief members of the cabinet Prime minister Puntsagiin Jasrai Deputy prime ministers Lamsürengiin Enebish Choijilsürengiin Pürevdorj

Key ministers administration Lamsürengiin Enebish culture Nyambaryn Enkhbayar defence Shagalyn Jadambaa demographic policy & labour Erdeniin Gombojav energy, geology & mining Byambyn Jigjid finance Erdeniin Byambajav food & agriculture Tseveenjavyn Ööld foreign affairs Tserenpiliin Gombosüren health Pagvajavyn Nyamdavaa infrastructure development Razdakyn Sandalkhan law Namsraijavyn Luvsanjav nature & the environment Jambyn Batjargal science & education Sanjbegziin Tömör-Ochir trade & industry Tsevegmidiin Tsogt

Chairman of the National Development Board Chultemiin Ulaan

EIU Country Report 1st quarter 1996 © The Economist Intelligence Unit Limited 1996 Mongolia 37

Economic structure: Mongolia

Latest available figures

Economic indicators 1991 1992 1993a 1994a 1995 GDP at 1993 prices Tg m 189.3 171.4 166.2 170.0 180.7 Real GDP % –9.5a –9.4 –3.0 2.3 6.1 Population m 2.18 2.21 2.25 2.28 2.32 Exports fob $ m 348.0 388.4 382.6 367.5 511.6 Imports fob $ m 360.9 418.3 379.0 258.4 388.7 Current account $ m –111.0 –31.3 4.2 n/a n/a Reserves excl gold $ m 76.00 16.35 59.74 37.00 83.70b Total external debt 10.3c 366.3d 391.3d n/a n/a Exchange rate (av) Tg:$ 25.86 40.00 n/a 413.00 441.00e

February 23, 1996 Tg466.7:$1 (free-market rate)

Origins of net material product 1991 % of total Components of net material product 1990 % of total Agriculture 20.7 Private consumption 73.0 Industry 36.0 Public consumption 25.9 Construction 5.5 Investment 29.0 Commerce 28.4 Exports of goods & services 28.5 Transport 7.2 Imports of goods & services –56.4 Total incl others 100.0 Total 100.0

Principal exports 1990 % of total Principal imports 1991 $ m Fuels, minerals & metals 49.7 Machinery & spares 172.4 Consumer goods 20.0 Petroleum products 134.0 Foodstuffs 6.6 Consumer goods 85.1 Agricultural goods 5.3

Main destinations of exports 1994 % of total Main origins of imports 1994 % of total Russia 28.0 Russia 69.0 China 19.5 China 7.8 Japan 13.2 Japan 4.5 Kazakhstan 12.8 Hong Kong 3.0 South Korea 6.0 Germany 3.0 Switzerland 5.2 USA 2.7 USA 4.0 South Korea 2.5 Italy 3.2 Switzerland 1.8 a Change in real PNI. b End-October. c Transferable Rb bn. d $ m. e First three quarters.

EIU Country Report 1st quarter 1996 © The Economist Intelligence Unit Limited 1996 38 Mongolia

Mongolia

Outlook

The MPRP will win the The refusal of the State Great Khural to sanction electoral reform, though next election— hardly unexpected, would seem to make the outcome of the parliamentary elections in June 1996 a foregone conclusion. The present ruling party, the Mongolian People’s Revolutionary Party (MPRP), is likely to go into its electoral campaign on a tide of enthusiasm following celebrations of its 75th anniversary year and the 22nd party congress in March.

It is possible that the MPRP will abandon its general secretary for the past four years, Budragchaagiin Dash-Yondon, on account of his participation in the 1994 agreement with the president, Punsalmaagiin Ochirbat, and the leaders of the two parliamentary opposition parties that led to the failed electoral reform bill (see The political scene). It is not clear who might succeed him, but any change is unlikely to lose votes for the “old” party.

The opposition parties will, at best, win only a few more seats than they presently hold. But they are likely to mount a good joint campaign, with social welfare being a prominent issue.

—its popularity boosted The popularity of the ruling party will be boosted by further evidence of eco- by economic success nomic success. GDP is officially estimated to have increased by 6.1% in 1995 (see Economic policy and the economy), and the banking sector has appeared considerably more stable. There has been an unexpected increase in gold production, and increased sales of gold abroad have given an added bonus. The government is already talking up the successes of its initially much-maligned Programme of Action, and ignoring those parts abandoned because they were unworkable.

The improved economic performance of 1995 has also bolstered confidence among members of the Mongolian aid donor group. This held its fifth meeting in Tokyo in February, and gave aid pledges worth $212m, slightly up on the $210m pledged in 1995. As inward foreign investment increases and existing projects mature, particularly those aimed at infrastructure development and the development of small and medium-sized enterprises, the country could experience growth in some areas of the economy that are still languishing, notably the construction industry. But there will be continuing problems in other areas, notably agriculture.

Review

The political scene

Parliament passes a range During the session of the State Great Khural (parliament) which opened on of legislation— October 10, 1995, several new laws and amendments were added to the statute book. A communications law was passed on November 16, the 1996 budget (see Economic policy and the economy) on November 28, a law on emergen- cies on December 14 and a package of social security legislation, including a law on pensions for the elderly and the handicapped and an energy law, at the end of the year. In addition the Khural approved the country’s participation in the Geneva Convention.

—but refuses to amend the On December 14 the president, Punsalmaagiin Ochirbat, urged members of the election law State Great Khural to adopt a bill of amendments to the election law, which would allow 52 of the seats in the Khural to be filled by majority vote and 24 by proportional representation. The basis for these amendments had been agreed in 1994 between Mr Ochirbat and leaders of the three parliamentary parties (3rd quarter 1994, page 39), following public demonstrations for power- sharing with the opposition (2nd quarter 1994, page 38). However, the hopes of electoral reform were dashed early in January when the State Great Khural, which is dominated by the Mongolian People’s Revolutionary Party (MPRP), refused to endorse the amendments. Since the MPRP can be sure of winning a substantial parliamentary majority under the existing system, this outcome was hardly surprising.

