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Tuesday, November 16, 1999

EDITORIAL

Seize the day

After a cliffhanger of negotiations that ended 13 years of hard effort, Beijing and Washington have finally agreed on terms for China's accession to the World Trade Organisation, the body that sets and enforces global trading rules. Though details are still scant, the news gives an enormous psychological boost to world trade prospects and carries profound political implications for Beijing's future engagement in international affairs.

The breakthrough is a victory for Chinese economic reformers headed by Premier Zhu Rongji and supported, usually, by President Jiang Zemin. It offers a similar triumph to President Bill Clinton in the closing portion of his administration.

This will give China new influence when WTO ministers meet two weeks from now in Seattle, even though it won't be an official member until European and other nations also agree. But the agreement will set an optimistic tone and, with a celebratory atmosphere surrounding the event, progress should be possible when delegates begin slowly redesigning the trading system to speed growth even faster.

Western euphoria may pale a bit after the first few days when the practical details of the agreement are examined. Mr Clinton must convince Congress to grant Normal Trade Relations to Beijing on a permanent basis, forgoing the annual ritual, relished by China's critics, of debating about whether this status should be withheld for real or perceived transgressions.

But the forces in favour should be dominant. Already the farming and business lobbies have indicated they will campaign to ease the passage through Congress for what is already described as "the largest market access agreement for American agriculture in history".

Although the Sino-US talks may appear to have focused on American interests, it should be remembered these are global agreements, and most of what has been signed by US trade representative Charlene Barshefsky and her team applies to all member nations.

Progress has its price, however, which is why there have been many vocal critics of China's membership on both sides of the divide. On the mainland, accession will be greeted with mixed feelings and some foreboding. There is no escaping the job losses through the inevitable demise of unproductive state-owned industries, plus the opening up of others to foreign competition.

Resistance may well continue inside China, as inefficient factories and financial houses realise new competition is on the way. The jobs and perks of many senior officials and executives will be on the line.

Beyond that, fear of wider urban unrest and political instability explains much of the leadership's past reluctance to make many concessions in return for what will be a mammoth step forward in the country's emergence as a full member of the global marketplace.

Gains far outweigh losses, of course, but it may take a decade or more before the benefits of membership trickle down to the grassroots. Foreign investment has been falling in China, and there have been two years of unprecedented deflation. Officially, unemployment runs at about 3 per cent; realistically, it is near 10 per cent. The country desperately needs injections of foreign capital and technology.

But the reality of doing business in China has caused many multinationals, which staked fortunes there in the mid-90s, to record disappointing profit levels. For many, interest has declined. Even though this agreement should bring a surge of renewed activity, it may take years to bear fruit.

Not so here, where the benefits will become apparent far more quickly. The volume of foreign goods expected to pour into the mainland will mean vastly increased business for China's traditional gateway. In addition, no other Asian city can match Hong Kong's financial infrastructure. It is the biggest port of entry into China, and can easily handle the expected increase in the transport and financing of goods.

For the mainland, WTO membership is only one step along the way. Trust and consistent adherence to the rule of law are equally important, and there again Hong Kong can act as a bridge over sometimes troubled waters.

But that situation will not apply indefinitely. As China becomes more financially sophisticated, cities such as Shanghai will become bigger competitors. Many of the SAR's financial heavyweights are international firms, who might easily move across the border where office space is more affordable and prospects someday may seem brighter.

So the city must seize the opportunities newly on offer. It is now on notice to sharpen its competitive edge, or be left behind in the bold new world of global marketing.

WTO ACCORD

Further consolidation on way for key carriers AVIATION by JOSEPH LO

Airline reforms in the mainland are expected to accelerate with agreement on entry to the WTO.

The mainland's more than 30 carriers will be forced to restructure or be swamped by the onslaught that potentially awaits from foreign carriers.

WTO membership will not open up the domestic network to foreign carriers but Beijing has already been forcing consolidation of the industry into three or four large groups.

"I think, overall, the impact on the mainland carriers will be positive," said Jim Lam, aviation analyst at Deutsche Securities.

"I expect China to further liberalise its market, which will mean more traffic, both internationally and within the domestic networks to feed the international traffic."

It is so far unknown what the Sino-US agreement covers specifically, although it is believed that most tradeable goods will be included, including aircraft parts and related items.

Of benefit to airlines would be the lifting of the ban on importation of petroleum products.

The price of kerosene - which jet aircraft burn as fuel - is as much as 50 per cent more expensive within the mainland than elsewhere.

Fuel can account for as much as 19 per cent of airline costs.

Analysts also expect that the number of flights between the mainland and foreign destinations will increase dramatically.

In April, Beijing signed a new air services agreement with the US that increases the allowed number of flights between the two countries from 27 to 64 per week by April.

"You can expect more bilateral agreements to increase the amount of air travel between China and other countries," Mr Lam said.

A longer-term uncertainty that remains, however, is the impact that Taiwan's plan to join the WTO will have on the Greater China aviation sector.

WTO ACCORD

EU, Canadian deals needed ahead of mainland accession REACTIONS by SHEEL KOHLI in London

The European Union has cautioned against excessive optimism over the mainland's early entry to the World Trade Organisation following its landmark agreement with the United States.

Trade representatives welcomed the deal but warned that Beijing would still have to reach agreement with the EU and Canada before it could join the WTO.

The EU had "specific interests" which were different from those of the US, said a spokesman for EC Trade Commissioner Pascal Lamy.

He said the EU shared a common policy on about 80 per cent of the issues that the US was likely to have pursued in its WTO negotiations.

However, there was a core set of concerns that were unique to Brussels, which the EC would need to discuss separately.

European trade negotiators were in contact with the US negotiating team in Beijing to ascertain the exact details of the agreement, the spokesman, Anthony Gooch, said.

"Clearly, there is around 20 per cent of a deal where we have specific interests that are different to the US and which would mean that we would need to have our own negotiation with China," Mr Gooch said.

The EU is keen to address the high level of import tariffs on cars and car parts and ensure greater access to the mainland's banking, life insurance, telecommunications and distribution markets.

Brussels negotiators believed the US had struck a meaningful, rather than a politically oriented, deal as this was the only way the US Congress would be willing to allow Normal Trading Relations with Beijing.

However, Mr Gooch said if certain key areas of the mainland's markets were not sufficiently open, Brussels would be concerned.

"If they are not allowing majority ownership in life insurance and telecoms then we would have some concerns," one negotiator said.

Trade diplomats in Geneva, where the WTO is based, also cautioned against excessive optimism over the deal.

They said that a deal was still some way off without an agreement with the EU, or Canada - the fourth trading nation that makes up the so-called "quad" countries, which includes Japan. "One should not be overly pessimistic, this agreement is certainly a milestone, but the Chinese still need to talk [to] Brussels and the Canadians."

Beijing has already reached an agreement on goods and industrial products with Japan, and is said to be close to an agreement on services, largely completing its WTO agreement with Tokyo.

Trade diplomats yesterday said that with the November 30 Seattle summit looming, when the world trading nations hope to launch a new round of global trade liberalisation, there seemed to be not enough time left for the mainland to enter the WTO before the new round is launched.

Furthermore, Beijing will also need to assuage concerns of other developing countries, who are worried the mainland's comparatively low labour costs will mean their markets will be flooded by cheap imports.

But many officials believe that if the US deal is seen as broadly acceptable, other countries will fall in line and ensure that, when the actual negotiation for the so-called Millennium Round begins, the mainland will be able to participate.

Failure to do so would mean the mainland would effectively have to wait for another three years before it could make a meaningful contribution to the trade liberalisation negotiations.

Mr Gooch said that until more details of the deal with the US were seen, Brussels was holding off before scheduling a new set of negotiations.

However, the much-delayed Sino-EU summit is now provisionally booked to take place in Beijing on December 20, and the weeks running up to the summit might prove to be a useful time to meet, some diplomats said. WTO ACCORD

Investment to pick up with entry

FDI by MATTHEW MILLER

The mainland, the world's second-largest recipient of foreign direct investment behind the United States, is guaranteed a stream of overseas capital as a result of its accession to the World Trade Organisation.

By agreeing to open markets and committing to international standards and practices, Beijing has created conditions that will prompt foreign companies to consider mainland destinations for their investments, foreign businessmen and bankers said.

Dahong Wang, director of corporate finance at Warburg Dillon Read, said of the Sino-US pact: "WTO is not only about trade but investment, and it should have a positive direct impact on many sectors, including telecommunications."

Gerald Butters, president of optical networking for Lucent Technologies, said at the weekend the mainland's accession to the world trade body would "not only propel the economic development of China but also the development of its business partners."

Mr Butters believed Lucent, which operates seven mainland joint ventures making telecommunications networking equipment, would benefit from any agreement, providing it with greater opportunity to manufacture, distribute and sell products.

Yesterday's deal was reached when foreign direct investment into the mainland had flattened, following a remarkable decade when foreign investment inflows grew by double-digits each year, propelling economic expansion.

The mainland's realised foreign direct investment last year reached US$45.25 billion, less than a 1 per cent increase recorded over the previous year.

During the first nine months of the year, foreign direct investment amounted to $29.4 billion, or a year-on-year decline of 6.8 per cent.

Foreign direct investment inflows are not expected to jump immediately, although many analysts said benefits created by market opening and rule-based governance measures should produce a steady increase over time.

"Don't expect anything to change dramatically in the first one or two years," said Peter Rudiger Puf, car manufacturer DaimlerChrysler's chief economist.

"Over a longer period foreign investment will pour into the country." For companies such as US household-products manufacturer Amway which have suffered from the mainland's often changing regulatory environment, yesterday's agreement was warmly welcomed.

"Amway is absolutely thrilled that an initial agreement has been reached," said Amway China chief Eva Cheng.

"We believe there is profound positive impact and more investment and trade between China and the rest of the world. It is hard for people who know each other to fight each other," Ms Cheng said.

Amway, which has invested $100 million in the mainland, was banned last year from using its primary distribution method, under a State Council decision that outlawed direct selling.

"I think the agreement has many positive implications for our business," Ms Cheng said.

"With WTO accession China will have to play by international standards."

Many American multinationals also applauded yesterday's deal. Procter & Gamble, which has invested about $300 million in 11 mainland joint ventures and one wholly owned foreign company, said the Sino-US agreement was "in the best interest of both countries".

Procter & Gamble has been among the most vocal proponents of a deal and chief executive Durk Jager has lobbied US congressmen to support normalised trading status with Beijing.

"We believe WTO accession is America's best tool for opening China's market," said P&G China public affairs manager Yvonne Pei.

"Bringing China into WTO is a vote of confidence in an open, rules-based trading system," she said.

WTO ACCORD

Wider access for professionals as tough nut finally cracked

SERVICES by CHRISTINE CHAN, MATTHEW MILLER and WINSTON YAU

The mainland service sector - one of the world's most closed markets - is one of three strategic areas foreign companies have been trying for years to gain greater access to.

The other two sectors are agriculture and industrial goods. Under the bilateral agreement signed yesterday between Washington and Beijing, the mainland has agreed to expand access, in varying degrees, to its banking, insurance, telecommunications, legal and other service areas.

The move could pave the way for further liberalisation of sectors such as distribution services (wholesaling, direct sales and retailing) and financial and professional services.

Foreign companies reacted positively towards Beijing's move despite the scant details revealed.

Amway China chief Eva Cheng said: "Amway is absolutely thrilled that an initial agreement has been reached. We believe there is profound positive impact.

"We have invested heavily in China and have gone through this roller-coaster ride [in the] past year, keen to see China's accession."

The announcement from the US embassy in Beijing yesterday said mainland access would be improved for US professionals such as lawyers, accountants and medical- services providers.

Baker & McKenzie partner Michael Moser said: "China's accession will have a very positive impact on the businesses of lawyers, accountants and consultants - directly and indirectly."

Earlier proposals from the US negotiators hinted at a degree of liberalisation in the professional-services sector, he said.

"We understand that it's China's intention to relax its restrictions to open a greater number of cities for lawyers and to remove the one-city, one-office requirement," he said.

Mr Moser said the indirect impact on the professional-services sector would be even more significant.

"The WTO accession will spark a new round of foreign direct investment in China, so a number of companies who over the past two years have been looking outside may be tempted to come back," he said.

"At the same time, the WTO will increase competition for many state-owned enterprises who may want to find strong partners from the developed economy, and this will encourage a new round of mergers and acquisitions."

Hong Kong General Chamber of Commerce director Eden Woon said: "If foreign companies can get into the distribution sector, that will greatly facilitate the movement of goods in Chinese domestic markets. "It is expected the retail market will be opened up and restrictions imposed on many of the experimental cities will be removed. So the China market should have more opportunities for foreign companies."

WTO ACCORD

Tariffs to be cut as trade pact sows seeds of change

AGRICULTURE by WINSTON YAU

The mainland will make greater reductions in tariffs on agricultural items of particular interest to the United States and establish tariff rate quotas for bulk commodities under an agreement that paved the way for the mainland's accession to the World Trade Organisation.

US Trade Representative Charlene Barshefsky said the mainland agreed to cut tariffs on agricultural products to between 14.5 per cent and 15 per cent.

The mainland also will set large and increasing tariff rate quotas for wheat, corn, rice and cotton with a substantial share reserved for private trade. State trading in soy oil will also be phased out.

Under the tariff rate quotas system, imports up to a quota level are charged minimum tariff, usually 1 per cent to 3 per cent, and imports above that level a high tariff.

It is anticipated the system could encourage state trading enterprises to buy bulk commodities at world market rates.

Analyst at China International Capital Corp (CICC) Shawn Xu Xiaonian estimated the value of the country's agricultural imports would be double that of last year under the Sino-US Agricultural Agreements signed in April.

According to the bilateral farm-trade agreement, the mainland would eliminate all quantitative restrictions.

However he cautioned that the tariff reduction should only have a limited impact on imports of tariff-insensitive agricultural products and large tariff reductions will occur mostly for items such as meat and wine. Traders in corn and wheat said the mainland would not be a big buyer of US grain, as domestic prices for corn are only slightly higher than US produce. The mainland is also largely self-sufficient in wheat.

In the mainland, concern has been raised about the possible impact of foreign competition on the sector's largely scattered and small-scale operations.

National security was also at stake as 900 million people, or three-quarters of the population, live in the countryside. However Mr Xu said the country's concessions in agriculture would not put national security at risk.

He said that, even if the value of grain imports increased threefold after the mainland's entry into the WTO, the country's grain self-sufficiency ratio would drop only from 97 per cent to 92 per cent.

It is still not clear whether the agreement would allow the mainland to continue subsidies for corn exports, which challenge US corn sales for Asian markets, but Mr Xu said the mainland could never compete with the US, Canada and Australia in the farming sector given the distribution of natural resources.

WTO ACCORD

Move hailed by institutions

BANKING by FOO CHOY PENG in Shanghai

Foreign banks got what they expected from Beijing - a full opening of banking to foreign participation within five years of accession to the World Trade Organisation.

The opening of the retail market to foreign banks will be phased in - starting with the local currency business opened to Chinese companies two years after accession, and to retail customers three years later.

United States Trade Representative Charlene Barshefsky said geographic and customer- based restrictions would be lifted so foreign banks would enjoy the same treatment as domestic banks.

Further opening of the country's banking and financial services sector has been one of the sticking points in the negotiations, and the concessions were what foreign bankers had expected.

They were similar to what Premier Zhu Rongji reportedly offered to the US during his recent North American trip. So far, the country has allowed some foreign banks in Shanghai and Shenzhen - including Standard Chartered Bank, Citibank and HSBC - to do limited yuan business with foreign customers in a few provinces.

But many want to do full retail banking - a move vigorously opposed by domestic banks, which have now lost the battle.

Standard Chartered's Shanghai branch manager Daniel Conklin said: "The deal is a victory for the country's modernisers and eventually healthy for the banking system.

"But I do not think it will lead to any radical opening of the banking sector overnight, and I don't expect the doors to full retail banking to be opened faster than the five-year time- framework previously offered," he said.

"I am a definite believer in the free market but I still support the country's gradual approach to opening to safeguard social stability, and as long as they act in good faith."

A French banker who refused to be named said while there could be some loosening of restrictions, many significant changes would be phased in.

