COUNTRY REPORT China Mongolia 4th quarter 1998 The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. 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ISSN 1350-7109 Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK 1 Contents 3 Summary China 5 Political structure 6 Economic structure 7 Outlook for 1999-2000 12 Review 12 The political scene 17 Economic policy 19 The economy 21 Industry 24 Agriculture 27 Infrastructure and the environment 29 Money and finance 34 Foreign trade and payments Mongolia 42 Political structure 43 Economic structure 44 Outlook for 1999-2000 46 Review 46 The political scene 49 Economic policy and the economy 52 Agriculture 52 Industry and construction 53 Mining and energy 54 Transport and communications 54 Foreign trade, aid and payments 57 Quarterly indicators and trade data List of tables 10 China: forecast summary 12 China: current-account forecasts 20 China: economic results 21 China: industrial value added, Jan-Sep 1998 29 China: financial statistics 35 China: trade, Jan-Sep 1998 35 China: direction by trade, Jan-Aug 1998 36 China: main exports and imports, Jan-Aug 1998 37 China: trade by type of enterprise, Jan-Jun 1998 EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 2 41 China: foreign debt, end-Jun 1998 51 Mongolia: inflation, 1998 52 Mongolia: money supply, 1998 55 Mongolia: foreign trade 57 China: quarterly indicators of economic activity 57 Mongolia: quarterly indicators of economic activity 58 China: foreign trade 60 China: trade with east European countries List of figures 12 China: gross domestic product 12 China: renminbi real exchange rate 19 China: comparison of volume growth rates 20 China: inflation 25 China: grain output per person 27 China: urban and rural incomes 34 China: export value growth 45 Mongolia: gross domestic product EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 3 November 25th 1998 Summary 4th quarter 1998 China Outlook for 1999-2000: Political and social stability require faster rates of economic growth, so the pump is being primed by capital investment. Bank lending has been increased in order to maintain production of state-owned enterprises (SOEs). GDP growth in 1998 will be higher than previously ex- pected, although consumption and exports are sluggish and agriculture has been hit by floods. In 1999-2000 growth will slow as the heat goes out of the current investment drive and reform is resumed. There will be a modest deval- uation in 2000. The current account will remain in surplus, and external debt will be kept under control. The political scene: The government has been attempting to use the army’s involvement in the flood prevention efforts to bolster its own legitimacy. Political reform has resurfaced amid mixed signals on human rights. The October plenum of the Chinese Communist Party (CCP) stressed agriculture. The fourth generation of leaders is coming to the fore. Active diplomacy with the West has yet to pay dividends, but talks have resumed with Taiwan. Economic policy: Policy is focused on boosting growth with looser monetary stance and fiscal expansion—financed by bond issues. Devaluation has been avoided, but more non-tariff barriers are in place. Progress on reform is taking second place to the maintenance of stability. The economy: Data inconsistencies are worse than usual, but growth evi- dently slowed in the first two quarters of 1998 before picking up in the third quarter. Deflation has continued and flood repairs are likely to have stimulated growth. Sectoral trends: Output growth has been maintained, as enterprise profits continue to decline. The coal industry remains depressed and listed companies reported a poor first half. Reform of SOEs has slowed. Agriculture’s role is once more being stressed and high hopes are pinned on the autumn harvest. The grain distribution network is in disarray and so is the cotton market. Rural incomes are barely growing. The floods were partly a man-made disaster. Con- struction of the Three Gorges project is continuing. Road-building and urban infrastructure are receiving greater attention. Construction of low-cost housing will boost growth. Money and finance: Moves are under way to improve the regulatory envi- ronment and the two stockmarkets are in the doldrums. Curbing ITICs is a priority. M2 growth has accelerated as lending, especially for investment, has risen and savings rates are holding up. Foreign-invested enterprises are experi- encing difficulties securing foreign exchange. Fears about the viability of debtors have led foreign lenders to cut credit, with serious implications for some projects. Foreign trade and payments: Exports are losing momentum as a result of the Asian crisis, and import growth is sluggish. The share of SOEs in exports is EIU Country Report 4th quarter 1998 © The Economist Intelligence Unit Limited 1998 4 falling. Smuggling is rampant, despite a major anti-smuggling campaign. A tightening trade regime makes entry to the World Trade Organisation more difficult. Inflows of foreign direct investment have held up. Counting foreign debt cannot rely solely on official data. Growth in tourism revenue is slowing. Mongolia Outlook for 1999-2000: The political crisis that began in April 1998 will rumble on, partly owing to divided control of major political institutions. Mongolia’s constitutional arrangements may further delay a solution to the crisis. Neither side appears willing to compromise, but may feel pressured to do so by the 1999 Donors’ Group meeting. External finance will be needed to pay for another budget deficit, which is also likely to cause backtracking on tax reforms. The rate of economic growth may slow in 1999, partly because of falling external demand. The political scene: Further prime ministerial candidates have been rejected. One possible candidate has been murdered, but instead of providing an impe- tus to a political solution, the killing highlighted tensions within the Democratic Coalition. The opposition Mongolian People’s Revolutionary Party (MPRP) has its own internal problems. The Constitutional Court has ruled that changes to the government law made in February were illegal, but parliament voted not to accept the ruling. The media is to be restructured. Mongolia has been engaged in diplomatic exchanges. Economic policy and the economy: The budget balance remains in deficit. The government has increased taxes and has tried to improve compliance. The 1999 budget has been discussed, and may include some tax changes, as pro- ceeds from privatisation may be disappointing. Cancelling a bank merger has been costly, although other banking sector reforms have been carried out. Inflation has slowed. Sectoral trends: Early snows have destroyed crops, but vegetable production has improved slightly. An audit has revealed safety deficiencies in industry. Power supplies have been erratic. Oil will be imported from China, and trans- port costs for Russian oil may fall. The government hopes to increase gold production. Some MIAT planes are to be licensed to private