The leader of the MPRP, Budragchaagiin Dash-Yondon, said that the result was an indication of the democratic process in Mongolia. His position as party leader may now be in jeopardy, however, as he was a signatory to the original 1994 agreement. Mr Ochirbat and opposition MPs view the rejection of the reforms as a setback in the development of a multiparty system.

The ruling party plans a The MPRP will celebrate its 75th anniversary on March 1, 1996. (Although the celebration party was founded in 1920, it is customary to mark the formal establishment from its first congress in March 1921.) The MPRP will undoubtedly use the celebrations and its 22nd congress, also to be held in March, to woo the electorate in advance of the June elections. A working group has been formed under the prime minister, Puntsagiin Jasrai, to draw up a manifesto.

MNDP leadership is still The Mongolian Social Democratic Party (MSDP) had already published its elec- uncertain tion manifesto in October 1995 (4th quarter 1995, page 40). The Mongolian National Democratic Party is also now in pre-election mode. It met on January 6 to discuss the adoption of candidates for the parliamentary election. In order to field as many candidates as possible, the leadership approved the adoption of supporters as well as party members as candidates.

Who will lead the MNDP through its election campaign is not yet clear. The first of a two-stage election for the MNDP leadership has put Tsakhiagiin Elbegdorj in interim control, in place of Davaadorjiin Ganbold. The final vote will be

taken in March when Mr Elbegdorj will stand against the winner of the aimag and city district elections. Mr Elbegdorj is also the leader of the Mongolian Democratic Union, which was at the forefront of demonstrations for democracy in 1990 and now provides a substantial body of support for the MNDP. He was also a member of the State Great Khural from 1992 until he resigned in 1994 (3rd quarter 1994, page 39).

An opposition alliance is The MSDP leader, Radnaasümbereliin Gonchigdorj, suggested in January that possible his party would probably reach an agreement with its fellow parliamentary opposition party, the MNDP, for an election alliance. Opinion polls in Ulaan- baatar appear to indicate that of these two parties the MNDP is likely to attract more votes but that Mr Gonchigdorj remains the most popular of all national politicians. All three parliamentary parties expect that the remaining nine registered parties, which are mostly very small, are unlikely to win seats in the June election, although one or two have published manifestos.

Far from the number of parties decreasing as was predicted after the 1992 elections, they continue to increase. In January a new conservative party was declared by O Davaanyam, the leader of the Mongolian Movement for the Sacred Frontiers and Freedom. The new party is provisionally called the Mongolian Khans and Intelligentsia Party.

The MPRP expects its A poll of 715 individuals living in Ulaanbaatar was sponsored by the Konrad majority to decline Adenauer Foundation of Germany and carried out in September 1995. The results gave rise to expectations that 43% of the votes could go to the MNDP and MSDP in June as opposed to 30.8% in the 1992 elections. How far such a poll, which takes no account of the rural population among whom support of the MPRP is believed to be particularly strong, can indicate the likely outcome of the election, is questionable. However, the parliamentary opposition parties express confidence in winning a higher proportion of seats than they presently hold, and remarks made by Dash-Yondon of the MPRP suggest that the ruling party also expects its majority to be slightly smaller after the election.

Education gets some On December 15 Mr Ochirbat, Mr Jasrai and the minister of education, San- attention jbegziin Tömörochir, launched a Year of Education. This is an effort to move away from the strike and other problems which plagued the education system in 1995 (3rd quarter 1995, pages 45-46) to make a concerted effort to meet the developmental targets of the 1995 education act. Mr Tömörochir wants to draw more children into education, including the estimated 55,747 dropouts and 12,677 children who are believed not to have attended school at all.

Pre-school education is also considered important since nursery places declined by one-third after 1990. In the long term it is intended to reduce the age for starting school from eight to seven. Since the government is not able to finance this change at present, the minister said he hoped an unofficial pre- school programme of education from 1996 would provide a starting point. One school in Ulaanbaatar has already begun a pilot scheme and issued early- learning materials for parents to use. The packs include instructions for educational verses and songs, mathematical games and advice.

The ministry also aims to improve the management of institutions of education and the teaching skills of 79% of all teachers. Professional training is particularly needed in the secondary education sector in the aimags, where a high proportion of teachers are untrained.

Spending on education in the 1996 budget is to be increased to $57.1m (Tg27.4bn). However, this will not cover all the running costs and pay for the reforms. Some of the shortfall will be provided by external aid agencies such as Danida, and various US sources. Privatisation of some services within education is also being considered. Mr Gonchigdorj, leader of the MSDP, who has a keen interest in education, recently suggested that the problems of science and education were not so much the result of inadequate finance, being due more to unsuitable policies.

The role of the NGOs Representatives of 600 non-governmental organisations (NGOs) gathered in Ulaanbaatar in November to discuss a draft of a law on the rights and status of NGOs. Debate on this issue in 1995 showed that the present government felt threatened by the potential power of such organisations. It has sought to limit their influence through economic means, by denying them the right to engage in any kind of business. At the November seminar external consultants at- tempted to offer an alternative view, arguing that many of Mongolia’s present problems could be solved by NGOs and, furthermore, 50,000 jobs could be created if the NGOs were allowed to exploit business opportunities. The delegates gave their approval to the draft law.

Russia agrees not to The Russian deputy prime minister, O D Davydov, who is also the minister of address the debt question trade, headed a high-level delegation to Ulaanbaatar from November 27 to November 30. He had meetings with Mr Ochirbat, Mr Jasrai and other senior officials and visited the copper enriching plant at Erdenet. On November 29 he signed an agreement on the protection and promotion of mutual investments, and a protocol on trade and economic cooperation in 1996. The latter includes arrangements for the exchange of petroleum products for copper concentrates. Mr Davydov handed over a message from the Russian president, Boris Yeltsin, who expressed the view that Mongolia continues to play an important role in Russia’s foreign policy and that he, Mr Yeltsin, hoped to see closer cooperation and trade for the mutual benefit of both countries.