"The state banks which dominate the industry still have to resolve their non-performing loans and they can not do it in a hurry because that will hurt the state enterprises and lead to instability," he said.

"That means they still have to phase in greater opening of the sector to foreign banks."

Foreign banks are already fighting for the right to extend yuan mortgage loans to mainlanders - a move said to be under serious consideration by the People's Bank of China.

A Shenzhen-based foreign banker said overseas banks wanted to ease qualifying terms for earning a licence to do local currency business.

Currently, to qualify for a yuan licence, foreign banks must have operated in the country for three years, showing profit in the last two years and having assets of at least US$150 million.

"Some banks have been fighting for the conditions to be relaxed, and we hope the WTO deal will help to expedite that," the Shenzhen-based foreign banker said.

A few months ago, Beijing allowed some foreign banks to borrow yuan loans directly from mainland banks, expanding the scope of yuan business which could be capped at 50 per cent of their US dollar assets. Previously, the cap was 35 per cent. WTO ACCORD

Industry faces day of reckoning over entry

CARS by MARK O'NEILL in Beijing

More than 120 car factories could be facing death because of the mainland's entry into the World Trade Organisation.

Entry is good news for globally competitive firms, bad for those that are not - such as most car plants, which the government has been trying to close for many years.

High tariffs and government protection have made car-production one of the mainland's least efficient industries.

Its plants last year produced 1.6 million cars, less than any of the world's top 10 car- makers, of which 507,100 were passenger cars. Toyota, Japan's largest car-maker and the world's third-biggest made 5.3 million vehicles last year.

The mainland's 10 biggest plants make more than 90 per cent of national output. Beijing wants to centralise production in these 10 but cannot because of the protection of local governments and special interests which see cars as a pillar industry.

Most produce less than 10,000 vehicles a year and one on Beijing's outskirts made just 1,000 last year.

Forty-eight per cent lost money last year, up from 42.3 per cent in 1997. Total losses rose 175 per cent to 2.2 billion yuan (about HK$2.05 billion) and profits fell 55.4 per cent to 3.44 billion yuan.

Accounts receivable rose 31 per cent to 75.7 billion yuan and inventory rose 15.7 per cent to a record 114,000 vehicles.

High costs, over-manning and small-scale production, make mainland car prices two to three times higher than world averages. Import tariffs of 80 to 100 per cent allow big domestic manufacturers to remain profitable.

With WTO entry, these would fall drastically. The world's most efficient car plants, operated by Toyota, Honda and Mazda in Japan are just two days away by ship over the East China Sea. As tariffs fall and the mainland is forced to give up import quotas, the market would be open to new Japanese and other models.

"The result of a closed market is high prices and low quality and a big gap with global manufacturers," the China Business Times said.

Zhu Yanfeng, general manager of First Automotive Works, one of the top two makers with 34.7 billion yuan worth of truck and passenger-car sales, said that domestic manufacturers were ill-prepared to meet the challenge of WTO entry.

"The impact of WTO entry will be enormous," said Mr Zhu. "China's car industry has always been heavily protected. Unlike advanced countries, we do not have a modern company system or diverse source of funds," he said.

"We are far behind international companies. Our passenger car industry has a short history, is immature and is especiallyweak in its basic products and parts and components. We are far behind advanced countries in developing new products," said Mr Zhu.

"Our wages are low but we have far too many workers so that our production costs are very high, making it difficult for us to compete."

During the next five years, his company plans to switch its focus from trucks to passenger cars, which should account for 60 per cent of output by 2004, and train managers and technical staff to international standard.

Mr Zhu said he wanted the government to provide a good legal and regulatory environment, to keep bureaucrats out of business, to improve social welfare so as to lighten the burden of his company and to encourage individuals to buy cars.

"In the last resort, a company can only rely on itself to survive in the market. Protection can only be temporary."

Beijing is hoping that the discipline of WTO rules will push local governments to give up the subsidies and protection of their car factories and force them to close. It wants external pressure to achieve what central government directives have been unable to do.

If anyone survives the shake-out, it will be the foreign-invested companies that are the most efficient producers, such as Volkswagen's two joint ventures which between them manufacture more than half of the mainland's passenger cars. WTO ACCORD

State firms brace for reductions in tariffs

REACTIONS by CHRISTINE CHAN and LANA WONG

Mainland enterprises have put on a brave face about the impact World Trade Organisation entry will have on them.

Highly protected industries, such as vehicles, which have been protected by tariffs of 80 to 100 per cent on the price of imports will see those tariffs cut to just 25 per cent after the mainland's accession.

First Automotive Works spokesman Zhang Yinfu said: "We are a little bit [worried], but we have prepared for it.

"There will be years of a transitional period for us. We will use the transition to lower production costs and improve quality."

Mr Zhang was particularly concerned about a possible flood of cheap Japanese imported cars because of their competitiveness.

H share Tsingtao Brewery chairman Li Guirong said: "China's entry into the WTO will not have a direct impact on us because high transportation costs restrict the world's exports of beer to just 4 per cent of total production.

"Our company, however, will benefit indirectly from the gradual lowering of tariffs imposed on imported raw materials such as barley, now charged at 3 per cent."

Barley accounts for 8 per cent of the company's production costs.

Cosco Pacific deputy managing director Kelvin Wong Tin-yau said: "The company is very excited because the entry will definitely bring about steady economic growth on the mainland. The entry will also boost foreign investors' confidence in China investments."

Foreign investment is behind 40 per cent of mainland exports.

It has been experiencing rapid container throughput growth of about 20 per cent since 1990.

With the mainland's WTO accession, rising export and import volumes will boost container leasing and terminal services handling - Cosco Pacific's two biggest income earners. But a European brokerage analyst said transportation-related red chips China Merchants Holdings (International) and Cosco Pacific might not emerge from the WTO entry as winners as widely believed.

The average monthly containerised throughput growth of the top 10 mainland ports was 38 per cent in the first half, while exports declined by 4.6 per cent. In the third quarter, exports jumped to 15 per cent growth but container throughput growth remained at 38 per cent.

"The figures showed that most of the increase in exports was done through bulk shipping instead of container transport," the analyst said.

He said toll-road companies which operated expressways along the coast had seen strong growth in daily toll revenue as exports surged.

WTO ACCORD

Deal opens door on lucrative market

TELECOMS by YVONNE CHAN and AGENCIES

Concessions by the mainland in one of its most closely guarded markets will see foreign investors taking controlling stakes in the mainland's telecommunications sector and also open the door for investments in the Internet sector.

The mainland is to allow up to 50 per cent foreign ownership and control in its telecoms and Internet markets sooner than previously agreed.

Once the mainland has completed entry into the World Trade Organisation, foreign companies will be allowed to take a 49 per cent stake in mainland telecoms ventures rising to 50 per cent after two years, said US Trade Representative Charlene Barshefsky.

"Foreign control is possible in a 50-50 joint venture," she said.

Foreign companies would have "full investment rights" in the mainland's rapidly growing Internet market, an area off-limits until now.

Foreign investors have pumped at least US$200 million into mainland Internet companies, but the industry has been jolted by recent announcements by government officials who said such investments were barred. Details have not yet been announced on the allowed foreign ownership in each telecoms sector, but Beijing appeared to have softened its previous stance, agreeing to a more advanced timetable for liberalisation than negotiated in April.

The timetable had called for 25 per cent maximum foreign ownership in value-added services such as the Internet by next year in Shanghai, Beijing and Guangzhou, expanded to 51 per cent of nationwide services by 2004.

Mobile services were to have 25 per cent allowed foreign ownership in the three areas by 2001, extending to 49 per cent of nationwide services by 2005.

Fixed-line businesses in the three key areas would be allowed 25 per cent foreign ownership by 2002, growing to 49 per cent of nationwide networks by 2006.

During last Friday's talks, US negotiators reportedly insisted on 51 per cent foreign ownership rights in the mainland's telecoms sector but Beijing refused to go beyond allowing minority holdings for foreign investors.

The government has spent more than a year restructuring dominant carrier China Telecom and preparing it for competition by breaking down its operations into separate divisions and forcing it to reduce tariffs.

Fledgling competitor China Unicom has been promised a more competitive market with China Telecom and is likely to be allowed to expand its Code Division Multiple Access mobile network and to gain interconnect rights into China Telecom's network.

Analysts predict mobile operator China Telecom (Hong Kong), the SAR-listed arm of China Telecom, may initially see its share price drop due to the threat of increased competition from Unicom.

WTO ACCORD

US companies celebrate 'a great breakthrough'

REACTIONS by MARK O'NEILL in Beijing

United States companies carrying out business in the mainland expressed delight at the World Trade Organisation agreement signed between Beijing and Washington.

Some called it the most important economic event for more than 20 years, saying it would stimulate foreign investment and make it easier to do business.

The agreement marked the end of a 13-year haul, since Beijing first applied to join what was then the General Agreement on Tariffs and Trade on July 10, 1986. Since then, US business has lobbied strongest for the mainland's entry. John Sullivan, vice-chairman of the American Chamber of Commerce (AmCham) in the mainland, said increased investment in operations was likely with the stability and predictability offered by Beijing's accession.

"Implementation of WTO standards will reduce many of the distribution and regulatory hardships that US businesses now face in China," he said.

"That means more growth potential for American companies and creation of more jobs back home."

AmCham China chairman Richard Latham said both the US and mainland economies would benefit from increased trade between the two nations.

"Having worked hard for years to convey to the two governments how China's WTO accession could help both countries, the American business community here is delighted it is now at hand, and we pledge our full support for the implementation process in coming years," he said.

Jerry Chen, president of Hewlett-Packard China, called the deal "a great breakthrough".

"It is very good for China and the United States," he said.

Zhang Ligang, chief executive officer of eLong.com, an Internet portal launched last week with equity investment from US venture capital, said: "If we say that Deng Xiaoping opened China to the world, we can say that this time China has entered the world."

A Western lawyer described the deal as a "very historic event".

"It is the biggest economic event since 1978. There are so many restrictions on normal activities, such as in distribution and mergers. This will do away with many of these obstacles," he said.

Robert Mao, president and chief executive officer of Nortel Networks China, said: "Accession of China to the WTO will make the China telecom markets, both in the service sector and the equipment supply side, even more dynamic.

"The opening of the market will intensify the service sector competition, expand the service market and enlarge the equipment supply market.

"Competition will evolve more towards value proposition, rather than on one- dimensional pricing on commodity service or equipment."

Ian Lancaster, chief representative in the mainland of the Chubb Group of insurance companies, said anything that brought Beijing into world organisations was very positive. "It is very clear the US business community supports China's accession and expects it to be on commercial terms," he said.

"It means a continued acceleration of the reform process. It clearly indicates to the international community that China wants to play an important role in world bodies.

"In the end, it was not easy for the Chinese Government. It is a sign that reality won out and the reformers won out."

Mr Lancaster said that, while he had not seen the details of the agreement, he expected that foreign property and casualty insurers would be able to write master policies to cover risks for the operations of foreign companies all over the mainland, provided the joint venture was based in the city where the insurer's licence was located.

"This would be a significant change," he said.

Chubb was given a licence in April but has not been told the city in which it is to operate.

WTO ACCORD

Competitive sector shows little concern over results of pact

PETROCHEMICALS by LANA WONG

Oil and petrochemical companies have played down the potential negative impact on the sector following Beijing's accession to the World Trade Organisation.

Analysts had mixed reactions.

They said the boost in demand for petrochemical products after WTO entry might outweigh the adverse effect of a cut in tariffs or wider foreign access to the sector.

Yizheng Chemical Fibre company secretary David Shao Jingyang said the polyester producer expected the benefits to exceed the disadvantages.

"Our products are mainly for use in the textile industries, which will see the United States phase out the quotas on mainland imports," he said.

Mr Shao said the company would also benefit from a bigger tariff reduction in materials it imported than on imports of foreign products.

"We don't expect there will be much impact on our profitability," he said. Beijing Yanhua Petrochemical's vice-director of the secretarial office of the board, Michael Zhou Quansheng, said the tariff on products that competed with theirs were actually lower than the prescribed rates.

For example, high pressure polyethylene and low pressure polyethylene, which were Beijing Yanhua's two key products, had an effective average tariff of about 9 per cent instead of 18 per cent.

"A tariff reduction will have little impact on us because the effective rate is not high," he said.

Mr Zhou said the company did not expect a lot of pressure to cut its product prices to compete with imports, as its pricing policy was being drawn up on the assumption of a tariff rate of as low as 3 per cent.

A Zhenhai Refining & Chemical spokesman said the company did not foresee much negative impact brought by changes in tariffs.

The spokesman said Beijing would open up the market gradually, during which time the company would raise its efficiency to narrow the gap with foreign counterparts.

He added that the company would be able to withstand competition from foreign products.

For example, its ex-factory price for petrol was about 2,500 yuan (HK$2,300) a tonne but foreign imports, if any, could be between 2,650 yuan and 2,700 yuan after counting in transportation fees, import tariffs, consumption and value-added taxes, the spokesman explained.

Goldman Sachs regional chemical analyst Shumin Huang said that overall the WTO deal was positive for the chemical sector but she was cautious about the refining sector.

The mainland's accession to the WTO would have positive impact on the consumption side because improving economic growth would suggest more demand for chemicals, she said.

She did not expect a tariff cut on refining products which were low at between six to nine per cent but the market access would be an issue. Beijing has banned imports of gasoline and diesel.

US and China sign WTO deal

MARK O'NEILL in Beijing China and the United States signed an historic agreement yesterday that will pave the way for Beijing to enter the World Trade Organisation (WTO), 13 years after it applied to join.

While Beijing has still to complete negotiations with other WTO members, the US was the toughest party to deal with.

The agreement, and after six gruelling days and nights of negotiations, opens the way for China to join the world's principal trading body and is the mainland's most important economic event since December 1979, when it switched from state planning and isolationism to reform and the open-door policy.

Zhang Ligang, chief executive of eLong.com, an Internet start-up firm that was illegal when it was founded last week but became legal yesterday with the lifting of a ban on foreign investment in the Net, summed up the day. "If we say that Deng Xiaoping opened China to the world in 1979, we can say that this time China has entered the world."

The chief US negotiator, Trade Representative Charlene Barshefsky, described the deal as "profoundly important", "absolutely comprehensive" and an excellent one for American business.

At a meeting with Ms Barshefsky yesterday afternoon, President Jiang Zemin called the deal "good, historic and realistic", and a win-win for both sides which showed that both countries saw the issue from a strategic viewpoint.

China's entry into the WTO will have profound ramifications for the country, binding her to international trading rules and encouraging foreign firms to invest by providing a system less based on rule by the idiosyncracies of an official and more on transparent laws and regulations.

It will accelerate a process of closing money-losing and over-manned state companies and moving labour and capital into market-driven businesses. In the short term, it will drive up unemployment as inefficient, capital-intensive state industries shed labour and shut down.

It also marks a vital political victory for Prime Minister Zhu Rongji, the main proponent, along with Mr Jiang, of China's membership, who offered a similar deal in Washington in April.

The war in Yugoslavia, in which Beijing sided with Serbia, and the Nato bombing of the Chinese Embassy in Belgrade, froze negotiations from May until September, when conservatives took advantage of anti-American sentiment sweeping the country to attack the April deal. In internal meetings, they accused Mr Zhu of being like Li Hongzhang, a senior official of the last Qing dynasty regarded as a national traitor for signing the humiliating peace treaty with Japan that gave away Taiwan.

Faced with such opposition and seeing his ambitious agenda blocked, Mr Zhu offered to resign in July, but Mr Jiang rejected the offer.

For Mr Zhu, WTO membership will serve as a motor for reform of state companies, banking, insurance, securities and other industries.

If Ms Barshefsky had left Beijing without an agreement, the prospects for Mr Zhu and his reform agenda would have been bleak indeed.

At a news conference just before she left China, Ms Barshefsky said the support of the two presidents had been crucial.

Presidents Bill Clinton and Jiang Zemin met in Auckland and agreed to put the talks back on track, with a deadline of the next round of WTO talks that will begin in Seattle on November 30. Mr Jiang's support for Mr Zhu was essential to overcome domestic opposition.