As usual, when Mongolian and Russian government officials meet, there was an airing of the question of Mongolia’s debt to Russia but no progress towards finding a solution. In the recent past harsh words on the issue were said on both sides. Russia appears to be taking a rather more emollient line than in the past. Mr Davydov said that Russia could not insist on repayment and that any settlement should be made taking into account Mongolia’s present economic situation. Similar assurances were given by the Russian deputy foreign trade minister, M A Sarafanov, when he visited Ulaanbaatar in October (4th quarter 1995, page 41).

New agreements are Agreements for the mutual protection of investments were signed with Poland signed in eastern Europe and Romania in early November during a working visit to eastern Europe by the deputy minister of external relations, Ch Baatar. While he was in Europe

Mr Baatar also visited Slovakia and the Czech Republic. The minister of trade and industry, Tsevegmidiin Tsogt, signed an intergovernmental trade agreement in the Czech Republic in December.

Overtures to the USA The deputy prime minister, Choiljilsürengiin Pürevdorj, made an official visit to the USA in November. He had talks with State Department officials in Washington and also with the World Bank and the IMF. A major purpose of the visit was to encourage further US investment from the private sector, particularly in mining. During his stay Mr Pürevdorj went to Denver, Colorado, where he met members of the US-Mongolia Business Council.

A further delegation headed by the deputy prime minister, L Enebish, and including several governors of aimags spent a month in the USA, returning to Mongolia at the end of December. During his absence Mr Enebish was criticised by MPs for taking two long trips abroad in one year when, it was argued, he ought to have been attending to state business at home. However, Mr Enebish did not return empty-handed. In addition to attending meetings with senior US officials in New York and Washington, the delegation travelled widely around the country and negotiated a number of agreements for direct relations between towns and regions in the two countries. These agreements, which have been submitted to the government for consideration, include links between Mongolia and the state of Wyoming; and between individual aimags and US cities and counties. If approved the links will facilitate a wide range of economic, educational, sporting and other exchanges. Mr Enebish also returned with the expectation of future aid for the power sector from the US aid agency, USAID.

The foreign minister goes The minister for foreign affairs, Tserenpiliin Gombosüren, paid an official visit to Japan to Japan at the end of November. He had meetings with his Japanese counterpart, Yohei Kono (a victim of a subsequent cabinet reshuffle), the then prime minister, T Murayama, and other senior government officials and members of parliament. Relations with Japan are an important aspect of Mongolia’s foreign policy, both as a counterbalance to relations with Russia and China in north- east Asia, and because Japan is a leading provider of external aid to Mongolia. During the visit Mr Gombosüren discussed his country’s current progress in development, and the forthcoming meeting of the Mongolian donor group in Tokyo (see Aid and investment). Both sides agreed that it would be appropriate for Japan to continue its present level of support for Mongolia.

Progress for the Tümen At the beginning of December an agreement was signed at the UN Development River project Programme headquarters in New York by the countries to participate in the proposed Tümen River Development Project: Mongolia, North Korea, South Korea, Japan, Russia and China. The deputy chairman of the National Develop- ment Board, L Demberel, signed on behalf of Mongolia. Under the agreement an intergovernmental development commission will be set up, and a second commission made up of Russia, China and North Korea will address matters relating to waterways. A number of recommendations on cooperation for environmental protection were made.

Mongolia has been involved in the Tümen project since it was initiated in 1990 and Mongolian experts have taken part in recent surveys in connection with

infrastructure development. Agreement has already been reached to build a 480-km rail link between the town of Choibalsan in the east of Mongolia and the nearest station in China, which will give Mongolia access to the sea.

Economic policy and the economy

Encouraging economic Both the Mongolian government and the IMF were considerably heartened by estimates for 1995 the official 1995 macroeconomic estimates. GDP rose by 6.1% (after 2.3% in 1994), industrial production 20.7% by volume, foreign trade reached a value of $900.3m, and Mongolia had over $50m in hard currency reserves at end year. In the first half of 1995, after several months of relative stability, inflation and the exchange rate had been rather unsteady. However, in the last quarter, the exchange rate stabilised and it stood at Tg466.7:$1 on February 23, 1996.

As a result of an agreement by the commercial banks with the central bank in September, in the closing months of 1995 the credit ceiling and reserve require- ments were strictly observed. There was an unexpected growth in hard currency reserves, bringing them above the level agreed with the IMF for 1995. This was largely due to outstanding performance in the gold industry (see Mining and energy) and the sale of refined gold abroad.

The 1996 budget is In 1995 government revenue amounted to $284m, and expenditure to $306m. approved Targets for income and business tax were met. Sales tax was 4.7% below target and special levies 5.7% below. On November 28 the State Great Khural passed the budget for 1996. Revenue was projected at $243m and expenditure at $274m, a reduction on 1995 levels. Around 60% of the budgetary income will be provided through income, customs and sales tax and the remainder by special taxes. The government plans to cover the $30.8m deficit from its own reserves.

There are 20% increases in spending on both defence and salaries. In addition, education is allocated $57.1m, health $11.5m and social security $61.5m. There will be investment in energy, agriculture and infrastructure.

High-denomination In January the State Bank put Tg10,000 denomination notes into circulation. banknotes go into This innovation was greeted with some enthusiasm by the population, since it circulation reduced the need to carry large amounts of paper money. At the end of 1995 79.2% of notes in circulation were in denominations of Tg500, Tg1,000 and Tg5,000.

The IMF defends its According the State Statistical Bureau, the average monthly rate of inflation fell approach from 4.3% in 1994 to 3.6% in 1995. The head of the IMF’s Asia-Pacific division, Kevin Brown, visiting Mongolia in December 1995, expressed the hope that inflation would fall even further in 1996 with consequent improvements in the standard of living. Nevertheless, some Mongolian economists remain critical of the IMF’s policies for price liberalisation, claiming that they are inflationary and not suited to Mongolian conditions. They favour a protectionist policy for the domestic manufacturing industry. Some would like the current ban on the export of raw cashmere, which is set to remain in force until August 1996, extended to cover skins and leather for which Chinese buyers are currently

offering high prices. They believe that, by banning raw agricultural exports and paying the producers prices below those offered by the external market, Mon- golia’s tanneries and leather factories would be stimulated into producing valuable finished goods for export. For its part, the IMF argues that factories which cannot pay the market price for raw materials should not be in the market at all. In any case, the IMF points out, whereas the quality of Mongolian cashmere is high, that of Mongolian skins and leather is low, and they could not therefore compete so easily in the market for finished goods.