Ms Barshefsky, full of energy despite the six-day marathon, presented the agreement's main details. Overall tariffs will fall to an average of about 17 per cent and on farm goods to 14.5 per cent to 15 per cent, while China will make significant liberalisations on importing such goods, especially wheat, corn, cotton and other bulk commodities.

Beijing will eliminate non-tariff quotas within five years, some in two to three years. It will cut tariffs on imported cars from the current 80-100 per cent to 25 per cent by 2006 and allow foreign financial institutions to finance the purchase of cars.

It will allow 49 per cent foreign investment in telecommunications firms from the date of entry, rising to 50 per cent in two years, and will allow foreign banks to conduct local currency business with domestic companies two years after accession and with domestic individuals five years after.

Beijing also agreed to lift a ban on foreign investment in the Internet.

These are substantial concessions and, if fully implemented, will give foreign firms far greater access to the China market than they currently enjoy.

In return, Beijing received a concession on textiles, with Washington backing down from its demand that quotas on China's exports remain until 2010. Instead they will end in 2005, but with an "anti-import surge" mechanism remaining for a further four years, to prevent a flood of exports. Barshefsky highlights payoff for Hong Kong

DAVID SAUNDERS

United States Trade Representative Charlene Barshefsky said on Tuesday morning the long-awaited trade agreement with China would be ''necessarily good'' for Hong Kong.

Speaking at Chek Lap Kok Airport, Ms Barshefsky said she had spoken with Chief Executive Tung Chee-hwa during her brief stopover in Hong Kong after leaving Beijing on Monday.

Ms Barshefsky was on her way back to the US after wrapping up a bilateral trade deal with Chinese negotiators following six days of talks in the capital.

The deal will accelerate the opening up of the mainland market in a range of sectors and also makes China's membership of the World Trade Organisation more likely.

''I think any step that regularises economic relations between the US and China is good for Hong Kong,'' Ms Barshefsky said.

''I think the most pointed example of that general principle is the annual NTR [normal trade relations] debate in the US, where Hong Kong often expresses its deep concern, to the extent that Congress could revoke MFN this would have a very severe negative impact on Hong Kong's economy through which most of China's goods to the US flows.''

National economic adviser Gene Sperling, who was drafted into the negotiating team last week, added that the past had shown any development that results in increased trade to and from China significantly benefits Hong Kong.

Mr Sperling also stressed the importance of the personal relationship between presidents Jiang Zemin and Bill Clinton in finalising this accord, as well as paying tribute to the involvement of Premier Zhu Rongji.

''If you look at the flow you have to see very much how important the personal relationship between the two presidents was during a year in which there had been great misunderstading and regaining the trust to allow this to go forward,'' Mr Sperling said.

With the agreement between Washington and Beijing now delivered, President Jiang must now turn his attention to securing a similar outcome with the European Union, while President Clinton and his cabinet will focus their energy on persuading an until- now hostile Congress to continue to offer China normal trade relations status.

In two weeks, Seattle will host a new round of global trade talks, amid scepticism about how much can be achieved in four days, as well as mounting sentiment against the speed with which the process of globalisation is being imposed. However, Ms Barshefsky underlined the importance of kicking off the new negotiations, especially to President Clinton.

''I believe also that we will see the WTO mature into an organisation that also has a very robust ongoing work programme, an organisation that can handle sectoral and other forms of agreement, an organisation that itself becomes more transparent and acceptable to all of our domestic publics and an organisation that begins to take into account the critical interception between trade and labour, as well as trade and environment,'' she said.

China starts hard sell to public

REUTERS in Beijing

After the euphoria of a WTO agreement with the United States, Chinese authorities on Tuesday began selling the deal to an anxious public worried about job losses.

China also appeared to have abandoned hopes of joining the World Trade Organisation before a meeting of ministers from the group's 134 members in Seattle on November 30.

Chief WTO negotiator Long Yongtu said China expected to complete its entry in the first half of next year.

Earlier, US Trade Representative Charlene Barshefsky said China's entry was likely in early 2000.

Ordinary Chinese fretted that foreign competition would destroy jobs by pushing already teetering state enterprises over the edge.

''Most state-owned enterprises which cannot survive the competition might have to close, leaving many people jobless,'' said Liu Jianchuan, 45, supervisor of a state-owned heater maintenance company in Beijing.

''Once that happens, there might be social unrest.''

Other people in Beijing, despite anxiety over jobs, nevertheless looked forward to cheaper and better goods – especially cars.

The Beijing Youth Daily, a popular broadsheet, warned its readers that after Japan joined the General Agreement on Tariffs and Trade, the WTO's predecessor, in 1955 there were ''painful adjustments in industries and employment''.

But it noted that Japan's economy doubled in size over the next decade. Entering WTO would ''provide a turning point'' for Chinese enterprises, it added.

The historic deal, signed on Monday by Ms Barshefsky and trade minister Shi Guangsheng, paves the way for China's entry to the WTO, although Beijing still needs to reach separate deals with the European Union and other key trading partners.

Also, US President Bill Clinton must now steer the agreement through a hostile Congress, which is required to vote on granting China normal trade relations before Washington can benefit from China's more open markets.

Stock markets in China and Hong Kong offered an immediate assessment of winners and losers.

Technology and Internet-related stocks of China-backed companies soared in Hong Kong in an ebullient reaction to news that US firms would be allowed to invest in Internet content and service providers.

Just two months ago, Beijing had deemed such investment illegal.

In Shanghai, stocks of highly protected and inefficient Chinese automakers slumped. Telecom companies also suffered.

THE WTO DEAL

Capitalist boom and gloom predicted

MAINLAND ECONOMY by SIMON PRITCHARD and WANG XIANGWEI

Entry to the WTO should integrate the mainland economy into a global capitalist system that offers both tremendous growth opportunities and, potentially, ruinous competition.

Lower tariff barriers promise a flood of imports, narrowing the mainland's trade surplus and focusing attention on a potential devaluation of the yuan, as Beijing fights a deflationary spiral of falling prices and low growth.

Policy makers will be forced to re-focus on state-owned enterprise reform, with inefficient firms soon to experience bruising competition from foreign companies, which have long been denied market access except on the harshest terms.

While broadly welcoming a move that weds the mainland to the global economy, most economists predict a deepening economic downturn and sharply rising unemployment as domestic firms shape up to competition. In the short term, imports are expected to surge, causing a deterioration in what had been an improving trade picture. The flood of investment from foreign firms looking to capitalise on direct market access will take longer to arrive.

"Surging imports and modest growth in exports means the mainland's trade surplus is likely to fall further next year, probably by 20 to 30 per cent," said Frank Gong Fangxiong, global currency strategist at the Bank of America.

"I expect Beijing to undertake an effective devaluation early next year to boost exports and growth, and deter imports. This is likely to involve a widening of the yuan's trading band," he said.

Mainland industries that have been cushioned from international competition are expected to be hit hardest. Automobiles, electronics, pharmaceuticals, banking, telecommunications, insurance and distribution would experience the greatest competitive pressure, said Liao Qun, senior economist at the Standard Chartered Bank.

Successful WTO entry legally binds Beijing to open its markets according to an agreed timetable or face punitive action enforceable through international institutions.

The agreement will see a phased liberalisation with chronically weak industries, such as the virtually insolvent banking industry, not seeing full foreign competition in local renminbi business for five years.

Still, fear of foreign competition prompted one Hong Kong-based banker at a major mainland state bank to say: "This is very bad news for the banks. How can a bank like us compete with HSBC or Citibank? If foreign banks come in, they would definitely beat Chinese banks.

"[Chinese banks] don't have much retail banking experience as we mainly serve as cashiers taking money from depositors and putting the money where the Government has directed."

But in other sectors, mainland firms are far better placed.

Shawn Xu Xiannian, economist at China International Corporation, cited the mainland's household appliance makers as an industry that 10 years ago lost out to foreign imports, but subsequently conquered international export markets.

Foreign firms may still find the mainland market hard to crack. China was likely to frustrate attempts to enter key areas such as agriculture and banking, Mr Liao said.

Beijing may impose restrictions on the number of branches a foreign bank can operate in an individual province or city. "If a foreign bank has just one branch in a city like Beijing, how can it compete with China Construction Bank?" Mr Liao said.

THE WTO DEAL

Role as middleman comes under review

SAR BUSINESS by DAVID SAUNDERS

Hong Kong will have to review its role as the middleman for firms doing business with the mainland as a result of China's expected membership of the WTO, according to the local business community.

While the agreement between US and mainland trade officials was seen as positive news for Hong Kong in the short term, economists and business groups warned that Hong Kong would have to become more competitive if it were to retain its role as the premier financial and trade gateway to China.

Professor Leonard Cheng Kwok-hon, head of economics at the Hong Kong University of Science and Technology, said the pact should spur businesses to make the best of new opportunities.

Professor Cheng said in the short term the SAR would benefit from an influx of capital and foreign investment in the mainland, providing expertise in financial services.

However, some sectors, particularly financial services, could be exposed by US and European firms in the longer term if they did not become more competitive.

"Hong Kong has to reinvent itself and become more competitive and able to handle the deals," said Professor Cheng. "We have to ask, 'are we good enough? Are we as good as American or European investors?' "

Shamus Mok Chung-yuk, chief economist at the Bank of East Asia, said the agreement would help Hong Kong's economic recovery, boosting business and consumer confidence.

But Mr Mok warned the SAR would gradually see its pre-eminence as the gateway to mainland trade diminish and would have to change if it were to remain an attractive place to do business. "We have to be an investor and a player, just like any other country. We have to get deeper into the market," he said.

Victor Fung Kwok-king, chairman of the Trade Development Council, hailed the Sino- US agreement as "extremely good news for Hong Kong", adding it would have a favourable impact both in the short and long term. Smaller multinationals would be encouraged to do business on the mainland and would need the support services offered by SAR firms.

"The [mainland] market pie is going to expand so much that our share may even decrease, but the actual benefits will be larger."

Mr Fung said service industries would benefit the most from the opening up of trade, while manufacturing firms would benefit from a more certain regulatory environment. "We will no longer be subject to, shall we say, capricious trade actions."

Fred Hu Zu-liu, head of greater China research at Goldman Sachs, agreed that even as Hong Kong's dominance was challenged by Shanghai and other mainland ports, it would gain from offering higher value-added services and goods as the economy diversified into new industries such as information technology.

Jason Felton, chairman of the American Chamber of Commerce in Hong Kong, said the deal would benefit both sides, including the SAR, but warned Hong Kong could suffer as investors capitalised on lower costs on the mainland.

THE WTO DEAL

Financial secretary eyes new opportunities

SAR POLITICS by CHRIS YEUNG

The Financial Secretary has pledged to increase dialogue with mainland officials to explore fully new opportunities for Hong Kong in the wake of US agreement to China's accession to the WTO.

Hailing it as a "landmark" development and "very positive news", Donald Tsang Yam- kuen said: "It is indeed rather ironic if China remains outside and continues to operate outside the orbit of the WTO for much longer."

China, he said, was likely to be a "new force in global trade in the new century".

He said Hong Kong companies had operated in the Chinese market for more than a decade and "established bridgeheads" there.

"I am sure China's accession to the WTO will benefit them even more because it is likely to offer more trading opportunities for the Hong Kong private sector and business generally." Tung Chee-hwa said in a statement he was extremely pleased with the agreement that "represents a most important step in China's WTO accession process".

"I very much hope that the other steps necessary for WTO accession can be completed at an early date. This will benefit world trade and all parties concerned. It will also provide Hong Kong with new business opportunities."

The Democratic Party said: "We support China's entry to the WTO because it will not just bring about long-term benefits to the economy of Hong Kong and China, but stabilise the economy in the whole Asia-Pacific.

"More important, it enhances China's international status."

Party spokesman Sin Chung-kai said: "Past experience shows the more China opens up the more benefit it brings to Hong Kong."

He said worries that Hong Kong would lose its intermediary role were unfounded.

The Liberal Party spoke of "three wins" - by China, the US and Hong Kong.

Chairman James Tien Pei-chun said: "The most important thing now is for the SAR Government and the business sector to grasp this opportunity to further facilitate Hong Kong's economy."

The Democratic Alliance for the Betterment of Hong Kong urged the Government to evaluate the implications for Hong Kong.

Early measures should be taken to help local firms to tap the mainland market before it was too late, the DAB said.

THE WTO DEAL

Taipei hopes to join up next

TAIWAN by VIVIEN PIK-KWAN CHAN

Taiwan's hopes of joining the WTO before the end of the year rose after Beijing's deal with the US yesterday.

Taiwan's Economic Minister Wang Chih-kang said Taipei was pleased to see Beijing clear the way for accession to the WTO but he was unsure whether Taiwan's moves for WTO membership would be speeded up.

He urged Beijing not to create obstacles for Taiwan's bid. "If Beijing tries to stop us from joining the WTO, the attempt would be opposed," he said. "Both we and Beijing, and even all the other countries applying for membership, have the backing of WTO and Apec [the Asia-Pacific Economic Co-operation forum]."

He said Taiwan had fulfilled all WTO entry requirements, like cutting tariffs.

There was "no reason" to delay Taiwan's admission and the island's entry should be considered independently of other economies, referring to Beijing.

Beijing says Taiwan is part of China and the island should not join international bodies like the WTO as a separate state.

Taiwan has completed talks with 26 WTO contracting parties. Economic Vice-Minister Lin Yi-fu said he had received WTO Director-General Mike Moore's guarantee Taiwan would be able to attend the first meeting of the next WTO round in Seattle this month as an observer.

THE WTO DEAL

Hurried signatures cap slow process

BEHIND THE SCENES by DAVID MURPHY in Beijing

Officials at the Ministry of Foreign Trade and Economic Co-operation may never have seen a deal signed so quickly.

As journalists burst into an upstairs room at the ministry, negotiators were frantically signing individual pages of an agreement that removes the single biggest stumbling block to China's admission to the World Trade Organisation.

In a state of nervous excitement, United States and Chinese negotiators paired off and scribbled their signatures on reams of documents as camera crews and reporters jostled for position.

"Don't stand on the chairs comrades," pleaded a security guard using language not normally heard at WTO gatherings.

A mainland negotiator muttered: "I've had no sleep for days. We have all been working really hard on this." The Chinese team has only a couple of days to get some rest before European negotiators, now readying themselves in Brussels, head for Beijing to attempt a conclusion of WTO accession protocols between China and the European Union.

Foreign Trade Minister Shi Guangsheng and US Trade Representative Charlene Barshefsky came forward to sign the final papers to a burst of applause from their weary negotiating teams.

They were flanked by China's chief WTO negotiator, Long Yongtu, and President Bill Clinton's chief economic adviser, Gene Sperling.

In a brief speech, Mr Shi praised President Jiang Zemin but made no mention of Premier Zhu Rongji.

In recent weeks, analysts had speculated that Mr Zhu's influence over the WTO talks process had diminished greatly.

The Premier was not at a formal signing ceremony in the Zhongnanhai leadership compound attended by President Jiang Zemin, Vice-Premier Qian Qichen, State Councillor Wu Yi and Ms Barshefsky.

At the ministry, Ms Barshefsky had said the agreement would regularise trade between the two countries and assist in the continued opening of the mainland's economy.

Mr Sperling praised both presidents for choosing "the long-term interest of both countries over short-term expediency" and "21st century vision over old, outdated 20th-century divisions".

THE WTO DEAL

Door to history opens, says trade chief

ADMISSION by REUTERS in Geneva

World Trade Organisation Director-General Mike Moore hailed the US-China accord on Beijing's bid to enter the body as opening "a door to history" but warned that much work remained to be done.

As a result of the deal, China's observer status at a key WTO ministerial meeting in Seattle from November 30 "will take on much greater meaning", Mr Moore said.

The gathering is expected to agree on the launch next year of new global trade liberalisation talks, dubbed the "Millennium Round". But diplomats said it was unlikely Chinese entry into the 135-member WTO could be finalised until well into next year, as other powers, including the European Union, have to wrap up their own pacts.

China also has to complete the lengthy procedure of producing a list, or schedule, of all the tariffs and restrictions it will impose on a vast array of goods and services once it is under the WTO umbrella.

"A door to history has been opened, and now [WTO] member governments must walk through it together," Mr Moore said. "We need to complete important technical talks before China can take her rightful place at the table of great trading nations."