Energy prices will be The price of energy is still controlled by the government, but the situation will liberalised— be changed under the new energy law which came into force in 1996. Liberali- sation of energy prices will be phased in so that 20% of electricity charges and 30% of heating charges will be liberalised by December 15, 1996. Tariffs will be completely free by 1998. The industry ran up a $31.3m loss in 1995, which was partly offset by $15.6m from the state budget for importing electricity, and by aid.

—but petrol price rises are The 80% state-owned petroleum importer Neftimport unilaterally raised its countermanded prices by 3% early in November 1995. Neftimport argued that the increase was necessary to offset a projected $8.3m loss for the year. The announcement led to a number of other retail price increases including food and clothing. The government immediately ordered Neftimport to withdraw its decision, which had apparently been taken without consultation. However, increases in the prices of petroleum products are likely in 1996.

Private companies As of April 1, 1995, 35.8% of those employed in economic enterprises worked diversify in state-owned enterprises, 42.5% in private enterprises and 21.7% in joint enterprises. Although the private sector had experienced difficulties in starting up operations in the past 2-3 years, there are now signs that some companies are becoming quite successful. Those companies which are able to diversify their activities are managing to overcome the difficulties of operating in a small domestic market. External business specialists have noted that a combination of gold mining, cashmere processing, tourism and trading is appropriate both for Mongolia’s nomadic rural economy, and for exploiting opportunities in the external market. Diversification of this kind, it is suggested, could have a positive effect on rural economic development, especially in areas not touched by the ongoing development in infrastructure that is heavily supported by the unilateral and multilateral aid agencies. A number of companies have joined together in the past year to form groups of companies in order to maximise their opportunities. On the other hand, there are fewer of the suitcase traders who were plentiful in 1992 and 1993.

Industry

Rapid growth in Industrial output in 1995 increased 17% in volume, according to the chairman industrial output of the National Development Board, Chültemiin Ulaan. In terms of value the increase was 20.7%. Goods worth $464m at 1995 prices were produced, which was $79.6m more than in 1994. Some growth was registered in all branches except energy, fuel, glass, ceramics, skins and leather, and footwear. Some new manufactures appeared in the statistics for the first time in 1995, for instance televisions, disposable syringes and needles for disposable syringes. They indicate attempts at import substitution through joint ventures.

Industrial production

1992 1993 1994 1995 Electricity (kwh) 2,357.8 2,131.7 2,122.7 2,052.8 Heat (’000 G cal) 7,609.2 6,264.7 6,745.5 6,816.8 Coal (’000 tons) 6,247.3 5,608.5 5,012.4 4,871.2 Copper (’000 tons) 300.2 334.3 343.4 346.3 Molybdenum (tons) 3,500.0 4,367.0 4,396.0 3,906.0 Gold (kg) n/a 1117.1 1,975.0 4,504.0 Fluorspar (’000 tons) 622.0 536.8 383.2 526.9 Cement (’000 tons) 132.5 82.3 85.8 108.8 Reinforced concrete (’000 cu metres) 42.0 17.1 14.8 13.7 Doors, window frames (’000 cu metres) 20.6 9.6 8.1 7.4 Red bricks (m) 39.1 23.7 27.3 17.7 Televisions n/a n/a 27.0 1,367.0 Carpets (’000 sq metres) 1,037.0 1,000.1 681.5 595.7 Combed cashmere (tons) 97.6 121.5 232.1 420.8 Blankets, camel (’000 sq metres) 90.6 48.7 24.1 19.4 Scoured wool (tons) 7,057.3 3,466.4 2,062.5 1,159.5 Wool cloth (’000 sq metres) 705.8 289.9 76.7 71.1 Felt (’000 sq metres) 494.8 241.4 107.7 76.5 Footwear, leather (’000 pairs) 2,244.7 1,030.8 406.6 245.5 Meat excl pork (’000 tons) 24.7 17.2 11.3 11.3 Pork (tons) 450.9 44.1 21.3 35.7 Sausage (tons) 3,360.0 1,245.3 1,065.3 639.2 Flour (’000 tons) 181.9 138.8 127.0 231.1 Bread (tons) 60,860.2 46,007.3 33,908.8 36,773.3 Milk, milk products (m litres) 27.7 12.9 4.9 5.9 Wines & spirits (’000 litres) 6,686.6 5,250.8 3,626.0 3,663.2 Disposable syringes (’000) n/a n/a n/a 6,645.2 Needles for disposable syringes (’000) n/a n/a n/a 3,210.8 Source: State Statistical Office.

The changing relationship Production in several industrial branches dependent on the livestock economy between agriculture and for raw materials is still falling. For instance, production of scoured wool in industry 1995 was only 56.2% of that in 1994, footwear 60.4% and sausage products 60%. Taking into account the outstanding results in the livestock sector in 1995 (see Agriculture), and the fact that the cashmere industry’s output rose by 81.3% in 1995, it becomes apparent that rural enterprises are either unwilling

or unable to deliver to the market. The dramatic fall in production of some manufactured goods of particular importance to the rural consumer is an indication of the way that much of the rural economy has reverted to a subsistence economy, producing its own finished goods as needed, for example, felt, felt boots and fur-lined traditional garments.

A pork-packing plant While the large-capacity production lines of the successors to the old state opens in Erdenet industries are languishing, new small and medium-sized enterprises (SMEs) and, particularly, joint ventures equipped with more modern and appropriate technology continue to start up. One recent example is a meat-processing factory in Erdenet, which is a joint venture with a Russian partner. The new company employs 60 workers and produces and packs its own pork. The factory was constructed in record time by Sovinvest, a Russian company, and was fitted with Yugoslav machinery, while the pig farm was constructed by the Mongolians. Pig farmers in Bulgan and Khövsgöl aimags are also under contract to supply the plant.