Japan said earlier it had completed its talks with China and a Canadian official said Ottawa could have wrapped up negotiations with Beijing by the end of this month.

EU-China talks last month left several issues unresolved, but one official said at the time European Commission President Romano Prodi would be going to Beijing on Friday for a trade summit.

THE WTO DEAL

Euphoria will wear off when the Fed raises rates

COMMENT by DAVID ROCHE

So China and the US have signed! It was hardly a surprise. There was never any alternative to integrating China into the global scheme of things. China pursuing its own dark destiny outside the comity of nations was hardly an option.

The immediate consequences are political. It was needed by President Jiang Zemin to increase his standing in China and China's standing in the world. It was as important to President Clinton as a diplomatic triumph in an election year. He hopes it will allow him to wrongfoot the Republican opposition in Congress when it attempts to bury the agreement under a mountain of amendments.

The changes it will bring to the Chinese economic landscape are positive, but will be glacial.

The US will now support China's entry to the WTO at its Seattle ministerial conference at the end of this month. At last, the world's ninth-largest trading nation is being ostensibly brought into the international trading community and its global rules. It will strengthen the reformists within the Beijing administration, raising the profile of Mr Jiang, whose intervention in the talks seems to have clinched the agreement.

China and Hong Kong should gain from rising trade and investment to and from the mainland. And the increased competition from abroad should provide the spur the reformists want to pursue state sector restructuring.

At the same time, it is a major foreign policy coup for President Clinton in his last year of office.

But it is precisely the political advantage that the Clinton administration may gain from this deal that should raise scepticism about its implementation. Republican-dominated Congress just doesn't like China. It growls about Chinese "spying", about abuses of human rights and any concessions by the US on Chinese imports (textiles have been a key issue in the talks) that will lead of huge loss of jobs for American trade unionists. Congress won't want to endorse this deal in an election year in which they hope to beat Al Gore and put a Republican in the presidency.

Mr Clinton may be able to put off facing up to Congress until after the WTO has accepted China, just as he did with the entry into Nato by the central European states. But eventually some time next year he will have to get Congress to agree to "normal trading relations" terms for China, in effect endorsing China's WTO membership. Then the proverbial will hit the fan.

And anyway, will China keep to the terms of any deal? The devil will be in the detail of any concessions that China has made on allowing foreign-owned ventures in sensitive sectors such as financial services and telecoms.

Last week China was closing telecoms markets to foreign investors. This week, in the name of a higher political reality, it promises to open them. Does anyone doubt that when it comes to awarding contracts nothing has changed just because WTO has been signed?

And then there's implementation. In China, despite protests to the contrary, counterfeiting and piracy of foreign goods and technology will still go on.

Last week in Shenzhen I was again impressed by Chinese creativity. The quality of upmarket product counterfeiting has improved dramatically! The Hermes bag I bought for $25, instead of $250, was perfect in the quality of its leather, the reproduction of the Hermes pattern inside and the detail of the stitching. Even the warranty was in faultless French. The whole item was quite indistinguishable from the original at home in Hong Kong.

The promised market openings of WTO will be of the same ilk. They are more likely to provoke a yawning wait than a yawning opportunity. The political cost of rapid market liberalisation is simply too high. The WTO deal, by reinforcing the reformers' position over the conservatives, simply makes a prosperous, friendly China more likely in the long run.

That of itself is a cause to rejoice - but hardly enough to buy the Hang Seng. And I bet obstacles to foreign entry into key markets will reappear. China will not keep to the letter on any deal. That will soon bring complaints within WTO.

Meanwhile, the euphoria will give a short-term fillip to financial markets, particularly the Hang Seng. But once the US Federal Reserve begins a series of interest rate rises over the next few months, starting this week, the good news will give way to the tougher news of a global environment with a higher cost of capital.

David Roche is chief strategist for Independent Strategy.

Congress opposition is next hurdle

GREG TORODE in Washington

As Washington awoke to one of the biggest developments in two decades of Sino-US relations, the battle was already on to drive yesterday's trade deal through Congress.

Hailing the agreement, John Foarde, vice-president of the US-China Business Council, warned American businessmen, farmers and politicians would need to see the details first before committing themselves.

"On the surface it is fantastic news, but in some ways the battle is just starting," Mr Foarde said.

"If the deal is good this has incredible potential for American businessmen and farmers and it should sell itself domestically."

Agricultural tariffs and the ability of US firms to control effectively investments in financial services, telecommunications and banking will sit at the heart of any upcoming scrutiny.

Speaking in Ankara during a visit to Turkey, President Bill Clinton claimed that neither China nor the US had made massive new concessions to make the deal.

"I would certainly hope the conclusion of this agreement between ourselves and China will lead to the rapid accession of China to the WTO and would lead the Chinese to urge other developing nations to take the same sort of comprehensive approach to their participation in the world economic system."

Lobbyists representing leading US business sectors have already been targeting possible opponents to any deal in the Republican-controlled Congress. Congress must agree on permanent Normal Trading Relations to ensure the benefits of China's entry is passed to US business.

The deal will first be considered by the House Ways and Means Committee. A source close to its chairman said last night if the deal proved solid, it would get support for swift implementation. But the source added: "We've got to have a good long look at it first to ensure China faces firm commitments and US commercial interests will be expanded and protected."

One Republican aide added: "With this Congress and this President, nothing is ever certain. The mistrust and hatred runs deep and it can surface in all sorts of ways. Don't bank on anything until the deal is done."

Asia weighs challenge from mainland after joining WTO

BARRY PORTER in Singapore

While Hong Kong traders celebrated a deal paving the way for China's entry into the World Trade Organisation, market reactions in the rest of Asia were less euphoric.

In the long run, there would seem little doubt that a strong and growing mainland economy would be good for Asia.

It should also be good news for regional firms with mainland interests, as illustrated by yesterday's strong rally in mainland plays in Singapore.

However, in the shorter term, there have been concerns that the mainland's liberalisation may undermine the competitiveness of other countries in the region.

"Traders are mulling [over] the effects, weighing the pros and cons," said Charles Kohsikatorn, a treasury analyst at Thomson Global Markets.

Most key Asian currencies except the South Korean won strengthened yesterday, despite concerns by some that the mainland's entry into the WTO would raise the likelihood of a yuan devaluation.

"We may see China's trade balance and deflation problem worsen in the short term as tariffs come down," a Bank of America strategist said.

"It is thus more likely that China will expand the trading band [for the yuan]."

Regional stock markets were moderately bullish, but sentiments were more driven by strong pre-weekend gains on Wall Street than events in Beijing.

The United States Federal Reserve will hold a meeting on interest rates today. The Singapore share market was Southeast Asia's star performer, with its benchmark Straits Times Index closing 1.83 per cent higher at 2,225.91 points. The index is expected to soon test a record closing high of 2,247.43.

Electronic and banking sectors - key players in the island's economic recovery - were among the biggest gainers before expected strong third-quarter gross domestic product figures due on Thursday.

Mainland-owned China Everbright, Tianjin Zhong Xin Pharmaceutical and Cosco Investment were among Singapore's biggest risers, each climbing between 11 per cent and 13 per cent.

Singapore-owned firms with mainland interests also performed well, including Omni Industries, JIT Holdings, Sunway and Dragon Land.

Yang Sy Jian, research head at Kay Hian Securities in Singapore, said: "China is a huge market. If we're going to have cross-listings between Hong Kong and Singapore, as was recently suggested, that is very good for Singapore."

Meanwhile, markets in Malaysia and Indonesia also enjoyed gains.

Taiwanese stock traders greeted the mainland's good news more coolly, with Taipei's Weighted Index gaining just 0.17 per cent.

Korea's Composite Index rose 0.56 per cent but failed to stay above the key 1,000-point level breached in the morning.

The won fell sharply due to aggressive central bank intervention.

Ajay Kapur, the chief regional strategist at Morgan Stanley Dean Witter, believed other east Asian countries had little to fear from Beijing's possible WTO success.

"Lower tariffs mean Koreans, Taiwanese and Indonesians can sell more into China," he said. "It has to be good for stock markets. It is a good thing unequivocally."

Kate O'Donoghue, treasury economist at Barclays Capital, said: "China does have a strong comparative competitive advantage in agriculture and textiles, which is bad news for some other east Asian countries.

"There may be short-term concerns, but in the long term WTO entry would be positive." Ten Market Breakthrough for China Nov 17,1999

Accession to the WTO means China will open its various sectors for foreign participation. It is expected that China will soon:

1. Reduce its average tariff on foreign goods to 17% from 22.1%.

2. Open the market for agricultural products including wheat, rice and cotton;

3. Ban its dumping of goods to other foreign countries.

4. Open its retail market and allow US companies to have more distribution rights and after-sales services.

5. Open the professional services market covering the legal, accounting and medical sectors.

6. Open its market for foreign films. The number of imported foreign films will be doubled to at least 20 every year.

7. Open its automobile market. Tariffs for automobiles will be reduced yearly.

8. Open its telecommunications industry. Two years after China has entered the WTO, foreign investors can invest in the Internet market.

9. Open its banking industry. Two years after the WTO entry, foreign banks can operate RMB business for mainland enterprises; and

10.Open its securities industry. Foreign financial companies can hold up to a 33% stake in fund management corporations.

Steel giant Anshan in $6b debt swap

AGENCIES in Beijing

H share Anshan Iron and Steel Complex, one of the mainland's largest state-owned steel firms, has signed a 6.85 billion yuan (about HK$6.39 billion) debt-for-equity swap agreement with creditors.

Xinhua news agency said Anshan's swap agreement was the largest so far signed between a state-owned enterprise (SOE) and the asset-management corporations Beijing set up this year to liquidate non-performing loans at state-run commercial banks. Creditors included the China Huarong Asset Management Corporation, China Development Bank, China Cinda Asset Management Corporation and the China Oriental Asset Management Corporation, the agency said.

Xinhua quoted a Huarong Asset Management Corporation official as saying the creditors and Anshan would organise a new company, with Huarong holding shares valued at five billion yuan and the other creditors holding part of its shares.

The swap would reduce the Liaoning province-based Anshan's gearing to 40 per cent from 71 per cent and cut the firm's annual interest expenditures by nearly 500 million yuan.

This year, the mainland formed four asset-management firms, each with registered capital of 10 billion yuan, to take over bad debts at its big four state-owned commercial banks - the Bank of China, the Agricultural Bank of China, the Industrial and Commercial Bank of China and the China Construction Bank.

Modelled on the United States Resolution Trust Corp, the asset-management companies - Donfang, Great Wall, Huarong and Cinda – say debt-for-equity swaps will be a main method of recovering loans and cutting the debt burdens of SOEs.

The aim is to lower the gearing at state firms and give ailing state banks a facelift by transplanting more than one trillion yuan in problem loans to the management companies.

They will try to recover the loans by packaging and selling the equity to domestic and international investors, some of whom will be sceptical about the quality of the shares.

The deal follows an announcement this week that Beijing plans to close 12 state-owned steel companies as part of its efforts to restructure the problem-plagued industry.

The decision is a reaction to heavy losses caused by low efficiency and heavy loan burdens, which have shown no signs of improving despite previous efforts to turn the industry around.

Companies in the sector suffered losses of about 500 million yuan last year, said Wang Chengrong, an official with the State Metallurgical Industry Bureau.

About 2.34 billion yuan in bad debt will be written off as a result of the shake-up, which should cut overall steel capacity by 2.8 million tonnes, or 10 per cent.

The 12 firms suffered combined losses of about 500 million yuan last year, said a senior official from the State Metallurgical Industry Bureau. WTO ACCORD

Guangdong faces up to pain, gain

ECONOMY by MATTHEW MILLER

Guangdong province, which accounts for about 40 per cent of all mainland foreign trade, will face a mixed bag of hardships and opportunities from the mainland's likely accession to the World Trade Organisation.

Pressures are expected to be felt in many of the province's main export sectors, with Beijing agreeing to scale-back subsidies used to boost overseas sales for many of its flagging domestic industries and agricultural enterprises.

Most likely to suffer are Guangdong's machinery and electronics sectors.

Last year, the two sectors made up about 50 per cent of Guangdong's US$75.72 billion in exports, a senior provincial foreign trade official said.

However, the trade official cautioned that the mainland's accession to the WTO represented both "a challenge and opportunity for Guangdong's foreign-trade enterprises".

Likely to gain from WTO entry are provincial textiles exporters, which have been crippled in recent months by dual pressures of regional price competition and the central government's implementation of an auction system for US textile quotas, which effectively raised the price of US-bound textiles by 10 per cent.

The combination of circumstances led to a 50 per cent exports crash for Guangdong garments-makers during the first half of the year, from exports last year of $10.81 billion.

"Textile exporters face more advantages," said Simon Peng, manager of Guangdong Textiles Import & Export.

"We have been preparing for this and we welcome the WTO."

Across-the-board tariff reductions for imports and further market-opening measures also are likely to provide additional competition to domestic industries in mainland markets, including distribution and service providers.

That theme was hammered home by Tian Xiaoren, Guangdong branch director for the Bank of China, who was quoted by mainland newspapers yesterday as saying that foreign bank participation in yuan business would "greatly impact" mainland banks, which at the end of last year held deposits of 1.32 trillion yuan (about HK$1.23 trillion), or about 14 per cent of the national total. There would also be a loss of customers and qualified personnel were likely to migrate to higher-wage jobs at foreign financial institutions, Mr Tian said.

However, the bank executive added that the restructuring WTO entry demanded would in the long run provide benefits that far outweighed the problems it caused.

Domestic banks would need to take measures to accelerate internal reform and improve their competitiveness, Mr Tian said.

"There will be a push for more competition," a Guangzhou-based European diplomat said.

"I think at the end of the day that will produce better results, especially in sectors that are already developed, like oil and petrochemicals.

"The problems created by issues of export subsidies and competition is that Guangdong will not have so much time to build up its own industries.

"There will be strong competition from the beginning."

WTO ACCORD

Trade pact lays foundation for more economic changes

REFORMS by STAFF REPORTER

The mainland's eventual accession to the World Trade Organisation will substantially increase the chance of economic reforms there, according to Institute of International Economics director Fred Bergsten.

The bilateral agreement with the United States would provide a "safe foundation" for the new century and for the mainland's emergence as a superpower, he said at the Asia Society in Hong Kong.

He also described the deal as "extremely good news for Hong Kong".

Mr Bergsten believed the deal - and the mainland's subsequent membership of WTO would be approved by a com fortable majority in the US Congress, despite continued resistance from some members on grounds ranging from spying allegations to human rights violations on the mainland.

However, Mr Bergsten believed most members of Congress now realised the implications of rejecting Beijing's application to join the group. "The most compelling argument is that if the US does not approve . . . the US would in future be discriminated against in the Chinese market," he said.

That will directly hit the province's and the country's ability to manufacture new products, including telephone handsets and many other information-technology items.

"Even though China will [enter WTO] with developing-country status, there was a high admission fee to the Americans," the diplomat said.

WTO ACCORD

Accession seen speeding reform

BANKING by STAFF REPORTER in Beijing

Accession to the World Trade Organisation could force mainland banks to reform in the face of competition from foreign banks.

"Chinese banks' ability to respond to foreign competition is very underestimated," said Davin Mackenzie, chief of International Finance Corp, part of the World Bank.

"Overall, it should be positive. It will even the playing field and instil competitive pressure among the Chinese banks to change."

According to the WTO agreement between Washington and Beijing, foreign banks will be able to conduct local-currency business with mainland firms two years after WTO entry and retail business five years after entry.

Geographic and customer-based restrictions would be lifted so foreign banks would enjoy the same treatment as domestic banks.

Between 70 and 80 per cent of the market is held by the Big Four - Bank of China, China Construction Bank, Industrial and Commercial Bank of China and the Agricultural Bank.

Large joint-stock banks in the mainland will be the main beneficiaries from increased competition provided by accession, Mr Mackenzie said.

The reforms are expected to be phased in slowly to allow the central government to strengthen supervisory controls.

Among the foreign banks, Citibank, HSBC and Standard Chartered are expected to benefit most as they already have operations in the mainland.

These banks have been allowed to provide limited yuan business. An increasing presence of foreign banks in the mainland is not expected to hinder the growth and business of domestic banks.

WTO ACCORD

Big players queue for shot as playing field levels out

FUND MANAGEMENT by CHRISTINE CHAN

At least 10 foreign companies are expected to gain access to the mainland's fund- management industry in the 12 months after the mainland's accession to the World Trade Organisation.

The prediction came from Woodrow Milliman China chairman Stuart Leckie - a veteran fund manager and a board member of the Exchange Fund Investment.

According to Monday's bilateral agreement between the mainland and the United States, foreign investors would be given unprecedented access to the mainland's burgeoning securities and fund management sectors.

US Trade Representative Charlene Barshefsky said foreign financial institutions would be allowed to take a 33 per cent stake in mainland fund management firms, rising to 49 per cent in three years.

"This is excellent. This is very good news. Up until now the action has been in the banking and insurance sectors. [The opening level] is on the high side of markets forecast of between 10-25 per cent," Mr Leckie said.

"We are going to have a level playing field on the mainland, particularly in the pension- fund industry, which should benefit from foreign management and technology."

International insurance and fund-management groups are forming a long queue to offer their experience and expertise to the mainland.

As part of the bilateral pact, foreign companies will also be allowed to invest up to 33 per cent in joint ventures to underwrite securities issues.

Officials of mainland brokerages yesterday admitted that they would face severe challenges from foreign rivals who had bigger capital bases and better expertise.

"With the liberalisation of the country's financial industry, this is something inevitable," an official with a Shenzhen-based brokerage said. WTO ACCORD

Tariff reduction expected to boost government revenues

TAXATION by LANA WONG

The mainland is likely to receive a boost in tax income despite its pledge to lower import tariffs by about 23 per cent, according to tax experts.

PricewaterhouseCoopers' tax services partner William Chan Chak-cheung yesterday said tax revenue could increase because trade volume would expand in the wake of the mainland's entry.

The government coffers would also swell as more products entered the mainland through legal channels under continued anti-smuggling efforts and a lower tariff regime.

Mr Chan cited official figures which showed tariff income doubled to 78.36 billion yuan (about HK$73.16 billion) in the first half due to a crackdown on smuggling.

Under the deal struck between Beijing and Washington on Monday, the mainland will lower its average tariffs from 22.1 to 17 per cent.

It will also cut tariffs on cars to 25 per cent by 2006 from the present 80-100 per cent.

It will reduce tariffs on agricultural products to between 14.5 and 15 per cent.

Mr Chan believed that, in general, tariffs ranging between 10 and 20 per cent would be acceptable.

As Beijing continued to open its market, more foreign firms would invest in the mainland, which would attract more tax revenue for the government through enterprise income tax, value-added tax (VAT) and others, he said.

He believed sufficient overall tax revenue might prompt the government to give a full VAT rebate.

Similarly, tax services senior manager Raymond Wong Chi-hung expected full VAT rebates on export sales in one or two years.

This had been partly made possible because the Beijing had adopted a more effective method of preventing companies faking receipts to collect tax rebates. "The mainland will benefit if additional exports are encouraged in the absence of a VAT," Mr Wong said.

The VAT rebates are now set at 13, 15 and 17 per cent for different categories of export goods.

China tax partner Marina Wong said the Sino-US agreement might help expedite Beijing's plan to unify various taxation systems for foreign invested companies and their domestic counterparts.

Domestic and foreign companies are subject to different sets of tax rates and preferential tax policies according to their locations and the industry in which they operate.

THE WTO DEAL

The barriers that still remain

WILLY WO-LAP LAM

Various departments and bureaucrats are already trying to erect roadblocks to slow the influx of goods, services and ideas that is expected into China after World Trade Organisation (WTO) accession.

And despite the perception that WTO membership will be a catalyst for thorough-going economic - and later political - reform, the impact will be much slower than most people think.

It is instructive that after the six-day negotiations ended with Monday's Sino-US agreement, it was the American delegation that released the details of Chinese concessions in market access and other areas. Yesterday's mainland papers carried hardly any information on tariff reductions and the opening of markets.

Opposition to WTO accession remains strong among State Council ministries and most regional administrations.

Soon after the WTO talks were resumed in September for the first time since the Nato bombing of the Chinese embassy in Belgrade, a number of senior cadres asked advisers to concoct open and hidden barriers to imports that will dilute or even override terms spelled out in the eventual deal.

Such attempts at quasi-sabotage will be made easier by the fact that Monday's agreement was much less detailed and specific than the document on the "Chinese concessions" unilaterally publicised by Washington during Premier Zhu Rongji's visit to the US in April. Take agriculture. While attention in the past week has been focused on telecommunications and finance, it is in rural areas, home to 800 million Chinese, where the adverse impact will be most felt.

In internal discussion with Beijing's trade negotiators, mainland agriculture officials reiterated that since Chinese produce was at least 30 per cent more expensive than that on the international market, even a slight opening of the door could translate into the loss of hundreds of thousands of jobs.

The Sino-US WTO agreement cannot stop the central or local administrations continuing to subsidise farmers either openly or through indirect means.

During Mr Zhu's trip to the US, Beijing agreed to lift the ban on the import of wheat from the Pacific Northwestern states that is infected with the fungus TCK smut.

Both sides also settled on an elaborate mechanism to settle disputes concerning the sanitary standards of other agricultural products. For example, the Chinese are to build inspection facilities and laboratories in Hainan Island and other places.

A Beijing-based trade specialist pointed out, however, that "the devil is in the implementation". Based on the sanitation issue alone, customs and quarantine stations in different provinces could slow the influx of Western farm produce by a big margin.

The specialist cited other existing or imminent hurdles for agriculture, industry and the services. It is understood that a couple of State Council units are drafting regulations on the environmental impact of imports. According to one version, the mere assessment of whether a foreign product can satisfy safeguards against pollution and other ills can take months.

Then there is the question of provincial protectionism. Even huge domestic conglomerates in areas ranging from cars to mobile phones have found it hard to penetrate regions that are the turf of rival groups.

Questions about the quantity and worth of Western products and services that will hit post-WTO China, however, pale beside these much more crucial issues. Will membership of the world body bring about fundamental changes in how enterprises - and the Communist Party and government apparatus - are organised and run? Will there be political reforms commensurate with market liberalisation?

It is almost a truism that the open door and integration with the world economy – which underlies China's WTO membership - will not go far unless there is a drastic cut in the party and government's control of enterprises and mainlanders' everyday lives.

The April document published by Washington said Beijing had agreed to gradually curtail the "high degree of state involvement in the economy". It said China would let enterprises operate solely on commercial considerations and that the authorities "will not influence these commercial decisions [either directly or indirectly] except in a WTO- consistent manner".

There is evidence Beijing will keep WTO-related requirements in mind when drafting economic policies such as the 10th Five-Year Plan for 2001 to 2005.

However, basic elements in the party orthodoxy - such as tight party and government control of major enterprises, enshrined by the Central Committee plenum in September - are unlikely to change in the foreseeable future.

The same goes for mutations in the political and social systems that are required for real integration with the world marketplace. Liberal officials such as Chief Trade Negotiator Long Yongtu are aware of the political implications of WTO membership.

"There will be a dovetailing with global norms," he said at a WTO seminar in the summer. "The degree of transparency of the [Chinese] system will be boosted, and this will make it easier to crack down on corruption."

Surely, basic institutions and practices such as party control of ideology and information - and much of the legal and judicial apparatus - are at odds not only with market-access provisions but the general spirit of matching global standards.

Major beneficiaries of Monday's agreement are telecommunications firms, which can finally exploit the Chinese Internet market.

However, there seems little doubt Beijing will stick to its time-honoured, double-fisted policy: taking steps to tighten ideological and political control even as it goes about liberalising the economy. There is speculation the authorities will soon pass additional regulations forbidding the flow of anti-socialist or anti-party information.

In the final analysis, free trade only thrives in a free society. Soon after concluding the deal, US chief negotiator Charlene Barshefsky denied reports that Washington wanted to use the WTO to promote the "peaceful evolution" of China into a capitalist nation.

"We have to be realistic about the prospects for change in China because there are elements of the country that will never change," Ms Barshefsky said. "I am cautious in making claims that a market-opening agreement leads to anything other than opening the market."

The Jiang leadership realises, of course, the interlinkage between economics and politics. But for as long as is possible, it will seek to keep them in watertight compartments.

Willy Wo-Lap Lam is a South China Morning Post Associate Editor. WTO may bring listing boom

STEPHEN SEAWRIGHT

Mainland state-owned enterprises could raise up to US$20 billion in Hong Kong as the SAR develops into a "world class stock market" once China joins the World Trade Organisation, according to a Morgan Stanley economist.

More mainland firms will be able to list in Hong Kong to tap overseas funds as greater foreign ownership is allowed under the WTO agreement signed between Beijing and Washington on Monday.

"Over the next 12 months, China may raise as much as $20 billion by selling state-owned enterprises," Morgan Stanley Greater China economist Andy Xie Guoshong said.

Much of this equity financing is expected to be conducted in Hong Kong, with some firms looking at dual listings here and in the United States.

Telecommunications and technology firms are expected to seek listings in Hong Kong first, followed by state banks. This will broaden the Hong Kong market's base.

"All these things will make a truly world class stock market," Mr Xie said.

Possible listing candidates in the near term include telecommunications company China Unicom and petroleum giant Sinopec. These companies had already hired investment bankers to arrange Hong Kong listings even before the WTO agreement.

Even more companies would rather list in Hong Kong than on mainland exchanges because of access to overseas capital through the SAR, as the mainland still does not have a fully convertible currency.

Assuming other WTO members agree to Beijing's entry, membership of the body will help the mainland reform its economy as sectors such as telecommunications, banking, insurance and agriculture are opened up.

"It is in China's interest to have all these things happen," Mr Xie said.

Mainland companies will also turn to equity markets as part of a trend in the region towards using stock markets; as companies turn away from using bank borrowing to finance expansion.

"Without inflation, debt is not going to be cheap so we are going to be much more dependent on the stock market for funding investment," Mr Xie said. Tapping the stock market instead of using bank loans would also help improve corporate governance and management as investors wanted to see earnings potential before they committed funds, he said.

"If you want to raise money in the stock market, you have to go through a beauty contest you have to convince investors you are going to make money.

"The bank is going to ask for collateral rather than earnings growth or how much money you are going to make down the road."

Foreign direct investment is only expected to increase slightly in the short term.

"Foreign investors are adopting a wait-and-see attitude because of the uncertain pricing environment with deflation," Mr Xie said.

Any positive effect on consumption from WTO membership will be minimised by concerns over higher unemployment as restructuring of the economy speeds up with WTO membership.

THE WTO DEAL

A long wait for the door to open

JASPER BECKER

How fitting it is that in the last days of the first treaty port, Macau, China should be able to announce that it is about to enter the World Trade Organisation.

With China's interior about to be thrown completely open to investment and trade, the days of both the treaty ports and their latter-day equivalents, the special economic zones, will be phased out.

That the United States should have played such a vital role is also no coincidence, as it was the Americans who, a century ago, were the first to push for an open-door policy for China to allow all foreign countries equal access to the China market.

Christopher Columbus had, after all, only discovered America on a trade mission to reach China and it was a Portuguese expedition which first established a trading base in China more than 400 years ago.

As the European powers scrambled to gain a foothold, the Emperor Qianlong famously rebuffed Lord Macartney's mission in 1793, saying China had no need for Britain's manufacturers nor its ingenious articles. Hong Kong's first governor, Sir Henry Pottinger, promised after the First Opium War, that he had opened up a whole new world to trade, so vast "that all the mills of Lancashire could not make stocking-stuff sufficient for one of its provinces". The dream is still strong although now it seems that just one of China's provinces can make enough textiles to clothe all of both England and America.

Foreign powers are still too demanding that a concession given to one must apply to another. On Monday the first response of Germany's Finance Minister Hans Eichel was to immediately demand equal access with the Americans.

Membership of the WTO, which is expected next year, will bring China back to where it was in the 1920s, when the interior was really opening up to international trade and the whole economy became integrated into the global trade system.

The Great Depression of the 1930s, when the US and other countries raised trade tariffs, brought ruin to Chinese export industries and left five million unemployed in the cities by 1935. Shandong peasants who grew tobacco for British American Tobacco starved to death when they could not sell their crops.

The General Agreement on Tariffs and Trade (Gatt) which the Kuomintang government joined in 1948 was created out of the lessons learned by disastrous policies of the 1930s.

Chairman Mao Zedong believed in a world of managed trade conducted with the socialist world. After 1959, China withdrew entirely from international trade, restricting itself as in the days of the Emperor Qianlong to a trade fair in Canton and some covert business in Hong Kong and Macau.

China began talks to rejoin Gatt, the precursor to the WTO, in 1986 but these were broken off in the aftermath of the Tiananmen Square crackdown. China successfully pursued bilateral trade deals playing one trading power off against another but as more and more goods and services have been opened to international trade, this has not been enough.

To further its own interests, China is compelled to take part in successive negotiating rounds like that starting in Seattle soon which will further open up trade.

Besides, accession to the WTO is no longer a matter of choice. Despite the best efforts of the bureaucrats who govern the country, China is no more able to close its markets than successive Qing emperors managed to do.

Many of the concessions that US Trade Representative Charlene Barshefsky has won are nothing of the kind. Smuggling has become so rampant along the coast that Chinese customs may as well try to gather 25 per cent duties on cars than obtain nothing at all. The same applies to diesel, oil, steel, metals, cigarettes or American wheat and cotton for that matter. Other trade "concessions" are equally theoretical. Under the deal China is now going to allow the US to export as much as 50 films a year instead of 10 but in reality you can already buy any number of US films on the streets of Beijing as soon as they come out.

As China gets fully wired up in the next few years, the state will be powerless to stop Chinese buying any kind of digitalised information product even though it surely wants to keep the barriers high.

Edicts like the one issued last week by the Ministry of Information Technology and the State Administration of Radio, Film and Television on "Strengthening the Management of Construction of Radio, Television and Cable Networks" are doomed to be ineffective.

Americans trying to block Normal Trade Relations with China cannot do any better. US Customs' best endeavours to stop illegal textile exports have not prevented about US$5 billion (HK$39 billion) worth of illegal Chinese textiles and apparel entering the US via third countries.

For a political system based on absolute state control of the economy, the breakup of domestic monopolies which WTO membership entrenches will bring many consequences.

For example, China must soon make its currency convertible. With trade flowing freely, there are too many ways to circumvent capital controls and already US$50 billion to US$70 billion is leaving the country illegally each year.

The dangerous part of WTO entry is that it may not bring benefits for years to come. The post-1992 boom has not been used to make Chinese industry and finance more competitive, quite the contrary.

Instead of using the capital raised at home or abroad to adapt, most state enterprises went on a reckless spending binge which has left them deeply in debt and with a vast overcapacity.

China can produce 180 million tonnes of steel a year in over 100 enterprises but only needs 80 million tonnes. Workers employed in producing the superfluous 100 million tonnes will have to be sacked.

The banks which extended the credit to finance the expansion will have to swallow the losses or live with non-performing loans.

In all major industries, firms will have to undergo a huge process of closures and mergers. The foreign companies that did well selling China huge amounts of redundant steel furnaces and other machinery will not see similar profits again. In just five years China imported US$10 billion worth of textile machinery but several million textile workers are being laid off and the country is still the world's biggest textile exporter. China already accounts for 40 per cent of the world trade in shoes and there cannot be much room for further growth.

The domestic investors and the state banks which funnelled the country's savings into this surplus capacity and a legacy of unsold housing and under-performing real estate projects will not see healthy returns.

With state banks in such a frail state, many Chinese may wish to put their remaining savings in foreign banks, pension and insurance companies, whose expansion the WTO will ensure.

Some fear that sooner or later, China will be forced into devaluation as it phases out export subsidies and seems to find markets for the surplus goods.

The central government might also be forced to seek outside help because its tax base keeps shrinking. Beijing is already issuing treasury bonds to pay the interest due on existing bonds.

It might have been better for China to have entered the WTO, while the expansion boom was under way, but with luck it will be able to weather short-term pain as long as outside investors are willing to support economic growth in new areas.

The global trading system has long waited for China to open its doors. And soon it will.