Construction

Strong growth in 1995 The commissioning of a number of public, commercial and domestic buildings in 1995, notably the Trade and Development Bank building and the 300-room Chingis Khan Hotel, as well as some roads and bridges, have boosted output in the building industry. Altogether construction and repair work worth $39m was completed in 1995, which was $8.1m higher than in 1994. Foreign investment and ongoing external aid projects supported by the unilateral and multilateral agencies are important factors. However, the 1995 statistics show that the building materials sector is responding sluggishly, with only slow growth in output of concrete, bricks, floorboards, doors, window frames and window glass.

New factories are A number of other industrial structures outside Ulaanbaatar were commis- constructed in the regions sioned in 1995. They include a factory to process intestines and a felt factory in Gov’-Altai, and a brickworks in Dornogov’ aimag. It is significant that the factories mentioned are all located in border aimags having access to external markets.

Mining and energy

Minerals sector is the key Output of Mongolia’s most valuable export commodity, copper, was sustained to future development in 1995 and the four-year decline in coal production was almost arrested. However, while levels of output of fluorspar have been maintained, the industry is still having difficulty in exporting, as a result of the depression in the Russian market, a traditional destination of Mongolian fluorspar.

The Mongolian government and international experts alike are convinced that Mongolia’s mineral assets will be crucial to its future development. Foreign companies, particularly Australian and US, are showing increasing interest in renovating old mines and opening up new ones. The Mongolian Business Development Agency (MBDA) (4th quarter 1995, page 46) has identified funds

amounting to $1m which the domestic industry might draw on to support joint-venture partnerships in this sector.

Gold production exceeds The most remarkable results in the minerals industry in 1995 were in the gold its target mining sector. Over the past three years there has been a dramatic increase in the number of companies mining for gold, mainly in placer mines, and production more than doubled in 1995 alone. Over half of the gold produced came from private mines and exceeded the government’s Gold Plan target by 400 kg. Until 1993 the government was anxious to retain a tight monopoly on gold production but the decision to allow the private sector greater access is result- ing in considerable financial benefit to the state (see Economic policy and the economy). New mines are expected to open in 1996 when a total output of 6,000 kg is predicted. The sector is becoming much more interesting to foreign investors, and specialists from the UK and the Netherlands conducted a work- shop on placer gold in Ulaanbaatar on November 23-24. Recent surveys indicate that Mongolia is rich in both placer and hard-rock deposits of gold and that the present gold boom is not likely to be short-lived. While the placer deposits give rapid returns and could be more productive with the use of appropriate technology, some hard-rock deposits, if developed, could be even more lucrative and producing on a year-round basis within 3-5 years.

Licensed gold production

Total Private Total Companies in Private mines production production licences operation operating (kg) (kg) 1990 3 3 0 810.8 0 1991 8 6 0 722.4 0 1992 12 6 0 775.5 75.24 1993 33 8 0 1,117.8 181.01 1994 54 47 44 1,752.0 682.22 1995 60 52 52 3,800.0 2,000.00 Source: Press reports.

Mongolia’s top eight gold producers, 1995 (kg) Mongolrostsevtmetal 1,432.0 Erel 502.8 Khailaast 357.5 Gazar Holding 296.3 Gachuurt 210 Jargalant Mining 155.5 Erdes 196 Shoroon Ord Scientific Production 123.3 Source: Press reports.

Electricity supplies are The national press has reported occasional cuts in power by stations serving the sustained central grid in the winter months of 1995-96. Most of these have been due to machinery failure and services have been restored rapidly so that, in general, the supply of electricity and heat from November 1995 has remained relatively steady. From time to time there have been reports that fuel stocks at power

stations are getting low, but whereas in the winter of 1992-93 such reports were issued when there were 2-3 days of stocks, the warnings now go out when there is still a week or more of coal supplies available. Renovation work on the power stations serving the central grid is going ahead with external aid, but the general public is still nervous about the prospect of cuts in service because of the considerable hardships experienced in the winter of 1992-93.

Agriculture

Livestock numbers reach The 1995 census of livestock revealed that the national herd was larger than at record levels— any time since the practice of taking a full livestock census annually com- menced in 1961. Officials attributed this success to a fall in the death rate, improvements in the survival rate of new-born animals and the consequences of privatisation. The horse and cattle herds have grown, there has been a significant increase in the goat population (undoubtedly stimulated by developments in the cashmere industry), and the decline in the camel population, which has been a source of considerable worry in recent years (3rd quarter 1994, page 45), has been arrested. A negligible fall in the sheep population was registered in 1995.

While improvements in the survival rate and the strengthening of the breeding stock are positive developments, the 1995 figures do, however, provide further evidence for the existence of a subsistence economy in the countryside and the fact that neither the infrastructure nor the incentives for the herdsmen to deliver to the home market are yet properly in place (see Industry).

Livestock (no)

1993 1994 1995 Camels 367,673 366,100 367,500 Horses 2,190,325 2,408,400 2,648,300 Cattle 2,730,456 3,003,700 3,316,400 Sheep 13,779,193 13,779,400 13,718,100 Goats 6,107,041 7,239,100 8,520,300 Total 25,174,688 26,796,700 28,570.6 Source: State Statistical Office.

—but crop farming Despite newspaper reports in September of a bumper harvest (4th quarter 1995, remains depressed page 50), the full-year figures for arable farming in 1995 are not very good. Since the area sown has steadily fallen over the past four years, it is hardly surprising that the harvest figures have also declined. The average yield per hectare also continues to fall for all but the potato crop, which is as worrying.

Data on cultivated fruit growing appeared in the annual statistics for the first time at the end of 1995. Some 299.3 tons were produced from 613 ha, an increase of 40.8% and 52.8% respectively on the 1994 crop and acreage. This result, and the increase in vegetable growing, may be indications of developments in market gardening in the small private sector. However, in general, it is clear that the successors to the old state farms still have many problems to

overcome. These include the inability to acquire new technology and fertiliser and poor management of the harvest.

Crop harvests, 1995

Crop harvest Area sown (tons) (ha) Grain 356,500 261,200 Potatoes 6,200 51,100 Vegetables 3,200 27,100 Fodder 6,000 743,900 Source: State Statistical Office.

The Japanese will In November the Japanese government announced its intention provide ¥55m modernise the to fund the technological renovation of the Kharkhorin farm which is in one Kharkhorin farm of Mongolia’s chief grain-growing regions of Övörkhangai aimag. The farm will get a new grain elevator and silo, a laboratory and modern equipment for cleaning and drying the grain.

Transport and communications

City travellers get more By the end of 1995 over 30% of the renovation of the Ulaanbaatar public new buses— transport service had been completed, and there are now 312 vehicles operating. In addition there are over 50 private buses in the capital as well as more than 100 taxis. At the end of 1995 many new vehicles were put into service. The First Bus Company now has 30 Japanese Nissan diesel buses each costing $160,000, funded by a Japanese non-returnable loan. They can carry 26 seated passengers and 63 standing passengers. The Second Bus Company, which oper- ates in the western part of the city, received 44 new vehicles from the Czech Republic, purchased with a long-term loan from the World Bank. In addition, eight new minibuses, each with a seating capacity of 22, have been put into service by Sogookhuu, a Mongol-Hong Kong joint venture. The minibuses were built in China under licence from the USA. A journey by minibus costs Tg70 and the buses stop on request.

—but flights to Beijing are In January 1996 China withdrew permission for Mongolia’s airline to operate reduced— its Wednesday flight to Beijing. The reasons given were that the intergovernmental agreement allowed for only two flights per week by either national company and, second, that the reduction was necessitated by problems associated with the reconstruction of Beijing’s Shoudu airport. The southern route has been especially important for Mongolia in the winter months since 1994, when Aeroflot began withdrawing its service between Moscow and Ulaan- baatar during the October to April period. Mongolia is making efforts to have the Wednesday flight to Beijing reinstated.

—and a train is derailed An express train belonging to the Ulaanbaatar Railway was derailed near Barabinsk in Russia in December. The accident was said to be due to severe frost. The train was carrying over 400 passengers and travelling at 70-80 kph. No serious injuries were sustained.

Foreign trade and payments

Export growth is boosted According to the full-year 1995 estimates, goods to the value of $511.6m were by minerals exported and $388.7m imported, making a total turnover of $900.3m. The value of exports increased by 39.2%; the value of imports by 50.4%. Mineral products, chiefly copper concentrate, accounted for over half of exports, being worth $261.5m.

Three-quarters of molybdenum exports went to the USA, smelted quartz worth $17.1m went to Russia and 3.9 tons of gold were exported to Japan. In spite of the depression in the food and leather industries some meat was exported, mainly to Russia, and animal casings went to the Netherlands and Germany. Raw cashmere exports amounted to 78.8 tons of which 43.1 tons went to China and 35.7 tons to UK in the first 11 months of 1995 while 424 tons of cashmere products were exported in 1995.

There was a considerable increase in the volume and range of imports in 1995 as compared with 1994 including fuel, ores, machinery spares, vehicles, chemicals, paper products and food goods. Over 42% of imports were paid for in hard currency.

Payment methods for imports, 1995

% of imports Hard currency 42.3 Barter 9.0 Credit 5.6 Aid 15.5 As joint-venture investment imports 19.5 Special orders 3.3 Other 3.9 Source: Press reports.

Business with China may The Mongolian government is considering a proposal made by the Chinese soon be settled in government in December 1995. This would permit the exchange of goods renminbi between the two countries to be conducted in renminbi (China’s currency). It is believed that this would lead to an expansion of trade and economic cooperation and would be especially beneficial for settlements of non-trade business such as tourism, communications, mail and transport. However, some Mon- golians fear that such an agreement would damage the dollar exchange rate.

The customs service is At the end of 1995 automated record-keeping was introduced into the customs improved service under a UN funded project. On December 15 new regulations concern- ing the licensing of warehouses for customs purposes came into force. To date, 20 licences have been issued in Ulaanbaatar and some border aimags including Bayan-Ölgii, Ömnögov’, Gov’-Altai, Selenge, Darkhan-Uul and Orkhon. In recent years poor warehousing facilities have had a detrimental effect on the quality of trade goods.

Aid and investment

New commitments will In 1995 Mongolia received approximately $210m in aid and credits, 80% of soon be made which was in the form of project loans. The main areas for deployment of aid continue to be infrastructure, poverty alleviation and management reform. Some medium-term projects will come to an end in 1996. On February 20 the Mongolian donor group held its fifth meeting in Tokyo to review progress since the last meeting in November 1994 (1st quarter 1995, page 49), and pledged $212m for 1996. This total included ¥6.7bn ($63m) from Japan, including a low-interest loan of ¥5.8bn for the purchase of coal-mining equipment, and a ¥850m grant to buy buses for Ulaanbaatar.

Plans for sustainable The prime minister, Puntsagiin Jasrai, and the UN Development Programme development are laid (UNDP) representative in Mongolia, Jan Swietering, signed an agreement on December 13 to draw up a programme of sustainable development called the Mongolia Action Programme for the 21st century (MAP-21). The programme, which will take shape over the next two years, will include three pilot projects in selected geographical areas, two in the countryside and one in the vicinity of Ulaanbaatar. They are intended to demonstrate the benefits of sustainability for the long-term improvement of living standards. The experience gained in the pilot projects will contribute to planning future use of natural resources. Like the current Poverty Alleviation Programme (3rd quarter 1994, page 49) and the forthcoming National Plan of Action to Combat Desertification (PAP), projects under MAP-21 will be decentralised and coordinated by 21 aimag consultants working with local communities and non-governmental organisations (NGOs).

Germans seek business Following the visit of the president, Punsalmaagiin Ochirbat, to Germany in opportunities in September 1995, the newly established Mongol-German Business Council met Mongolia— in Ulaanbaatar on November 23. The German side included representatives of Berliner Bank, Siemens Nixdorf Information Systems, which has an office in Ulaanbaatar, and Philipp Holzman Corporation, which is working on the refur- bishment of Ulaanbaatar’s Buyant Ukhaa airport.