Jasper Becker is the Post's Beijing bureau chief. Friday, November 19, 1999

THE WTO DEAL

US touts pact as better than offer from Zhu

GREG TORODE in Washington

The White House embarked yesterday on its drive to win domestic support for its trade deal with China, claiming the pact is stronger than the one from Premier Zhu Rongji that was rejected in April.

President Bill Clinton's economic adviser, Gene Sperling, and his Trade Representative, Charlene Barshefsky, met leading United States business representatives and foreign envoys to insist their boss would be going all out to push the deal through Congress.

They also expressed considerable confidence they would win and China would be granted permanent Normal Trading Relations, crucial to ensure US firms milk the benefits of Beijing's WTO entry, in the first quarter of next year, sources inside the meeting said.

The pair were unable to produce a full draft of the deal as it is still being translated and approved by diplomats.

A business lobbyist said: "The problem is they still can't show us the full deal. Nobody can really say just yet that it is better than what was offered in April."

Mr Sperling repeatedly stressed any congressional opposition, enough to scuttle earlier foreign initiatives by Mr Clinton, would be quashed this time around.

Several times he referred to an offer from Hong Kong Democratic Party leader Martin Lee Chu-ming to write to anti-Beijing factions saying that they should not fear the deal, sources said.

While Congress is starting to be seen as a fait accompli, the debate could be long and bruising, insiders warn.

Both Democrat and Republican opponents may try to link the deal to laws less favoured by the administration and China, such as pledges to upgrade arms sales to Taiwan or tougher sanctions on religious freedoms.

"It is going to be a long tough road ahead despite what the White House might be saying now," a trade diplomat said.

"Things could swing wildly in all sorts of directions." All possible opponents are coming under a massive lobbying effort by the extensive US business community.

Full-page advertisements are already starting to appear in a number of newspapers from the Business Roundtable to mobilise grassroot support.

WTO

Summary of US-China agreement

Following is a summary of the US-China bilateral trade agreement signed on Monday. The text was released by the office of the US Trade Representative:

AGRICULTURE

The Agreement provides increased access for US exports across a broad range of commodities and elimination of barriers. Commitments include:

Significant cuts in tariffs that will be completed by January 2004. Overall average for agricultural products will be 17 per cent and for US priority products 14.5 per cent.

Establishment of a tariff-rate quota (TRQ) system for imports of bulk commodities, eg, wheat, corn, cotton, barley, and rice, that provides a share of the TRQ for private traders. Specific rules on how the TRQ will operate and increased transparency in the process will help ensure that imports occur. Significant and growing quota quantities subject to tariffs that average between one and three per cent.

The right to import and distribute products without going through state-trading enterprise or middle-man.

China has also agreed to the elimination of SPS barriers that are not based on scientific evidence and no export subsidies on agricultural products.

INDUSTRIAL PRODUCTS

China's commitments will eliminate broad systemic barriers to US exports, such as limits on who can import goods and distribute them in China as well as barriers such as quotas and licences that restrict imports of US products. TARIFFS

Tariffs cut to an average of 9.4 per cent overall and 7.1 per cent on US priority products.

China will participate in the Information Technology Agreement (ITA) eliminating all tariffs on products such as computers, telecommunications equipment, semiconductors, computer equipment and other high-technology products.

In the auto sector, China will cut tariffs from the current 100 per cent or 80 per cent level to 25 per cent by 2006, with the largest cuts in the first years after accession.

Auto parts tariffs will be cut to an average of 10 per cent by 2006.

Significant cuts will also be made in the wood and paper sectors, going from present levels of 12-18 per cent on wood and 15-25 per cent on paper down to levels generally between 5 and 7.5 per cent.

China will also be implementing the vast majority of the chemical harmonisation initiative. Under that initiative, tariffs will be at 0, 5.5 and 6.5 per cent for products in each category.

ELIMINATION OF QUOTAS AND LICENCES

WTO rules bar quotas and other quantitative restrictions.

China has agreed to eliminate these restrictions with phase-ins limited to five years.

China will eliminate existing quotas upon accession for the top US priorities (eg optic fibre cable). It will phase-out remaining quotas, generally by 2002, but no later than 2005.

Quotas will grow from current trade level at a 15 per cent annual rate in order to ensure that market access increases progressively, and reduces the effect of quantitative restrictions.

Auto quotas will be phased out by 2005. In the interim, the base level quota will be $6 billion (the level prior to China's industrial auto policy) and this will grow by 15 per cent annually until elimination.

RIGHT TO IMPORT AND DISTRIBUTE

Trading rights and distribution are the major priority of the manufacturing sector. At present, China severely restricts trading rights (the right to import and export) and distribution (wholesaling, retailing, maintenance and repair, transportation, etc). Under the Agreement, China will provide, for the first time, trading rights and distribution rights to US firms. Trading rights will progressively be phased in over three years. Distribution rights will be provided even for China's most restricted distribution sectors such as wholesale, transportation, maintenance and repair. China will provide for trading rights and distribution.

SERVICES

China has made commitments in all major service categories with reasonable transitions to eliminate most foreign equity restrictions (especially in sectors where the US has a strong commercial interest), agreeing to accede to the Basic Telecommunications and Financial Services Agreements, and ''grandfathering'' of current market access for US service providers.

GRANDFATHERING

China will grandfather all existing current market access and activities in all services sectors. This will protect existing American distribution services, financial services, professional and other service providers in China, including those operating under contractual or shareholder agreements or a licence, from restrictions as Chinese commitments phase in.

DISTRIBUTION

In China today, foreign firms have no right to distribute products other than those they make in China, or to own or manage distribution networks, wholesaling outlets or warehouses. China also now frequently issues businesses licences which limit the ability of American firms to conduct marketing, after-sales service, maintenance and repair and customer support. As the section on industrial goods noted, this is a severe baffler to goods exports as well as to service exports.

China's commitments address all these issues. They reflect a comprehensive commitment on distribution - including wholesaling, sales away from a fixed location, retailing, maintenance and repair, and transportation. Thus, Americans will be able to distribute imported products as well as those made in China, offering significant opportunity to expand US exports of goods. As noted above, China will phase out all restrictions on distribution services for most products within three years.

SERVICES AUXILIARY TO DISTRIBUTION

Chinese commitments in services auxiliary to distribution include rental and leasing, air courier, freight forwarding, storage and warehousing, advertising, technical testing and analysis, and packaging services. AU restrictions will be phased-out in 3 to 4 years, at which time US service suppliers will be able to establish 100 per cent wholly owned subsidiaries.

TELECOMMUNICATIONS

China now severely restricts sales of telecommunications services and bars foreign investment. China's commitments mark its first agreement to open its telecommunications sector, both to the scope of services and to direct investment in telecommunications businesses. Through these commitments, China will become a member of the Basic Telecommunications Agreement.

Specific commitments include:

Regulatory Principles - China has agreed to implement the pro-competitive regulatory principles embodied in the Basic Telecommunications Agreement (including cost-based pricing, interconnection rights and independent regulatory authority), and agreed to technology-neutral scheduling, which means foreign suppliers can use any technology they choose to provide telecommunications services.

Scope of services - China will phase out all geographic restrictions for paging and value- added services in two years, mobile/cellular in five years and domestic wireline services in six years. China's key telecommunications services corridor in Beijing, Shanghai, and Guangzhou, which represents approximately 75 per cent of all domestic traffic, will open immediately on accession in all telecommunications services.

Investment - Under present circumstances, China allows no foreign investment in telecommunications services. With this agreement, China will allow 49 per cent foreign investment in all services, and will allow 50 per cent foreign ownership for value added in two years and paging services in three years.

INSURANCE

For insurance, China now restricts foreign companies to operating in Shanghai and Guangzhou. Under the agreement:

Geographic Limitations - China will permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession, and will eliminate all geographic limitation for future licences over five years, allowing access to the key cities of priority US interest in two to three years. Scope - China will expand the scope of activities for foreign insurers to include group, health and pension lines of insurance, which represent about 85 per cent of total premiums, phased in over five years.

Prudential Criteria - China agrees to award licences solely on the basis of prudential criteria, with no economic needs test or quantitative limits on the number of licences issued.

Investment - China agreed to allow 50 per cent ownership, remove onerous joint venture requirements on foreign life insurers and phase out internal branching restrictions. Life insurers may now choose their own joint venture partners. For nonlife, China will allow branching or 51 per cent ownership on accession and form wholly owned subsidiaries in two years.

Reinsurance is completely open upon accession (100 per cent, no restrictions).

BANKING

Currently foreign banks are not permitted to do local currency business with Chinese clients (a few can engage in local currency business with their foreign clients). China imposes severe geographic restrictions on the establishment of foreign banks.

China has committed to full market access in five years for US banks.

Foreign banks will be able to conduct local currency business with Chinese enterprises starting two years after accession.

Foreign banks will be able to conduct local currency business with Chinese individuals from five years after accession.

Foreign banks will have the same rights (national treatment) as Chinese banks within designated geographic areas.

Both geographic and customer restrictions will be removed in five years.

Non-bank financial companies can offer auto financing upon accession.

SECURITIES

China will permit minority foreign owned joint ventures to engage in fund management on the same terms as Chinese firms.

As the scope of business expands for Chinese firms, foreign joint venture securities companies will enjoy the same expansion in scope of business. Minority joint ventures will be allowed to underwrite domestic securities issues and underwrite and trade in foreign currency denominated securities (debt and equity).

PROFESSIONAL SERVICES

In the professional services, China currently tightly restricts operation of foreign law firms and accounting firms.

In the agreement, China has provided a broad range of commitments, including on legal, accountancy, taxation, management consultancy, architecture, engineering, urban planning, medical and dental, computer-related services. China will permit foreign majority control except for practising Chinese law (an exception common to many WTO members.) For accountancy, China has agreed to eliminate a mandatory localisation requirement and will now allow unrestricted access to its market to professionals licensed and follow transparent procedures.

AUDIOVISUAL

China's commitments cover the right to distribute video and sound recordings and cinema ownership and operation. For video and sound recordings, China will allow 49 per cent foreign participation in joint ventures engaged in the distribution of these products. China has also agreed to import 40 films after accession growing to 50 films in three years, of which 20 films will be revenue sharing.

TRAVEL AND TOURISM

China will allow unrestricted access to the Chinese market for hotel operators with the ability to set up 100 per cent foreign owned hotels in three years, with majority ownership allowed upon accession.

PROTOCOL PROVISIONS

Commitments in China's WTO Protocol and Working Party Report establish rights and obligations enforceable through WTO dispute settlement procedures. We have agreed on key provisions relating to anti-dumping and subsidies, protection against import surges, technology transfer requirements and offsets as well as practices of state-owned and state-invested enterprises. These rules are of special importance to US workers and business.

China has agreed to implement the TRIMs Agreement upon accession, eliminate and cease enforcing trade and foreign exchange balancing requirements, eliminate and cease enforcing local content requirements, refuse to enforce contracts imposing these requirements; and only impose or enforce laws or other provisions relating to the transfer of technology or other know-how, if they are in accordance with the WTO agreements on protection of intellectual property rights and trade-related investment measures.

These provisions will also help protect American firms against forced technology transfers, as China has also agreed that, upon accession, it will not condition “investment approvals, import licences, or any other import approval process on performance requirements of any kind, including: local content requirements, offsets, transfer of technology, or requirements to conduct research and development in China.

ANTI-DUMPING AND SUBSIDIES METHODOLOGY

The agreed protocol provisions ensure that American firms and workers will have strong protection against unfair trade practices including dumping and subsidies. The US and China have agreed that we will be able to maintain our current anti-dumping methodology (treating China as a non-market economy) in future anti-dumping cases without risk of legal challenge. This provision will remain in force for 15 years after China's accession to the WTO.

Moreover, when we apply our countervailing duty law to China we will be able to take the special characteristics of China's economy into account when we identify and measure any subsidy benefit that may exist.

PRODUCT SPECIFIC SAFEGUARD

The agreed provisions for the protocol package also ensure that American domestic firms and workers will have strong protection against rapid 'increases of imports.

To do this, the Product-Specific Safeguard provision sets up a special mechanism to address increased imports that cause or threaten to cause market disruption to a US industry.

China is a major exporting country that enjoys open access to US markets. This mechanism, which is in addition to other WTO Safeguards provisions, differs from traditional safeguard measures. It permits the United States to address imports solely from China, rather than from the whole world, that are a significant cause of material injury through measures such as import restrictions. Moreover, the United States will be able to apply restraints unilaterally based on legal standards that are lower than those in the WTO Safeguards Agreement. This provision will remain in force for 12 years after China accedes to the WTO.

STATE-OWNED AND STATE-INVESTED ENTERPRISES The Protocol addresses important issues related to the Chinese government's involvement in the economy. China has agreed it will ensure that state-owned and state-invested enterprises will make purchases and sales based solely on commercial considerations, such as price, quality availability and marketability, provide US firms with the opportunity to compete for sales and purchases on nondiscriminatory terms and conditions.

China has also agreed that it will not influence these commercial decisions (either directly or indirectly) except in a WTO consistent manner. With respect to applying WTO rules to state-owned and state-invested enterprises, we have clarified in several ways that these firms are subject to WTO disciplines.

Purchases of goods or services by these state-owned and state-invested enterprises do not constitute ''government procurement'' and thus are subject to WTO rules.

We have clarified the status of state-owned and state-invested enterprises under the WTO Agreement on Subsidies and Countervailing Measures. This will help ensure that we can effectively apply our trade law to these enterprises when it is appropriate to do so.

TEXTILES

China's protocol package will include a provision drawn from our 1997 bilateral textiles agreement, which permits US companies and workers to respond to increased imports of textile and apparel products. This textile safeguard will remain in the effect until December 31, 2008, which is after the WTO agreement on Textile and Clothing expires. Friday, November 19, 1999

UNEMPLOYMENT

Jobs boost seen with competition

REUTERS in Beijing

Urban unemployment is much worse than official figures indicate but the United Nations believes the intense foreign competition which will follow membership in the World Trade Organisation should not exacerbate it.

"When China enters the WTO it doesn't necessarily mean it will increase unemployment because it will also create new jobs," Kerstin Leitner, resident representative of the United Nations Development Programme, said yesterday.

A UN report issued yesterday said the mainland's urban unemployment rate was between 7.9 and 8.3 percent last year, or between 15.4 million and 16 million people.

That figure included unemployed rural migrants.

The government urban unemployment rate of 3.1 per cent excludes rural migrants. The UN report said urban unemployment might hit 18 million next year.

There are widespread fears in the mainland that opening up the economy as WTO membership requires will bring even more job losses, especially in the suffering state-run industrial sector.

"While we're preparing for WTO, the government has to put the problem of unemployment and the creation of new jobs as its top priority," said Hu Angang, a research fellow at the Chinese Academy of Science who was co-author of the UN report.

Millions of jobs have already been eliminated at state-run firms as the government pushes restructures.

Ms Leitner said while many state-owned enterprises might axe more jobs due to increased foreign competition, millions of jobs would be created in services such as tourism, fashion and marketing.

"Tourism is flourishing and there is much more job opportunities," she said.

Ms Leitner said restructuring was also under way in the garment industry as factories switched from cheap T-shirts to fashion apparel. Friday, November 19, 1999

INTERNET

Deal will not harm mainland telecoms players

REUTERS

World Trade Organisation membership would not shock mainland firms in the telecommunications sector, according to Minister for Information Industry Wu Jichuan.

"Entering the WTO would not create a big shock for China's information industries," the Economic Times quoted Mr Wu as saying.

He made no mention of Internet services, an area he said only two months ago was forbidden to foreign investors. Tuesday, November 23, 1999

Western provinces in line for large-scale development

VIVIEN PIK-KWAN CHAN

The development of western provinces is to be sped up along lines similar to the way special economic zones were established in the 1980s, the mainland's planning boss said.

Zeng Peiyan, Minister of the State Development Planning Commission, said in a conference in Beijing on Sunday that inland provincial development would soon take off like the five zones.

"Development in the western regions will move a significant step forward next year," Mr Zeng said.

The special economic zones - Shenzhen, Zhuhai, Shantou, Xiamen and Hainan - pioneered China's economic reforms in the 1980s.