—and help reindeer Foreign embassies are active in channelling humanitarian aid to small and herdsmen vulnerable groups in Mongolia. The German ambassador, Cornel Metternich, delivered clothing, tools, utensils and reindeer vaccine worth $40,000 to the Turkic-speaking Tsaatan minority in Khvösgöl aimag in January 1996. About 100 Tsaatan families, who herd reindeer, are the recipients of the aid under a project supported by GTZ, the German Technical and Economic Cooperation agency.

The USA aids disaster The US embassy has donated goods worth Tg10.5m to two Mongolian Red victims Cross projects, Microproject Snowfall and the Dornod Project, which support the victims of last September’s snowstorms in Sükhbaatar aimag on Mongolia’s south-eastern border and the steppe fires of Dornod aimag in the east.

Australia plans to increase In November 1995 Australia’s foreign trade commissioner, Alan Reid, visited aid Mongolia. In the past three years Australia has provided $240,000 of aid to

Mongolia and 20 Mongolian students are pursuing postgraduate studies in Australia. Australia plans to increase its aid in 1996 when $100,000 will be provided for small projects and retraining. Mr Reid also said during his visit that he would arrange for Mongolian businessmen to meet Australian counter- parts at a business seminar in Beijing in 1996. The Mongolian government has been anxious to attract Australian investment in the mining sector since 1993 (3rd quarter 1993, page 39) and during his visit to Ulaanbaatar Mr Reid had talks with the minister of energy and mining, Byambyn Jigjid, about the possi- bility of investment by the Australian CRA conglomerate.

Flour aid is rumoured to People are suspicious about the quality of imported flour, particularly flour that be of low quality arrives as food aid. In December 1995 the Mongolian Consumers’ Association, which keeps a close watch on the quality of imported goods, received complaints about flour donated by the Hungarian government. Much food aid is purchased by the donor in China and recent consignments have included maize flour. A Consumers’ Association spokesman has had to explain in the press that maize flour dries out more quickly than wheat flour but it is not poisonous, as had been widely rumoured.

Appendix 1

Quarterly indicators of economic activity in China and Mongolia

1993 1994 1995 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr CHINA Production Monthly av Industrial 1990=100 114.5a n/a n/a n/a n/a n/a n/a n/a n/a n/a Agricultural “ 103.7a n/a n/a n/a n/a n/a n/a n/a n/a n/a Prices Consumer prices: change year on year % 13.9 16.1 17.2 22.2 21.9 25.8 26.9 22.6 n/a n/a Moneyb End-Qtr M1, seasonally adj: Rmbbn 1,284.6 1,372.3 1,589.2 n/a n/a n/a n/a n/a n/a n/a change year on year % 20.7 21.6 27.1 n/a n/a n/a n/a n/a n/a n/a Foreign trade Qtrly totals Exports fob $ m 24,091 30,438 19,102 29,335 31,012 41,607 30,944 38,845 37,216 41,767 Imports cif “ 27,067 36,114 20,404 28,709 28,872 37,631 23,864 32,726 33,998 41,491 Exchange holdings End-Qtr Goldc $ m 3,573 3,563 3,663 3,634 3,677 3,665 3,609 3,695 3,661 3,661d Foreign exchangee “ 19,620 21,199 28,618 31,863 39,969 51,620 57,960 62,659 69,800 74,496d Exchange rate Official rate Rmb:$ 5.787 5.800 8.708 8.653 8.530 8.446 8.427 8.301 8.319 8.317f MONGOLIA Industrial production Monthly av General 1990=100 58.6 65.9 64.9 66.1 61.6 68.5 n/a n/a n/a n/a Prices Consumer prices Jan 1991=100 1,531 1,779 2,131 2,288 2,649 2,985 n/a n/a n/a n/a change year on year % 297 202 138 99 73 68 n/a n/a n/a n/a Money End-Qtr M1 Tg m 21,415 24,033 34,326 42,428 48,906 43,422 44,380 49,439 53,238g n/a change year on year % 60 116 167 161 128 81 30 17 n/a n/a Foreign trade Qtrly totals Exports fob $ m 80.8h 117.6 62.2 68.4 94.7 98.9 n/a n/a n/a n/a Imports cif “ 70.8 137.8 25.4 48.9 66.2 82.2 n/a n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 40.93 59.70 67.68 86.47 90.43 78.49 72.50 63.60 94.40 83.40f Exchange rate Market rate Tg:$ 389.00 396.51 409.32 411.58 411.34 414.09 432.75 449.10 462.86 466.67f a Average for 1991. b Consolidated accounts of the People’s Bank of China, domestic branches of the Bank of China and the Bank of Agriculture. c End-quarter holdings at quarter’s average of London daily price less 25%. d End-November. e Excluding foreign exchange holdings of the Bank of China. f End-October. g End-July. h Estimate.

Appendix 2

Foreign trade of China ($ m) Total Japan USA Taiwan South Korea Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports cif 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 Food, beverages & tobacco 3,196 6,550 187 215 483 1,833 45 40 39 64 of which: cereals & preparations 1,332 3,677 6 11 286 1,494 5 13 1 4 Metalliferous ores & scrap 1,345 1,977 5 4 3 20 1 1 1 2 Mineral fuels 4,037 5,133 117 193 164 104 20 26 231 398 Chemicals 13,028 18,285 2,263 3,052 2,057 2,910 2,449 2,961 1,462 2,444 of which: organic 2,152 3,287 574 780 309 431 88 227 388 733 dyeing & tanning materials 704 793 119 136 49 57 164 168 75 108 fertilisers 1,938 3,742 3 3 817 1,311 12 12 13 21 plastics & manufactures 6,166 8,016 1,244 1,727 634 779 1,861 2,183 915 1,477 Rubber & manufactures 776 983 130 163 27 36 137 159 35 47 Hides, skins & leather 1,986 2,251 79 85 161 227 626 577 542 681 Wood & manufactures 1,630 1,564 13 12 106 65 45 54 40 57 Paper & manufactures 2,047 2,322 236 309 357 399 405 447 247 351 Textile fibres & mnfrsa 12,864 15,825 2,161 3,056 864 1,351 2,996 3,124 1,632 2,427 of which: synthetic fibres 5,421 6,569 1,116 1,512 243 307 1,600 1,634 1,075 1,574 Base metals & manufactures 13,264 12,166 3,902 4,052 544 805 1,037 1,291 1,079 1,046 of which: iron & steel & manufactures 10,665 8,036 3,365 3,292 272 311 501 590 940 818 copper & manufactures 1,209 1,955 275 411 129 261 265 396 47 73 aluminium & manufactures 712 1,368 117 177 96 169 108 141 45 76 Machinery excl electric 25,115 27,575 6,494 7,923 2,967 3,225 3,387 2,997 712 1,126 Electric machinery 16,559 19,419 5,751 6,791 1,558 1,905 1,779 2,005 882 1,103 Transport equipment 9,778 5,365 3,037 669 3,331 1,125 232 176 180 160 of which: road vehicles & tractors 4,844 2,719 2,520 584 477 270 228 174 118 147 aircraft 3,478 1,361 0 10 2,817 779 0 0 0 0 Scientific instruments etc 3,717 4,581 1,377 1,774 697 819 246 276 40 79 Total incl others 115,693 132,078 26,321 29,005 13,970 16,118 14,085 14,784 7,318 10,293 continued

Foreign trade of China (continued) ($ m) Total Hong Kong Japan USA South Korea Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fob 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 Food, beverages & tobacco 10,980 11,236 2,205 2,350 3,833 4,002 477 457 814 514 of which: meat & fish & preparations 3,230 4,224 583 663 1,724 2,247 233 275 123 135 fruit & vegetables 2,817 3,276 419 495 1,107 1,345 117 152 97 65 Oilseeds 1,280 1,170 226 222 235 247 32 35 101 124 Mineral fuels 4,061 5,335 329 641 1,700 1,961 365 437 514 713 Chemicals 8,379 11,874 1,784 2,291 903 1,417 1,431 1,830 337 635 of which: organic & inorganic 3,591 5,447 459 552 528 860 363 571 220 460 plastics & manufactures 2,659 3,535 827 1,100 186 276 808 968 35 66 Leather handbags, travel goods etc 4,141 4,903 895 1,046 429 584 1,255 1,265 112 112 Textile fibres & manufactures 34,534 36,243 12,506 11,901 7,406 8,897 3,230 3,240 1,220 1,602 of which: cotton & manufactures 3,236 3,850 1,610 2,043 336 332 133 141 136 163 clothing 21,798 21,647 7,213 6,013 5,676 7,120 2,497 2,354 346 461 Footwear 6,042 6,662 510 517 518 661 3,184 3,347 112 160 Non-metallic mineral mnfrs 1,993 2,665 302 313 340 596 420 512 35 112 Precious stones, metals & jewellery 1,496 1,752 1,050 1,250 26 47 167 187 9 12 Base metals & manufactures 6,833 12,081 1,636 1,973 959 2,133 876 1,257 370 1,414 of which: iron & steel & manufactures 3,351 7,583 634 771 570 1,504 411 661 250 1,195 Machinery excl electric 5,637 8,671 1,167 1,763 381 818 1,383 1,839 89 133 Electric machinery 14,111 18,996 4,283 5,737 1,948 2,999 3,214 3,691 263 473 Transport equipment 2,824 4,100 701 1,031 157 316 598 857 29 92 of which: road vehicles & tractors 1,441 1,832 394 109 88 172 447 529 5 14 Scientific instruments etc 3,513 4,606 1,184 1,308 713 1,116 704 878 26 50 Furniture 2,467 2,930 452 501 337 423 948 1,074 18 26 Toys etc 4,716 5,415 1,010 979 327 435 1,951 2,277 45 47 Total incl others 121,038 148,770 32,365 35,984 21,573 28,463 21,461 24,711 4,402 6,689 a Including clothing.

Direction of trade ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports cif 1992 1993 1994 1995 Exports fob 1992 1993 1994 1995 Japan 13,682 23,253 26,321 29,005 Hong Kong 37,512 22,064 32,365 35,984 USA 8,901 10,688 13,970 16,118 Japan 11,679 15,779 21,573 28,463 Taiwan 5,866 12,933 14,085 14,784 USA 8,594 16,964 21,461 24,711 South Korea 2,623 5,360 7,318 10,293 South Korea 2,405 2,860 4,402 6,689 Hong Kong 20,534 10,473 9,457 8,591 Germany 2,448 3,968 4,761 5,672 Germany 4,015 6,040 7,137 8,038 Singapore 2,030 2,245 2,558 3,501 Russia 3,526 4,987 3,496 3,799 Netherlands 1,200 1,609 2,267 3,232 Singapore 1,236 2,646 2,482 3,398 Taiwan 694 1,462 2,242 3,098 Italy 1,748 2,737 3,068 3,115 UK 923 1,929 2,414 2,792 Canada 1,927 1,375 1,831 2,681 Italy 1,095 1,305 1,591 2,067 Total incl others 80,585 103,950 115,693 132,078 Total incl others 84,940 91,763 121,038 148,770

Appendix 3

Trade of China with east European countries ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 1990 1991 1992 1993 1994 1995 Chinese exports fob Former Soviet Uniona 2,048 1,860 2,690 2,692a 1,581 1,665 Poland 71 56 119 248 294 472 Hungary 24 20 45 165 390 325 Romania 189 84 78 120 110 157 Czechoslovakiab 305 27 38 59cd 85 140 Bulgaria 36 24 20 36 3732 Slovak Republic n/a n/a n/a 9c 10 32 Total listed 2,673 2,071 2,990 3,329 2,507 2,823 Chinese imports cif Former Soviet Uniona 2,213 2,109 3,889 4,986a 3,496 3,799 Romania 214 200 211 379 286 194 Czechoslovakiab 275 154 176 243cd 125 88 Poland 253 88 90 224 105 84 Slovak Republic n/a n/a n/a 24c 14 36 Hungary 113 36 19 62 20 31 Bulgaria 101 95 58 137 73 20 Total listed 3,169 2,682 4,443 6,055 4,119 4,252 a From 1993, Russia. b From 1993, Czech Republic. c April-December.