Unlike other cities and provinces, Beijing allowed governments in the zones to grant generous tax breaks to foreign businesses.

According to Xinhua, Mr Zeng acknowledged that huge investment would be needed to build infrastructure facilities in the west as well as ecological projects.

Schemes in the pipeline included cross-province motorways linking major cities, airports and railways and water conservation facilities.

Experts said that foreign investment would be essential.

"Authorities are considering opening up these projects for foreign investment," Hu Angang, a research fellow at the Chinese Academy of Science, said.

"Other sectors like tourism and insurance may also be gradually established in major cities in the western region."

Another western-region development expert, Chen Dongsheng, said despite the calls for infrastructure development, the major focus in the region in the next two years would be to restore wasteland into grassland and forests.

ECONOMY

600 enterprises given go-ahead to conduct swaps REUTERS

Beijing plans to give about 600 enterprises the go-ahead by the end of this year to conduct debt-for-equity swaps involving more than 400 billion yuan (about HK$373.52 billion), the China Securities newspaper reported.

The newspaper yesterday quoted Sheng Huaren, Minister of the State Economic and Trade Commission, as saying the government had so far recommended 394 enterprises with debts of 358.7 billion yuan to asset management companies.

Asset management firms, set up by the government this year, had already signed debt- for-equity deals with 32 enterprises which have a combined debt of 67.55 billion yuan, Mr Sheng was quoted as saying.

Most of the 32 firms would be able to move into the black this year, thanks to the swaps, he said.

The four asset management corporations - Cinda, Dongfang, Great Wall and Huarong - say swaps will be a main method to recover bad loans of the four big state banks and cut the burden on hand-picked state-owned enterprises which are presently highly geared.

The management companies would try to recover the loans by packaging and selling the equity to domestic and international investors, some of whom are expected to be sceptical about the quality of the shares.

All enterprises approved by Beijing must post profits next year, Mr Sheng said.

FUND MANAGEMENT

Easier listing planned

FOO CHOY PENG in Shanghai

Beijing has taken steps to allow state-approved mutual funds to make easy money in a bid to lure retail investors to play the markets through these investment vehicles.

The move comes as the government plans to build up a base of institutional investors to stabilise volatile stock markets and pave the way for more listings of state enterprises.

Ten more mutual funds are expected to sell shares to the public in the coming year, adding to the 19 already approved, which have a combined capital base of 47 billion yuan (about HK$43.8 billion). In the latest package of goodies for funds, the China Securities Regulatory Commission said funds could:

Apply for a combined stake of at least 20 per cent of new-share offers by companies offering 50 million new shares to the public;

Allow funds to invest up to 30 per cent of their assets in new-share offers annually, but money invested in public offerings of at least 400 million shares will not be counted in the 30 per cent cap;

Sell off 50 per cent of the share-debut purchases, and keep the remaining 50 per cent for at least six months; and

Subscribe to additional or rights share sales by companies already listed, with the size decided by fund managers, underwriters and companies involved.

The government measures improved substantially on previous ones, which allowed mutual funds to buy combined stakes of 10 to 20 per cent in new offers, depending on the issue size; invest up to 15 per cent of their assets in shares; and freeze new share allotments for two months before they could be traded.

Analysts said the moves were aimed at expanding the size of primary offers to mutual funds, whose size has grown significantly.

"It is easy money because primary offers often go up sharply on debut, and with so many funds coming into the market, naturally there is a need to expand the cake," Shanghai Finance Securities analyst Shao Rui said.

"To continue to attract retail investors to the funds, the funds must show good profits," he said.

Retail investors' market confidence had been shaken by poor corporate results, and fears of economic disruption stemming from the country's possible entry to the World Trade Organisation.

By giving all-out support to the development of mutual funds, Beijing also hoped to revive the lackadaisical secondary markets, which have been drifting listlessly.

Haitong Securities analyst Zhu Zhan said: "The secondary markets are attracting very little money these days and the country hopes to make mutual funds their mainstay, so it needs to give them solid support." TELECOMS

Foreign investors allowed to invest in mainland telecoms

AFX-ASIA

The mainland will allow foreign investors to acquire 25 per cent stakes in domestic telecom operators after the country's entry into the World Trade Organisation, a Ministry of Information Industry official said.

The maximum permitted foreign stake in telecom operators will be raised to 49 per cent six years after WTO entry, the official said.

She said a recent report saying the information industry would restructure into four holding groups may have mistakenly referred to China Telecom's division into four parts. Monday, November 22, 1999

ZHEJIANG BRIEFING

Textile city prepares for big WTO windfall

MARK O'NEILL

His army of textile machines throbbing in the background, Zhao Jingui pondered, like thousands of company executives across the mainland, what entry into the World Trade Organisation would mean.

''It has to be good for us since we make textile fabric. Chinese fabrics are subject to quotas in Europe and the United States, which will be abolished in 2005,'' said Mr Zhao, vice-general manager of the Zongheng Group, which will turn out 120 million metres of fabric this year, making it the mainland's biggest producer and Asia's third- largest.

''Exports account for about 10 per cent of output now. With WTO entry, it will be 30 per cent 10 years from now,'' said Mr Zhao.

''It also means that, with lower tariffs, we will import more of our raw material synthetic fibres from South Korea, Taiwan and Japan. Currently, we use only Chinese-made material,'' he said.

The city of Shaoxing should benefit from the agreement between Beijing and Washington signed last Monday, which removed the biggest obstacle to the mainland's WTO entry. Officials are now speaking of the country becoming a full member by March next year.

Shaoxing makes textiles and light industrial goods, which accounted for 54 per cent of US$2.64 billion worth of exports in the first nine months of this year.us100 The ending of textile quotas and WTO member countries giving Beijing normal trade relations status will greatly broaden the export market for goods in which the mainland is globally competitive, such as garments, toys and shoes.

Shaoxing, a city of 4.2 million in the centre of Zhejiang province, makes all of these. It can produce two billion metres of textiles and three billion metres of dyed fabric per year 15 and 20 per cent of the national total. It is also the mainland's biggest fabric market, with a turnover of 1.5 billion metres and 15.1 billion yuan (about HK$14.09 billion) last year.

City officials said WTO entry would also stimulate export of its labour. Its 79 construction firms, employing 300,000 people, have built roads, railways and sports stadiums in Thailand, Cambodia and Africa and sent engineers and technicians to Singaporean factories.

Entry will also attract foreign investment, they said.

Chen Zhongming, head of the city's township and village enterprises bureau, which accounts for more than 80 per cent of its GDP, said WTO was good news because its firms needed new markets.

''The domestic market for many goods is saturated. This will open up new markets and end quotas on our textile exports. We are lucky. We have no auto industry and not much electronics production.''

Wang Qiang, the city's foreign trade and economy bureau director, said that entry presented threats as well as opportunities.

''It does not mean there will be no obstacles to our imports. Foreign countries can use ways other than quotas to limit our exports, such as technical and packaging restrictions, minimum prices and environmental reasons, saying that our dyeing methods are polluting,'' he said.

He said entry would have a severe negative impact on finance, telecommunications, commerce, agriculture, petrochemical, and car and electronics industries the latter two the worst hit.

Lower tariffs and a more liberal import policy would increase flow of foreign products to these sectors.

Mr Zhao said entry would be a mixed blessing for the petrochemical industry.

''It will be good for the refiners, since they will be able to import cheaperraw material, but it will be bad news for domestic producers of crude.''

Production costs are usually higher than abroad.

The official press has put a positive spin on the agreement part of the government's effort to sell it to the public and to overcome opposition from many in government and state companies, who see it as selling out to foreign interests. ''State firms still have five years to turn themselves round and adapt to the market,'' said the Zhejiang Daily. ''But the pressure from foreign firms will intensify and threaten the survival of state firms with backward technology and poor-quality goods. The impact on national industries will be enormous.''

It continued: ''But our exports of labour-intensive products no longer made in developed countries will rise, especially synthetic garments which are subject to all kinds of tariff and non-tariff barriers. After the ending of quotas in 2005, our share of the textile market in Europe and North America could rise to 35 per cent from 15 per cent now,'' it said.

''It will be a bonanza for exporters of shoes, china, refrigerators and colour televisions. It will be like fish swimming in water.''

But leave the last word to a local taxi driver.

Once we get into WTO, I will be able to get rid of this bad Santana car and buy a Japanese one, preferably a Honda. Japanese cars are best for us because we drive a lot and they save petrol. American cars are too big and use too much petrol.

''It will be good for Zhejiang, as we have few big state companies and many small and medium-size firms. The biggest plant is a steel mill in the capital Hangzhou employing 30,000, which is nothing compared to Capital Steel and the giant state firms in the north,'' he said.

''WTO will be good for China south of the Yangtze, which makes light industrial goods, but spells the end for China north of the river.

''The big state firms will close and their workers will be laid off, living on 300 yuan a month paid by the government.'' Tuesday, November 30, 1999

ISSUES

State-share sale plan hits market

REUTERS in Shanghai

Beijing has selected 10 firms, including Shanghai Lujiazui Finance and Trade Zone Development, to experiment with the sale of part of their state-held shares, accordingto a report.

Two of the 10 companies would be allowed to place their state shares with existing public shareholders on a trial basis before the end of this year, Shanghai Securities News said yesterday.

It quoted an announcement from the market watchdog, the China Securities Regulatory Commission.

Analysts said these stocks shared similarities in that they were cash-strapped stocks with a bigger capitalisation.

The announcement was a further blow to the already weak market sentiment.

All four indexes on the mainland's stock markets posted declines yesterday.

The Shanghai A-Share Index fell 0.63 per cent to 1,525.84, while the Shanghai B-Share Index closed down 0.16 per cent to 37.85 points.

In Shenzhen, the A-Share Index dropped 0.8 per cent to 455.52 points, while the B-Share Index closed down 0.29 per cent to 82.08 points.

The government said last month it would allow some listed companies to sell part of their state shares to reduce government control.

The shares would be placed with public shareholders.

If the offers were not fully subscribed, the remaining shares would be placed with domestic mutual funds.

Shares sold to public shareholders would be listed immediately, while stock placed with mutual funds would be listed over a two-year period.

Most of the mainland's listed companies are controlled by the state and have sold only a small portion of their shares to the public. State shares usually cannot be sold, even though many government entities need cash.

The candidates for sales included Shenzhen-listed Jidong Cement, Huayi Investment, Huitian Heating, Fulong Heating and Guizhou Tyre, the newspaper said.

The others were Shanghai-listed Tianjin Port, Chengdu People's Department Store, pharmaceutical producer Chongqing Taiji and motorcycle-maker China Jialing, it said.

Most of the companies list domestic-currency A shares.

Shanghai Lujiazui is the only company with A shares and hard-currency B shares, both listed on the Shanghai stock exchange.

Officials have not so far clarified whether B-share holders can also buy state shares. Wednesday, December 1, 1999

SAR most open economy

MATTHEW BROOKER

Conservative think-tank The Heritage Foundation has admitted "imperfect" methodology led it to dethrone Hong Kong as the world's freest economy in favour of Singapore last year.

The admission came as the Washington-based institute again named Hong Kong No 1 in its 2000 Index of Economic Freedom yesterday.

The SAR retained its place at the top despite a warning a year ago from the foundation that it had slipped below Singapore due to the Government's market intervention.

That intervention, in August last year, came too late to affect last year's rankings. Hong Kong has headed the index for the six years it has been in existence.

The foundation's declaration in December last year that Hong Kong was no longer the world's freest economy provoked bitter reaction from senior government officials.

Foundation officials yesterday said the study's methodology had been changed to take account of factors such as the Singapore Government's substantial stock market holdings through its investment company, Temasek.

"It was imperfect, I admit it," Heritage Foundation president Edwin Feulner said.

However, the foundation defended its criticism of the intervention as justified and claimed it had been vindicated by the Hong Kong Government's decision to start selling its holdings.

It denied the Government's strong reaction had prompted it to change the way the index was compiled, saying its methods were constantly being refined.

The index is based on an analysis of 50 economic variables in 10 broad categories across 161 economies.

Hong Kong was downgraded for the intervention in this year's study but was rewarded for lower inflation, leaving its combined score unchanged.

Last month's launch of the Tracker Fund came after the cut-off point for the index and was not factored into this year's rating. Singapore, despite remaining in second place, saw its rating decline due to an increase in the marginal tax rate paid by the average wage earner.

The survey is a further boost for Hong Kong's image as it recovers from the deepest recession in its history. The Government last week said that gross domestic product grew 4.5 per cent year on year in the third quarter.

However, the foundation warned that the SAR's economic crown was still under threat and pointed to concerns over the Disney theme park and Cyber-Port projects.

Mr Feulner said the developments were unfavourable because "it's the Government making investment decisions".

"It isn't up to the Government to subsidise private enterprise projects."

Gerald O'Driscoll, senior fellow in economic policy at the foundation and one of the study's authors, said it would monitor the Government's actions but "thus far, it hasn't show up as any systematic negative trend".

Financial Secretary Donald Tsang Yam-kuen said he was delighted Hong Kong had retained the No 1 ranking.

"We appreciate the concerns that were expressed when the world's freest economy was forced to intervene in the stock market in 1998," Mr Tsang said.

"However, it has now been widely accepted that the decision was taken during exceptional circumstances that carried potentially devastating consequences for our currency and economy.

"It was never our intention to hold on to the stocks."

He said the Government had not departed from its philosophy of minimum intervention.

"There is no question that the Government would favour one section of the economy over another," Mr Tsang said.

"We are, however, conscious of our responsibility to provide the necessary infrastructure in response to market demands, especially those arising from the ongoing shift to a knowledge-based economy."

A year ago The Heritage Foundation named Hong Kong as No 1 in its 1999 Index but warned that the August intervention had put it behind Singapore.

Mr Tsang responded with a thinly veiled critique of the island state, urging the foundation to examine whether "other economies also hold local stocks and to what extent". Temasek controls about a third of the Singapore stock market. He also drew attention to transparency and disclosure, freedom of the press and Government dictation of wages.

Mr Tsang's comments came a week after Singapore imposed across-the-board pay cuts for civil servants and backed a plan to extend them to all workers.

WTO

Car sales suffer in wait for cheap deals

MARK O'NEILL in Beijing

The agreement the mainland made with the United States on entering the World Trade Organisation and the expectation of lower prices is deterring people from buying cars.

The deal, signed in Beijing on November 15, calls for the mainland to cut car tariffs from the present 80-100 per cent, to 25 per cent by 2006, with the largest cuts in the first years after accession.

Mainland officials say the country should be able to enter the WTO during the first half of next year.

A spokesman for the Asian Games Car Trading Centre, Beijing's biggest car market, said the expectation of lower prices for domestic and imported cars has stopped some consumers from buying.

"Prices will fall next year, depending on the level of imported cars. Domestic makers will cut prices in line with imported models. I expect a price fall of about 10 per cent next year," he said.

Fearful of a drop in sales, officials and manufacturers are playing down such expectations, saying even after WTO entry the government will control imports.

Dong Yang, an official of the State Machinery Building Bureau, responsible for the car industry, said: "Entering WTO does not equal price cuts. There will not be major falls in price over the next two to three years."

An official of one Japanese car-maker said that, while the government had promised to lower tariffs, it would continue to limit import volume after entering the WTO in order to protect domestic manufacturers.

After the Sino-US deal, nearly all the main domestic makers, including the Shanghai- Volkswagen joint venture, First Auto Works, Citroen-Dongfang joint venture Beijing Jeep, Honda Motor and ChangAn, have said they do not plan to cut prices and fear the effect of a price war.

This is because their profit margins are low and they need to spend heavily on new technology and new models to meet the foreign competition.

It is widely believed Shanghai-Volkswagen wants to cut the price of its Santana, the most popular passenger car from its 110,000 yuan (about HK$102,000) to below 100,000, but that the bureau has refused for fear that would hurt other manufacturers.

The most important buyers of passenger cars are individuals.

This year they will buy 922,000 models, accounting for 55.6 per cent of all sales, up from 50.6 per cent last year, the China Economic Times said.

Experts said that, at present income levels, an additional one million individuals could afford to buy a car.

In the first 10 months, the mainland produced 1.43 million vehicles, an increase of 11.8 per cent from the same period last year, and sold 1.46 million, an increase of 9.99 per cent.

The present import levels are low. In the first half, the mainland imported 14,161 cars, down from 17,483 in the same period last year. This is due to government restrictions, high tariffs, widespread smuggling and a ban on officials below vice-minister buying imported cars.

Last year, imports were 39,715, down from 48,441 in 1997.

"Auto imports is one of many questions arising from the Sino-US WTO deal," said one Western banker. "Everyone welcomes the agreement but what will it mean in practical terms? How will it be implemented? I am telling my clients to be cautious." Thursday, December 2, 1999

BANKING

Hong Kong new site for forex operations

REUTERS in Shanghai

The Bank of China and other state-owned commercial banks plan to move their main foreign-exchange trading operations to Hong Kong from Beijing, according to bank officials.

"Our bank has decided to move its foreign-exchange operation centre to Hong Kong from Beijing shortly," said a foreign-exchange dealer at the Shanghai branch of the Bank of China.

The bank is the mainland's main foreign-exchange bank.

"Hong Kong is more commercial and closer to world currency markets," the dealer said.

"Dealers can conduct transactions around the clock, keeping pace with movements in world currency markets."

An official at the bank's headquarters in Beijing confirmed the plan but declined to give a timetable.

Two other big state-owned commercial banks, the Industrial and Commercial Bank of China and the Agricultural Bank of China, had similar plans, officials said. They gave no timetable.

A dealer for Industrial and Commercial Bank of China in Shanghai said: "We will move major foreign-exchange operations to Hong Kong from Beijing, while our Beijing headquarters will only play a role in settlement."

All Industrial and Commercial branches in the mainland would trade foreign exchange with the Hong Kong centre, he said.

Banking officials said some regulations would have to be changed to make the move possible. Saturday, December 4, 1999

WTO talks on brink of failure

DAVID SAUNDERS and GREG TORODE in Seattle

Bitter wrangling over divisions in World Trade Organisation policy yesterday brought efforts to create a new economic order close to the brink of failure.

Talks at the WTO's ministerial conference continued into the early hours of the morning as delegates sought desperately to achieve consensus on issues ranging from agricultural subsidies to implementation of tariff reductions agreed to in the last round of talks.

But even WTO officials said a declaration of substance looked unlikely.

Trade officials from the WTO's 135 member countries have been in Seattle since Tuesday trying to forge an agenda for a new round of trade talks.

Questions about the WTO's effectiveness, threats of walkouts and anger at the manner in which the US had subverted the talks with domestic political issues have undermined the summit.

"Never underestimate the potential for a breakdown. This is at a delicate stage," chief WTO spokesman Keith Rockwell said.

All 48 African member countries issued a joint statement expressing disappointment at the way in which negotiations were being conducted.

"There is no transparency in the proceedings and African countries are being marginalised and generally excluded on issues of vital importance for our peoples and their future," the statement said.

"We are particularly concerned over the stated intentions to produce a ministerial text at any cost."

WTO director-general designate Supachai Panitchpakdi said: "I'm very concerned . . . things are starting to look extremely difficult indeed."

Norwegian Foreign Minister Knut Vollebaek described the US leadership of the talks in Seattle as "chaotic".

These sentiments came as US Trade Representative Charlene Barshefsky, chairman of the working groups, gave delegates an ultimatum to get consensus by last night, warning she would exercise her powers to push through a declaration if they failed. She said: "I reiterated to the ministers that if we are unable to achieve that goal I fully reserve the right to also use an exclusive process to achieve a final outcome. There's no question about my right as a chair to do it or my intention to do it, but it is not the way I want this to be done."

However, trade representatives questioned what power Ms Barshefsky in fact had to force an outcome on an organisation that emphasises its consensus approach.

The decision by the US to call a working group discussion on the contentious labour standards issue also angered many countries which vehemently opposed its introduction to the agenda, prompting questions from some developing nations about its legitimacy and status at the talks.

The labour standards debate followed calls by US President Bill Clinton on Wednesday to impose sanctions on countries that did not adopt appropriate labour practices, a remark which sparked outrage among other delegations and accusations that he had used the WTO as a forum to gain support for the Democratic election campaign.

A senior Hong Kong trade official said: "What President Clinton has said has raised the temperature a few notches. I think the event is not going well."

A frustrated European Union trade commissioner Pascal Lamy countered Mr Clinton, saying sanctions would not be on the agenda.

He also questioned the effectiveness of the WTO process, suggesting the body may have to consider alternative methods, including a possible WTO parliamentary body, to achieve outcomes.

"I am worried about the process. The problem I'm trying to raise for the future, looking ahead, is how an institution as important as the WTO is for world trade and the world economy can have such mediocre procedures," Mr Lamy said.

The one area where there appeared hope of a breakthrough was in agriculture, where a working party produced a draft text that appeared to have broad support.

BROKING

Trust securities arms merged to form super group REUTERS in Beijing

The mainland plans to set up a big brokerage next year by merging the securities operations of five trust and investment companies.

The move, announced yesterday, is part of the country's financial reforms, according to trust officials. The brokerage, to be called Yinhe Securities would become the mainland's largest securities house, with 160 offices, the officials said.

But it was expected to have limited registered capital of about 1.2 billion yuan (about HK$1.11 billion), they said.

The officials said the State Council issued a document in January proposing the merger of the securities arms of People's Insurance Trust and Investment with those of four trusts owned by the country's major four state banks.

They are Huarong Trust and Investment, Dongfang Trust and Investment, Cinda Trust and Investment and Great Wall Trust and Investment.

Huarong is wholly owned by the Industrial and Commercial Bank of China, Dongfang by the Bank of China, Cinda by the China Construction Bank and Great Wall is held by the Agricultural Bank of China.

People's Insurance is owned by one of the mainland's largest state insurance companies.

The officials said the merger plan would comply with the first Securities Law, which bans trust firms, insurers and banks from operating directly in one another's markets.

A People's Insurance official said the China Securities Regulatory Commission - the stock market watchdog - and the Finance Ministry were drafting proposals on the merger, which required the final approval of the State Council.

A Huarong Trust official said Yinhe was expected to be formed next year. When established, the trust firms of the big four banks would be shut down.

The trusts were in the process of unwinding their businesses. Their foreign debts were minimal, the officials said.

Some staff members of the four trusts had been transferred to the mainland's four asset management companies, created to take over bad debts at the big four banks and recover them through debt-for-equity swaps or auctions, they said.

Published on Thursday, December 9, 1999

REFORM

Era calls for global bodies, says Trichet AGENCE FRANCE-PRESSE in Tokyo

Banking reform in Europe, the United States and Japan has entered a "biological process" out of the hands of the authorities, accoring to Bank of France governor Jean-Claude Trichet.

European monetary union since the launch of the euro on January 1, the November 12 abolition of United States depression-era laws on financial institutions and the Big Bang reforms in Japan were creating "homogenous and decompartmentalised markets", Mr Trichet told the Japanese Bankers' Association.

The new era called for the creation of "global entities" acting across the planet, he said.

The home market for banking participants was growing, Mr Trichet said.

"No single institution accounts for more than 4 per cent of the continental European market. In the United States it would appear that up until the end of 1988 no one banking institution covered the US territory in its entirety."

"The levels of concentration remain relatively low in most European banking systems as well as in the United States." he said. "Consequently, the wave of restructuring is far from being over."

The central bank governor indirectly answered critics of French authorities' handling of the ferocious battle last summer between the three big financial houses, Banque National de Paris, Paribas and Societe Generale.

The government, if not the central bank, was suspected of encouraging a hostile takeover by BNP against Societe Generale and Paribas to create a "French champion" while deterring other European players from entering the fray.

"We are dealing with a biological process. There is no plan by the authorities to create such and such a champion," said Mr Trichet.

"The logic of the consolidation is more or less the same evolution that has taken place in other industries. You start by reshaping your own economy and go on to larger-scale reshaping."

In Europe, he said, consolidation was allowed by a strengthening of the roles of shareholders and markets. "In Europe, most of the banking privatisation programmes have now been completed," Mr Trichet said, including the demutualisation of building societies in Britain.

He said the powerful mutual financial sector in France, led by European No 2 Credit Agricole, could not escape the need to adapt.

"In this [French] market place as well as all others, all participants - whatever their legal structure - are called on to move rapidly and adapt to a changing world," he said.

"We will see whether they all [mutual groups] end up with having a capitalist arm."

Mr Trichet warned that financial mergers should meet a number of conditions in order to be successful.

"Improvement in profitability is not an automatic consequence of a merger," he said.

"The definition of optimum size varies according to the type of institutions, activity and business conducted."

Restructures could hit high hurdles, including the compatibility of information systems and culture clashes.

Mr Trichet said experience in Europe and the US showed that mergers and acquisitions would be successful when they were part of a strategy aimed at striking a balance between the need to strengthen existing product lines and the diversification of activity.

"[This should be] part of medium-term plans aiming at extensively reorganising both distribution channels and means of production," he said.

But, "the emergence of transnational banking groups will bring new risks" if the new giants have eyes bigger than their bellies.

Mr Trichet said banking authorities had a responsibility to monitor the restructuring "in order to preserve and reinforce the integrity of the banking system as a whole". Monday, December 13, 1999

Co-listing set to follow expected Nasdaq-HK link

BLOOMBERG in New York

A tie-up between Nasdaq and the Hong Kong stock exchange, expected to be announced today, paves the way for shares to be co-listed in both markets.

Ahead of a joint press conference by the two exchanges to be held later today in New York, a statement issued on Friday said: "Information-sharing agreements will be signed and an initial list of stocks to be co-listed will be announced."

The Nasdaq, which is the world's second-largest stock market by capitalisation, and the Hong Kong stock exchange agreed last December to make it easier for companies to list their shares in the United States and Hong Kong.

Frank Zarb, chairman of the National Association of Securities Dealers, Nasdaq's parent, will speak at today's press conference, along with Hong Kong exchange chairman Lee Hon-chiu.

Mr Zarb has said he wants to create a European version of Nasdaq in 2001.

And he expects investors anywhere in the world to be able to trade any stock at any time.

Meanwhile, the New York Stock Exchange (NYSE), the world's largest stock market and Nasdaq's cross-town rival, wants to create an alliance with eight of the largest markets around the world.

Australian Stock Exchange managing director Richard Humphry said the NYSE plans a meeting next month in Europe to discuss the so-called G-9.

The Hong Kong exchange's market capitalisation was US$2.7 trillion at the end of last year, according to the International federation of Stock Exchanges. Nasdaq's market cap is about US$4.5 trillion, and the NYSE's about three times that. Tuesday, December 14, 1999

MULTINATIONALS

SAR on track as base for region

JOSEPH LO

Multinational firms are beginning to rediscover Hong Kong as a headquarters site for their Asian operations, ac cording to a government poll. The Industry Department said the number of regional operations based in Hong Kong rose an annualised 1.7 per cent this year.

An overwhelming majority of the companies surveyed cited "cleanliness of government" to be the most favourable aspect in choosing Hong Kong over its regional competitors.

An Industry Department spokesman said he welcomed the positive results from this year's survey.

"This is a good sign that our business environment has turned for the better and that international business interest in Hong Kong is on the rise," he said.

By comparison, a similar survey conducted last year recorded a 2.6 per cent decrease in the number of overseas companies headquartering their Asian operations in Hong Kong, he said.

The survey comes as Asia begins to emerge from two years of regional recession.

Hong Kong's position as the leading regional business city has been under pressure from Singapore, Shanghai, Sydney and Tokyo.

Other important factors cited by the 411 respondents to the survey included access to information, the political climate, banking and financial facilities, location and the liberal tax regime.

The survey showed there were 2,490 regional operations in Hong Kong, made up of 840 regional headquarters and 1,650 regional offices.

When asked whether they would consider relocating elsewhere, 95 per cent of companies with regional headquarters in Hong Kong and 94 per cent of the regional offices in Hong Kong said they would not.

United States multinationals have the largest number of regional headquarters in Hong Kong with 205. This is followed by the Japanese firms with 114 regional headquarters and British companies with 82.

In terms of regional offices in Hong Kong, Japan has the largest number with 368 offices, followed by the US with 278, and mainland companies with 136.

Most of the Hong Kong regional headquarters and offices were engaged in wholesale and retail, import and export, or other business services such as legal, accounting and advertising services.

Other operations were in finance and banking, manufacturing and transport. Tuesday, December 14, 1999

Microsoft, Intel join Nasdaq queue for SAR listing

ENOCH YIU and HUI YUK-MIN

Technology giants Microsoft and Intel will be among the seven Nasdaq-listed companies expected to list in Hong Kong early next year in a programme aimed at making the SAR the regional listing centre for high-technology firms.

Cisco Systems, Dell Computer, Amgen, Applied Materials and Starbucks will also be in the pilot Nasdaq-Hong Kong dual-listing programme, a stock exchange spokesman said.

The stock exchange and the parent of Nasdaq - the National Association of Securities Dealers - signed a regulatory agreement on share information yesterday in New York.

The agreement paves the way for the Nasdaq companies to seek dual listings in Hong Kong.

The Nasdaq companies are expected to begin listing procedures in Hong Kong in February, stock exchange chairman Lee Hon-chiu said.

The companies would be listed via introduction, meaning initial public offerings were unnecessary.

"The pilot programme will establish Hong Kong as a major trading centre for global stocks in the Asian time zone," Mr Lee said.

"Eventually, Hong Kong will be an integral part of a 24-hour trading platform linking three time zones."

Under the agreement, companies with primary listings on the Nasdaq and with good track records can seek dual listings in Hong Kong.

They must also have large market capitalisations.

Local listing rules would not apply, as they already complied with Nasdaq requirements, Mr Lee said.

However, regulations governing market manipulation and insider dealing would apply to investors in Nasdaq securities listed in Hong Kong, stock exchange chief executive Alec Tsui Yiu-wa said.

The stock exchange is in talks with the Securities and Futures Commission on waiving the share disclosure rule as it is already covered by US regulations. The Nasdaq counters will be traded in Hong Kong dollars on the existing stock exchange system.

Nasdaq international president and chief executive John Wall said clearing houses in the US and Hong Kong had set up mechanisms to facilitate clearance and settlement of Nasdaq trade.

Graham Brant, general manager at Microsoft Hong Kong, said under the programme Nasdaq companies would be able to reach more international investors.

"Stock exchanges are now facing a new challenge from Internet trading," he said.

"They have to move ahead to allow global trading."

The Government's plan for Hong Kong to become a regional technology hub would also benefit from the programme, as it would help to attract more foreign investment, Mr Brant said.

Software giant Microsoft had a market capitalisation of US$484.4 billion (about HK$3.77 trillion) at the close of Friday trading.

That is just slightly lower than Hong Kong's entire market capitalisation which stood at HK$4.17 trillion as at the end of last month. Wednesday, December 15, 1999

STOCK EXCHANGE

Market-maker proposal for Nasdaq counters attracts flak

ENOCH YIU

The stock exchange may implement a market-maker system for US Nasdaq companies expected to begin trading in Hong Kong next year, according to chief executive Alec Tsui Yiu-wa.

"Market makers, who quote prices for stocks, will help investors to enter and leave the market," Mr Tsui said.

"This will help ensure the liquidity of the Nasdaq companies when they list in Hong Kong next year."

However, brokers said a market-maker system was unnecessary.

Credit Suisse First Boston vice-chairman (Pacific region) Alan Smith said only new counters required market makers to ensure their liquidity.

"Microsoft, Intel and Dell Computer are well-known companies," Mr Smith said.

"I don't think market makers are needed to promote the trading of these stocks."

In addition to these firms, Cisco Systems, Amgen, Applied Materials and Starbucks have been given the go-ahead to seek dual listings in Hong Kong through a pilot programme with Nasdaq.

Mr Smith said institutional and retail investors would be interested in trading in these Nasdaq counters.

"Fund managers would think it is convenient to trade the Nasdaq stocks in the Asian time zone," he said.

"Retail investors would also interest to trade in the hi-tech Nasdaq stocks."

Stock exchange vice-chairman Stephen Hui Chiu-chung said he was opposed to introducing a market-maker system only for Nasdaq stocks.

"It is unfair to introduce the market-maker system for the Nasdaq firms while the system is not applying to other local companies," he said.

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